Q4 Synergy In April 1994, Novell Inc. announced its plan to acquired WordPerfect Corp. for $1.4 billion. At the time of the acquisition, the relevant information about the two companies was as follows: Table 6.1 Revenues Cost of goods sold Depreciation Tax rate Capital spending Working capital (as % of revenue) Beta Expected growth rate in revenues/EBIT Expected period of high growth Growth rate after high growth period Beta after high growth period Equity risk premium (market risk premium) Novell $1,200.00 WordPerfect $600.00 57.00% 75.00% 42.00% 25.00% 35.0% 35.0% 75.00 40.00 40.0% 30.0% 1.45 25.0% 1.25 15.0% 10 years 10 years 6.00% 1.10 6.00% 1.10 5.50% Questions: a b C Capital spending will be 115% of depreciation after the high-growth period. Neither firm has any debt outstanding. The treasury bond rate is 7%. Estimate the value of the combined firm, with no synergy. As a results of the merger, the combined firm is expected to growth 24% a year for the high growth period. Estimate the value of the combined firm with this higher growth rate. What's the synergy worth? What is the maximum price Novell can pay for WordPerfect?