3. Sirius Satellite Radio and XM Satellite Radio announced the completion of their merger, which will be called SiriusXM Radio Inc. XM shareholders will receive 4.6 shares of Sirius common stock for each share of XM stock. The company slates that it will be able to offer consumers new packages in audio entertainment and that it will offer subscribers the option of expanding their subscriptions to include the "Best of Both" services. SiriusXM Radio states that it expects to begin realizing synergies beginning in the first post-merger year. The company expects to achieve synergies of approximately $400 million (pretax) in 2009, net of costs. The combined revenues of the two companies equal approximately $2.2 billion. The expected post merger variable cost is 65% of revenues. The company will incur $200 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 13%; that the post-merger income tax rate is 40% on all income; that annual inflation is expected to be 3%, and that the breakdown of the expected 2009 pre-tax synergies (all of which are cash flows) is estimated as follows: . $300 million revenue increase from an increase in the number or channels that is expected to grow with inflation. $105 million from a reduction in costs for the design and production of radios for automobiles provided to auto manufacturers (note: depreciation is unchanged) $60 million from a reduction in costs for the design and production or non-auto radios $50 million from the reduction in costs for the production of overlapping entertainment channels $20 million from a reduction in marketing costs $20 million from the reduction in corporate overhead costs $40 million from a reduction in information and other technology costs from eliminating overlapping technologies . Assume that cost synergies grow 50% in 2010 and then decline at a rate of 5% in perpetuity, and that revenue synergies after 2009 will grow at 3% in perpetuity. Measure the present value of the synergies. 3. Sirius Satellite Radio and XM Satellite Radio announced the completion of their merger, which will be called SiriusXM Radio Inc. XM shareholders will receive 4.6 shares of Sirius common stock for each share of XM stock. The company slates that it will be able to offer consumers new packages in audio entertainment and that it will offer subscribers the option of expanding their subscriptions to include the "Best of Both" services. SiriusXM Radio states that it expects to begin realizing synergies beginning in the first post-merger year. The company expects to achieve synergies of approximately $400 million (pretax) in 2009, net of costs. The combined revenues of the two companies equal approximately $2.2 billion. The expected post merger variable cost is 65% of revenues. The company will incur $200 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 13%; that the post-merger income tax rate is 40% on all income; that annual inflation is expected to be 3%, and that the breakdown of the expected 2009 pre-tax synergies (all of which are cash flows) is estimated as follows: . $300 million revenue increase from an increase in the number or channels that is expected to grow with inflation. $105 million from a reduction in costs for the design and production of radios for automobiles provided to auto manufacturers (note: depreciation is unchanged) $60 million from a reduction in costs for the design and production or non-auto radios $50 million from the reduction in costs for the production of overlapping entertainment channels $20 million from a reduction in marketing costs $20 million from the reduction in corporate overhead costs $40 million from a reduction in information and other technology costs from eliminating overlapping technologies . Assume that cost synergies grow 50% in 2010 and then decline at a rate of 5% in perpetuity, and that revenue synergies after 2009 will grow at 3% in perpetuity. Measure the present value of the synergies