Reference no: EM132644929
Question - The following are the details of two potential merger candidates, Khyber electronics and Saleem electronics, in 2018. X shows that you have to assume your own value (40)
Khyber electronics Saleem electronics
Revenues Rs. 104,400.00 $55,125.00
Cost of Goods Sold (w/o Depreciation) X X
Depreciation X X
Tax Rate 35.00% 35.00%
Working Capital 10% of Revenue 10% of Revenue
Market Value of Equity $2,000.00 $1,300.00
Outstanding Debt $160.00 $250.00
Both firms are expected to grow 15% a year in a perpetuity. Capital spending is expected to be offset by depreciation. The beta for both firms is 1 and both firms are rated BBB, with an interest rate on their debt of 9% (the treasury bond rate is 8%).
As a result of the merger, the combined firm is expected to have a cost of goods sold of only X% of total revenues. The combined firm does not plan to borrow additional debt.
Required -
a. Estimate the value of Khyber Electronics, operating independently.
b. Estimate the value of Saleem electronics operating independently.
c. Estimate the value of the combined firm, with no synergy.
d. Estimate the value of the combined firm, with synergy.
e. How much is the operating synergy worth?
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