One company that the analysis indicated as potentially suitable for acquisition by Admiral is Favorite Food Systems Inc. Favorite Food Systems Inc. which was founded by John Favorite in 1994, is a West Coast chain with current annual sales of approximately $75 million. In 2003, the company went public. (The Favorite family now controls about 57 percent of the common stock.)

1. The merger will generate $1.0 million in after tax earnings each year from synergies. Calculate the free cash flow from the synergies for 5 years, assuming $100,000 of depreciation for each year.

2. Develop the terminal year value of the synergies based on the fifth year of the cash flows. Assume the growth rate of the synergistic cash flows after the terminal year is 1.0%

3. Determine the net present value of the cash flows resulting from synergies. Assume that the earnings due to synergies end after 5 years.

4. Determine the EPS of the combined company in Year 1 if these synergies occur. Assume an exchange ratio of 0.45.

5. Compare this EPS (including synergies) to the EPS of the combined company without the synergies. What percentage increase is EPS is this?

Admiral Foods Corporation Income Statement (in Millions of Dollars) Favorite Food Systems, Inc. Balance Sheet (in Millions of Dollars) Favorite Food Systems, Inc. Income Statement (in Millions of Dollars) SalesLess:[xpenses,excludingdepreciationLess:DepreciationCamingsbeforeinterestandtaxesLess:InterestCamingsbeforetaxesLess:Taxes(40%)Carningsaftertaxes$75265.4$8.41.40.4$8.03.2$4.8$30 Additional Information \begin{tabular}{lcc} & Admiral Foods Corporation & Favorite Food Systems \\ \hline Dividends per share & $2.50 & $0.60 \\ Common stock (price per share) & $50 & $15 \end{tabular} Admiral Foods Corporation Income Statement (in Millions of Dollars) Favorite Food Systems, Inc. Balance Sheet (in Millions of Dollars) Favorite Food Systems, Inc. Income Statement (in Millions of Dollars) SalesLess:[xpenses,excludingdepreciationLess:DepreciationCamingsbeforeinterestandtaxesLess:InterestCamingsbeforetaxesLess:Taxes(40%)Carningsaftertaxes$75265.4$8.41.40.4$8.03.2$4.8$30 Additional Information \begin{tabular}{lcc} & Admiral Foods Corporation & Favorite Food Systems \\ \hline Dividends per share & $2.50 & $0.60 \\ Common stock (price per share) & $50 & $15 \end{tabular}