Firm is considering merging

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Reference no: EM131336190

Firm A and Firm B are considering merging. Firm A operates in a low-tax country and pays an average corporate tax rate of 15% while Firm B operates in a high tax country and pays an average corporate tax rate of 25%. If the firms merge they can structure the deal so that the merged entity pays the lower rate of 15% on all of the merged firm’s income. Currently Firm A has a market value of $200 million and Firm B has a market value of $100 million. If the firms merge there will be no operational synergies, the only effect on the firms will be the tax effect. Under the current tax rates Firm A pays taxes of $5 million per year and Firm B pays taxes of $4 million per year. These firm’s income and taxes are fairly constant over time and thus can be treated as perpetuities. Any tax savings from merging are fairly safe and thus should be valued using a 10% discount rate (i.e., interest rate). Given this information, what is your estimate of the market value of a merged firm AB? (In other words what is PVAB?).

Reference no: EM131336190

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