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These two companies are proposing a merger (SHOW WORK AND ANSWERS PLEASE) company 1 company 2 Revenues $4,500 $3,150 COGS (without dep) 87.50% 89% Depreciation
- These two companies are proposing a merger (SHOW WORK AND ANSWERS PLEASE)
| company 1 | company 2 | |
| Revenues | $4,500 | $3,150 |
| COGS (without dep) | 87.50% | 89% |
| Depreciation | $300 | $75 |
| Tax Rate | 35% | 35% |
| Working Capital | 10% of revenues | 10% of revenues |
| Market Value of equity | $2,000 | $1,300 |
| Outstanding debt | $160 | $250 |
Both firms are expected to grow 5% a year in perpetuity. Capital spending is expected to be offset by depreciation. The beta for both firms is 1 and both firms are BBB rated, with an interest rate on debt of 8.5% (T-bond rate is 5%)
As a result of this merger, the combined firm is expected to have a COGS of only 86% of revenues. The combined firm does not plan to borrow additional debt.
- Estimate the value of company 1 independently.
- Estimate the value of company 2 independently.
- Estimate the value of combined firm, with no synergy.
- Estimate the value of combined firm, with synergy
- How much is the synergy worth?
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