2. Microsoft has agreed to acquire another business software applications company, PS Inc., for approximately $10.3 billion. Microsoft expects to achieve various synergies, and its strategy is to continue to support existing versions of PS software solutions, create Microsoft PS-software to replace all of PS's software, and then migrate PS customers to Microsoft PS-software. Assume that as a result of the merger, the company expects annual selling and administrative costs to decrease by $750 million, annual research and development costs to decreaase by $300 million, and annual general and administartive costs to decrease by $200 million. Also, assume that Microsoft will be able to migrate about 80% of PS's customers (roughly 10,000) and $3 billion in revenue but that it will lose the remaining 20%. Assume that hte company will incur $400 million in fees, expenses, and integration- and synergy-related costs in the first year after the merger and none thereafter. Assume that the appropriate discount rate for discounting synergies is 12%; that the post-merger income tax is 40% on all income; that revenues are expected to grow with inflation, which is expected to be 3% annually; and that variable costs are, on average, 55% of revenues. What is the value of the synergies , assuming that the cost synergies begin in the first year after the merger, remain constant for the following two years despite inflation, and then decline at a rate of 10% in perpetuity beginning in the fourth year after the merger. Also assume that the migration of the custoers will take place immediately after the merger and impact the Year 1 cash flows. (Show all work in this sheet, and explanations as needed; more complete explanations increase the ability to give you partial credit) 2. Microsoft has agreed to acquire another business software applications company, PS Inc., for approximately $10.3 billion. Microsoft expects to achieve various synergies, and its strategy is to continue to support existing versions of PS software solutions, create Microsoft PS-software to replace all of PS's software, and then migrate PS customers to Microsoft PS-software. Assume that as a result of the merger, the company expects annual selling and administrative costs to decrease by $750 million, annual research and development costs to decreaase by $300 million, and annual general and administartive costs to decrease by $200 million. Also, assume that Microsoft will be able to migrate about 80% of PS's customers (roughly 10,000) and $3 billion in revenue but that it will lose the remaining 20%. Assume that hte company will incur $400 million in fees, expenses, and integration- and synergy-related costs in the first year after the merger and none thereafter. Assume that the appropriate discount rate for discounting synergies is 12%; that the post-merger income tax is 40% on all income; that revenues are expected to grow with inflation, which is expected to be 3% annually; and that variable costs are, on average, 55% of revenues. What is the value of the synergies , assuming that the cost synergies begin in the first year after the merger, remain constant for the following two years despite inflation, and then decline at a rate of 10% in perpetuity beginning in the fourth year after the merger. Also assume that the migration of the custoers will take place immediately after the merger and impact the Year 1 cash flows. (Show all work in this sheet, and explanations as needed; more complete explanations increase the ability to give you partial credit)
