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Vonnegut Company and Heller Company are two identical firms that agree to merge. Both have revenues (R0) of $1,500, operating margin (m) of 15%, a tax rate (T) of 40%, investment rate (I) of 10%, growth rate (g) of 11%, 5 years of supernormal growth (n) followed by zero growth thereafter, and a 9% cost of capital (k).
a. What are the values of the firms as stand-alone companies?
b. If the combined firm increases its operating margin by 2%, revenues are combined, and the other value drivers remain unchanged, what is the value of the combined firm?
What is the earnings before interest and taxes under the base case scenario?
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