Estimate the value of synergy in this merger

Assignment Help Finance Basics

Reference no: EM133290506

Question: 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:

G & P 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.

BandAdd is a smaller company that produces only perfumes. 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 G & P using the EVA approach.

b. Value BandAdd 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.

Reference no: EM133290506

Questions Cloud

Identify all the financial documents needed for the transact : provide the best support to the Canadian business person and explain your reason for the choiceV. What are the documentations, certificates andlicenses

What rate would you be taxed and what would be your tax : FINANCE 6331 St. Augustine's University - your capitail gain will be classified as short term. at what rate would you be taxed and what would be your tax

Explain protandrous hermaphrodites : Please explain how protandrous hermaphrodites (e.g. Crassostrea virginica) reproduce? Please can you explain food source communication in bees?

Determine whether dealers in nasdaq shares and dealers : Determine whether dealers in NASDAQ shares and dealers (''specialists'') in NYSE shares in the particular market being discussed provided price improvements

Estimate the value of synergy in this merger : Estimate the value of synergy in this merger - This firm is also in stable growth, and the EVA is expected to grow 5% a year in perpetuity

Explain the binding of neurotransmitter leads : Explain how the binding of neurotransmitter leads to a depolarisation in the post-synaptic neurone.

Analyze the contribution of system to muscle contraction : Analyzes the contribution of each system to muscle contraction and energy production during physical activities of different duration and intensity.

Why might a corporation use a special category such as found : Why might a corporation use a special category such as founder's stock in issuing common stock and Explain how you would use this information as the VP

How can we selectively pick assets : MPRE 736 Georgetown University how can we selectively pick assets so that the portfolio performs "better" than the single assets on a standalone basis

User Account

All Pages