Indigo intends to merge with Pricy. The managers anticipate cost savings pretax of $50 million in...
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Indigo intends to merge with Pricy. The managers anticipate cost savings pretax of $50 million in the first year of the deal, and $100 million in the next year (both are at today's prices), and thereafter the savings would grow at the rate of inflation, 2%. The marginal tax rate is 40%. The firm must invest $1 billion to achieve these savings, and starting in the third year, must spend 5% of pretax savings to sustain the rate of savings. As part of the rationalization of operations, some assets will be sold, generating a positive cash flow of $20 million net of tax in years 1 and 2, and $10 million in year 3. The analyst judges that these cost savings are rather certain, reflecting a degree of risk consistent with the variability in the firm's EBIT. Accordingly, the analyst decides to discount the cash flows at the firm's cost of debt of 6%. Required: Value the synergies Indigo intends to merge with Pricy. The managers anticipate cost savings pretax of $50 million in the first year of the deal, and $100 million in the next year (both are at today's prices), and thereafter the savings would grow at the rate of inflation, 2%. The marginal tax rate is 40%. The firm must invest $1 billion to achieve these savings, and starting in the third year, must spend 5% of pretax savings to sustain the rate of savings. As part of the rationalization of operations, some assets will be sold, generating a positive cash flow of $20 million net of tax in years 1 and 2, and $10 million in year 3. The analyst judges that these cost savings are rather certain, reflecting a degree of risk consistent with the variability in the firm's EBIT. Accordingly, the analyst decides to discount the cash flows at the firm's cost of debt of 6%. Required: Value the synergies
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Valuation of IndigoPricy Merger Synergies 1 Calculate the pretax cost savings Year 1 50 million Year ... View the full answer
Related Book For
Modern Advanced Accounting in Canada
ISBN: 978-1259087554
8th edition
Authors: Hilton Murray, Herauf Darrell
Posted Date:
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