Inputs

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 stable growth rate = riskfree rate.
Acquiring firm Target Firm After merger In terminal year
Beta 1.20 0.90 1.08838 1.09073955
Pre-tax cost of debt 5.00% 5.00% 5.00%
Tax rate 30.00% 30.00% 30.00%
Debt to Capital Ratio 10.00% 10.00% 10.00%
Revenues $1,000.00 $500.00 $1,500.00
Operating Income (EBIT) $50.00 $25.00 $75.00
Pre-tax return on capital 15.00% 15.00% 15.00%
Reinvestment Rate = 70.00% 70.00% 70.00%
Length of growth period = 5 5 5
Computed Values Acquiring firm Target firm Value of firm with synergy In terminal year (Weights based on terminal value)
Cost 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 capital = 10.50% 10.50% 10.50%
Reinvestment Rate = 70.00% 70.00% 70.00%
Expected growth rate= 7.35% 7.35% 7.35%
Value of firm
PV of FCFF in high growth = $50.86 $26.20 $77.14
Terminal value = $612.34 $350.76 $963.10
Value of firm today = $458.19 $271.50 $729.79
Value of Synergy
Value of independent firms $729.68
Value of combined firm $729.79
Value of synergy $0.11
I will assume that there are zero excess returns beyond your high growth phase and that stable growth rate = riskfree rate.
In terminal year
In terminal year (Weights based on terminal value)