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Synergy Valuation

Synergy Valuation

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Published by robinkapoor

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Published by: robinkapoor on Jan 02, 2009
Copyright:Attribution Non-commercial


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Current riskfree rate =4.25%Risk Premium =4.00%I will assume that there are zero excess returns beyond your high growth phase and that stablAcquiring firmTarget FirmAfter mergerIn terminal yBeta1.200.901.088381.09Pre-tax cost of debt5.00%5.00%5.00%Tax rate30.00%30.00%30.00%Debt to Capital Ratio10.00%10.00%10.00%Revenues$1,000.00$500.00$1,500.00Operating Income (EBIT)$50.00$25.00$75.00Pre-tax return on capital15.00%15.00%15.00%Reinvestment Rate =70.00%70.00%70.00%Length of growth period =555
Computed Values
cquiring firmTarget firmValue of firm with synergyIn terminal yCost of Equity =9.05%7.85%8.60%8.61%After-tax cost of debt =3.50%3.50%3.50%3.50%Cost of capital =8.50%7.42%8.09%8.10%After-tax return on capital10.50%10.50%10.50%Reinvestment Rate =70.00%70.00%70.00%Expected growth rate=7.35%7.35%7.35%Value of firmPV of FCFF in high growth $50.86$26.20$77.14Terminal value =$612.34$350.76$963.10Value of firm today =$458.19$271.50$729.79
Value of Synergy 
Value of independent firms$729.68Value of combined firm$729.79Value of synergy$0.11

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