You have been asked to assess the value of synergy in an acquisition of Nuevos Fashion, a childrens apparel firm, by Fitch and Spitzer, a general apparel firm. You are supplied with the following information on the two firms.

Nuevos Fashion earned an after-tax operating margin of 8% on its revenues of $1000 million last year, and its sales to capital ratio was 2. The cost of capital is 10%.

Fitch and Spitzer earned an after-tax operating margin of 10% on its revenues of $2250 million and its sales to capital ratio was 2.5. The dollar cost of capital is 10%. You can assume that both firms would be in stable growth as independent companies, growing 5% a year.

a. Value Nuevos Fashion as an independent firm.

b. Value Fitch and Spitzer as an independent firm.

c. Now assume that the primary motive behind the merger is Fitch and Spitzers belief that they can run Nuevos more efficiently and increase its sales to capital ratio and margin to match their own. Assuming that the growth rate remains unchanged at 5%, estimate the value of control in this merger.

Problem 2
a. Valuing Nuevos Fashion
Return on capital =	0.16
Reinvestment rate =	0.3125
Value of firm =
b. Valuing Fitch and Spitzer
Return on capital =	0.25
Reinvestment rate =	0.2
Value of firm =
c. Valuing combined firm
Operating margin of combined firm =	0.1
New after-tax operating income =	325
Return on capital =	0.25
Reinvestment rate =	0.2
Value of combined firm =
Value of independent firms =
Value of synergy =