You have been asked to value the synergy in a merger by your boss, who also happens to be an avid believer in Economic Value Added (EVA). As a result, you are given the following information on the two firms: Company A is a diversified consumer product company with $ 2 billion in capital invested, a return on capital of 13%, and a cost of capital of 11%. The firm is assumed to be in stable growth, and the EVA is expected to grow 5% a year in perpetuity. Company B is a smaller company that produces only cleaning supplies. It has $ 500 million in capital invested, earning a return on capital of 16% with a cost of capital of 12%. This firm is also in stable growth, and the EVA is expected to grow 5% a year in perpetuity. Both firms have 40% tax rates. Using the above information, answer the following questions: a. Value Company A using the EVA approach. b. Value Company B using the EVA approach. c. As a result of the merger, you expect the firm to be able to lower its cost of capital to 10% (as a result of increased debt capacity) and to post an increase in the combined operating income of 10% (as a result of economies of scale). Estimate the value of synergy in this merger.

a. Valuing Company A
Capital Invested =		2000
EVA created this year =
PV of EVA =
Value of Firm =
b. Valuing Company B
Capital Invested =		500
EVA this year =
PV of EVA =
Value of Firm =
c. Capital Invested =		2500
Combined Operating Income =
Restated Operating Income =
Restated EVA =
PV of EVA, assuming 5% growth =
New Firm Value =
Value of Synergy =
Note: $1000 = $1 billion