Handout problem 5 - The Value of Synergy: Higher Growth (A Two-Stage FCFF model) Novell Inc. announced its plan to acquire WordPerfect Corporation for $1.4 billion. At the time of the acquisition, the relevant information on the two companies was as follows: Novell WordPerfect Revenues $1,200.00 $600.00 Cost of Goods Sold (w/o Depreciation) 57.00% 75.00% Depreciation $42.00 $25.00 Tax Rate 35.00% 35.00% Capital Expenditures $75.00 $40.00 Working Capital Level (as % of Revenue) 40.00% 30.00% Beta 1.45 1.25 Expected Growth Rate in High- Growth Period 25.00% 15.00% Expected Period of High Growth 10 years 10 years Growth rate After High- Growth Period 6.00% 6.00% Beta After High-Growth period 1.10 1.10 Neither firm has any debt outstanding. The Treasury bond rate is 7%, market risk premium is 5.5%. A. Estimate the value of Novell, operating independently. B. Estimate the value of WordPerfect, operating independently. C. Estimate the value of the combined firm, with no synergy. D. As a result of the merger, the combined firm is expected to grow 24% a year for the high-growth period. Beta of the combined firm in the high-growth period is 1.4 and after the high-growth period is 1.1. Estimate the value of the combined firm with the higher growth. E. What is the synergy worth?