Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Company A is preparing a deal to acquire company B.One analyst estimated that the merger would produce 175 million dollars of annual cost savings, from

Company A is preparing a deal to acquire company B.One analyst estimated that the merger would produce 175 million dollars of annual cost savings, from operations, general and administrative expenses and marketing. These annual cost savings are expected to begin two years from now, and grow at 2% a year. In addition the analyst is assuming an after-tax integration cost of 0.3 billion, and taxes of 20%. Assume that the integration cost of 0.3 billion happens right when the merger is completed (year 0). The analyst is using a cost of capital of 8% to value the synergies.

a)Compute the value of the synergy as estimated by the analyst. Please show your calculations.

b)Does the estimate of synergies in a) justify the premium that company A offered to company B?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Fundamentals of Investment Management

Authors: Geoffrey Hirt, Stanley Block

10th edition

0078034620, 978-0078034626

More Books

Students also viewed these Finance questions

Question

Indicate important requirements of four other key EEO-related laws.

Answered: 1 week ago

Question

Explain four basic EEO concepts.

Answered: 1 week ago