You have been asked to assess the value of synergy in a merger of TriMedia Productions, a
Question:
You have been asked to assess the value of synergy in a merger of TriMedia Productions, a firm that produces movies, with Leppard Records, a record company. The following table summarizes the current debt ratios and other relevant statistics for the two firms:
Both firms are at their optimal debt ratios prior to the merger and are fairly valued; they are in stable growth and expect to grow 5% a year forever. After the merger, however, it is anticipated that the optimal debt ratio for the combined firm will be 30%, and that the cost of debt for the combined firm at this debt ratio will be 7.5%. The current riskfree rate is 6% and the market risk premium is 4%, estimate the value of synergy in this merger.
(The tax rate for both firms is 40%)
2. Satellite Telecommunications Inc. is a firm in significant financial trouble. The firm reported an EBITDA of - $ 100 million last year on revenues of $ 1000 million. You expect revenues to grow 30% a year for the next 3 years and the EBITDA as a percent of revenues to be –5% in year 1, 5% in year 2 and 25% after that. The firm has substantially over invested in plant and equipment in the last few years and will reduce its capital expenditures to $ 50 million a year for the next 3 years, while depreciation will remain at $ 100 million a year for the next 3 years. Non-cash working capital is expected to be 5% of revenues. After year 3, the firm will grow 4% a year forever, and maintain a return on capital of 10%. The cost of capital will be 12% for the next 3 years and 10% thereafter. The firm has a net operating loss carryforward of $ 150 million currently and the marginal tax rate is 40%.
a. Estimate the free cashflows to the firm for the next 3 years.
b. Estimate the terminal value at the end of year 3.
c. Estimate the value of the firm today.
Auditing An International Approach
ISBN: 978-0071051415
6th edition
Authors: Wally J. Smieliauskas, Kathryn Bewley