In June 2010, Citicorp announced its merger with one of the largest finance companies in the US. Cost savings were an important part of the deal: An estimated 8,000 employees were to be laid off by the completion date. Below are stand-alone forecasts for both companies. Citicorp forecasted revenue synergies at 5 percent of projected revenue, annual cost savings of $400 thousand for 2011 (and thereafter growing at the rate of inflation), and projected operating margins at 12.2% of revenue. Revenues will also grow at the rate of inflation after 2015. Assume a tax rate of 35percent, a discount rate of 10 percent suitable for the cost and revenue synergies combined, and inflation of 3%. Assume the merger was completed as of December 31, 2010. Calculate thepresent value of the expected synergies. Dec 31: 2010 2011 2012 2013 2014 2015 Revenues ($000) US Finance Corp 41,829 43,653 46,804 49,847 52,837 56,008 Citicorp 23,525 26,139 28,194 30,449 32,733 35,188 65,354 69,792 74,998 80,296 85,570 91,196 Net income US Finance Corp 4,035 4,420 5,035 5,234 5,548 5,881 Citicorp 4,273 4,806 4,973 5,329 5,728 6,158 8,308 9,226 10,008 10,563 11,276 12,039

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In June 2010, Citicorp announced its merger with one of the largest finance companies in the US. Cost savings were an important part of the deal: An estimated 8,000 employees were to be laid off by the completion date. Below are stand-alone forecasts for both companies. Citicorp forecasted revenue synergies at 5 percent of projected revenue, annual cost savings of $400 thousand for 2011 (and thereafter growing at the rate of inflation), and projected operating margins at 12.2% of revenue. Revenues will also grow at the rate of inflation after 2015. Assume a tax rate of 35 percent, a discount rate of 10 percent suitable for the cost and revenue synergies combined, and inflation of 3%. Assume the merger was completed as of December 31, 2010. Calculate thepresent value of the expected synergies. Dec 31: 2010 2011 2012 2013 2014 2015 Revenues ($000) US Finance Corp Citicorp 43,653 46,804 56,008 41,829 23,525 65,354 26,139 28,194 49,847 30,449 80,296 52,837 32,733 85,570 35,188 91,196 69,792 74,998 Net income US Finance Corp Citicorp 5,035 5,548 4,035 4,273 8,308 4,420 4,806 9,226 4,973 10,008 5,234 5,329 10,563 5,728 11,276 5,881 6,158 12,039