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Acquisitions Inc is a brick and mortar retail company.Acquisition’s management believes that the company needs toestablish an on-line presence in order to remain viable. For thatreason, Acquisition would like to purchase Target Company, anon-line company in a similar line of business. Acquisition believesthat Target would also benefit from the merger by gaining access toa brick and mortar outlet.

Some basic information about Acquisition and Target follows:

	2018		2018
	Acquisition		Target
Revenues	30000		20000
Cost of Goods Sold	24000		16000
Depreciation	4500		1000
EBIT*(1-T)	1200		2400
Capex	1500		1000
Working Capital	300		200
Working Capital 2017	200		150
Levered ? (Equity)	1.8		0.9
MV Debt	23400		6700
MV Equity	35000		27000
Tax Rate	0.2		0.2
Pre-tax cost of debt	4.2		3.5
FCF growth rate	0.03		0.05

                               

Analysts hired by Acquisition to valuethe merger estimate that if the two companies merge, their combinedrevenues will increase by 5 percent for 3 years and for 3%thereafter. Cost of Goods Sold for the combined firms will bepermanently reduced by 2%. assume the market riskpremium is 5.5%, the risk free interest rate is 2% and thecorporate tax rate is 0.20.

Please find:

1. The status-quo values of Acquisition and Target, using eachfirm’s WACC to value its assets.
2. The WACC for the combined firm
3. The value of the combined firm with potential synergiesconsidered.
4. Should the merger take place?