You have been asked to value the synergy in a merger by your boss who is an avid believer in EVA. You are given the following information on the two firms for the year just ended: A & P is a diversified consumer product company with $2,000 in capital invested, a return on invested capital of 13% and a WAAC of 11%. The firm is assumed to be in stable growth and the EVA is expected to grow 5% a year in perpetuity. Groomer Inc. is a smaller company that produces only hair products. It has $500 in capital invested, earning a return on invested capital of 16% with a WAAC of 12%. This firm is also in stable growth and the EVA is expected to grow 5% a year in perpetuity. Tax rate for both firms is 40%.

a) What is A&P's standalone enterprise value using the EVA approach?

b) What is Groomer's standalone enterprise value using the EVA approach ?

c) You expect the merger to produce economies of scale and an increase in consolidated debt capacity that will generate a combined EVA for the two firms of 130.2 for the next year and a combined WAAC of 10%. You expect the EVA will grow at the rate of 5% per year thereafter. Estimate the the value of synergy in this merger.