American Health Care, a pharmaceutical firm, announces that it will be acquiring Healthcare Associates, a hospital management firm. The following table summarizes the expected cash flows to the firm at each of these firms, run independently, and the expected cash flows from the combined firm with synergy benefits. The cost of capital for both firms, run independently, is 10%; the combined firm will have the same cost of capital. The expected growth rate in the cash flows after year 2 is 5%, for the firms run independently. And the combined firm is expected to be able to grow faster at 5.5% after year 2.

Expected Cash Flows

Company	FCF1	FCF2	Growth Rate after Year 2
AHP	100	120	5%
HA	60	69	5%
Combined (with Synergy)	172	203	5.5%

Question 7.1 Estimate the value of the combined firm with synergy.

	a.	5083.35
	b.	4257.37
	c.	3899.81
	d.	3581.81

Question 7.2

Estimate the value of synergy.

	a.	675.56
	b.	616.18
	c.	1501.54
	d.	812.70

Question 7.3

Assume that Healthcare Associates was fairly valued before the acquisition. American Health Products had 100 million shares outstanding at $22.83 per share, before the acquisition. If American Health Products paid a premium (over the market price) of $800 million for Healthcare Associates, what would you expect will happen to American Health Products stock price on the announcement?

	a.	Increase because of the expected synergy benefits
	b.	Decrease because the AHP overpaid for HA
	c.	Increase because AHP pays less than they gain from synergy benefits
	d.	Not enough information