1. What is the incremental value to shareholders of the cost savings (synergies) projected in this merger? Assume a cost of capital of 11%, an income tax rate of 40%, and growth in pretax synergy savings of 3% per year after year 4.

In the case, the combined company was expected to save $350 million annually, which would be achieved over three years. According to the Exhibit 1 in this case, we got that the $350 million would be shared on 4 parts.

1. Manufacturing and Distribution - $45 million

2. Purchasing - $75 million

3. Corporate Overhead - $95 million

4. Business Unit and Regional Integration - $135 million

a. Should you include the inventory charge and transaction cost in this calculation? How does including or excluding them change the interpretation of the calculation?

b. What fraction of the transaction's incremental value do you expect to be realized in the first 4 years after the transaction? What might lead the firms not to realize the value you estimated?