Reference no: EM132934330

Wolfco (A) management is currently considering a merger with Lambco (B). Wolfco has 20 million shares outstanding, selling at a price of $30 per share. Lambco has 10 million shares outstanding. Neither company has any debt.

Lambco is expected to have revenues of $1 billion, cash operating costs of $800 million, depreciation deductions of $100 million, net additions to working capital of $25 million and capital expenditures of $100 million annually for the foreseeable future. The corporate tax rate is 35%. Lambco's cost of capital is 10%.

If Wolfco and Lambco were to merge, Wolfco believes that it could apply its superior inventory control and accounts receivable management techniques to Lambco. Thereby Wolfco believes that it could eliminate Lambco's need for any additions to net working capital in the foreseeable future. The two companies' management teams are now trying to negotiate the terms of a merger.

Problem 1: What is the total value of Lambco (B) to Wolfco (A) (that is, the current value of B plus the synergy)

a. 600 million
b. 650 million
c. 250 million
d. 1250 million
e. 400 million