The following are the details on two potential merger candidates, Northrop and Grumman: Northrop Grumman Revenues $4,400.00 $3,125.00 Cost of Goods Sold 87.50% of Revenue 89.00% of Revenue Depreciation $200.00 $74.00 Tax Rate 35.00% 35.00% Capex $200.00 $74.00 NWC change $22 $16 Market Value of Equity $2,000.00 $1,300.00 Outstanding Debt $160.00 $250.00 Both firms are in steady-state and are expected to grow 5% a year in the long term. The beta for both firms is 1, and both firms are rated A+, with an interest rate on their debt of 8.5%. (The treasury bond rate is 7%, the market risk premium is 5.5%)

Handout Problem 2 - Synergy Gains from Higher Growth In the Grumman-Northrop example, described in the previous example (Handout Problem 1), assume that, as a result of the merger, the combined firm expected to grow 6% a year in the long term A. Estimate the value of the combined firm, if it has 6% growth rate B. Whats the additional value if the firm has higher growth?