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Compute the value of the synergy as estimated

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Reference no: EM133024007

Question - Company A is preparing a deal to acquire company B. Company B's equity is trading at 4.3 B dollars (market value of equity). Company A is planning to pay a 32% premium for company B.

Annual Cost Savings = 175m

Cost Savings = 3% annually at year 3

After Tax Integration Cost = 250m at year 0

Tax Rate = 21%

Cost of Capital = 9%

a) Compute the value of the synergy as estimated by the analyst. Please show your calculations.

b) Does the estimate of synergies in a) justify the premium that company A offered to company B?

Reference no: EM133024007

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