The following are the details of two potential merger candidates, Northrop and Grumman, in 1993 Northrop Grumman
Question:
The following are the details of two potential merger candidates, Northrop and Grumman, in 1993
| Northrop | Grumman |
Revenues | $4,400.00 | $3,125.00 |
Cost of Goods Sold (w/o Depreciation)87.50% | | 89.00% |
Depreciation | $200.00 | $74.00 |
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 5% a year in 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 8.5% (the treasury bond rate is 7%).
As a result of the merger, the combined firm is expected to have a cost of goods sold of only 86% of total revenues. The combined firm does not plan to borrow additional debt.
a. Estimate the value of Grumman, operating independently.
b. Estimate the value of Northrop, 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?
Financial Accounting An Integrated Statements Approach
ISBN: 978-0324312119
2nd Edition
Authors: Jonathan E. Duchac, James M. Reeve, Carl S. Warren