In April 1994, Novell, Inc. announced its plan to acquire WordPerfect Corporation for $1.4 billion. At the time of the acquisition, the relevant information about the two companies was as follows:

Capital spending will be 115% of depreciation after the high-growth period. Neither firm has any debt outstanding. The Treasury bond rate is 7%.

a. Estimate the value of Novell, operating independently.

b. Estimate the value of WordPerfect, operating independently.

c. Estimate the value of the combined firm, with no synergy.

d. As a result of the merger, the combined firm is expected to grow 24% a year for the high growth period. Estimate the value of the combined firm with the higher growth.

e. What is the synergy worth? What is the maximum price Novell can pay for WordPerfect?

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Revenues Novell WordPerfect $1,200.00 $600.00 Cost of goods sold (without depreciation) 57.00% 75.00% Depreciation Tax rate Capital spending Working capital (as % of revenue) Beta Expected growth rate in revenues/EBIT Expected period of high growth Growth rate after high growth period Beta after high growth period $42.00 $25.00 35.00% 35.00% $75.00 $40.00 40.00% 30.00% 1.45 1.25 25.00% 15.00% 10 years 10 years 6.00% 6.00% 1.10 1.10