The VP of operations insists that the merger will generate $1.0 million in after tax earnings each year from synergies, due to Favorite using Admiral products in its cost of goods sold.

Calculate the free cash flow from the synergies for 5 years, assuming $100,000 of depreciation for each year. Use a table to illustrate your calculations and conclusion. Develop the terminal year value of the synergies based on the fifth year of the cash flows. Assume the growth rate of the synergistic cash flows after the terminal year is 1.0%..

Determine the net present value of the cash flows resulting from synergies. Assume that the earnings due to synergies end after 5 years. Use a table to illustrate your calculations and conclusion.

Admiral Foods Corporation is a diversified food processing and distributing company that has shown excellent growth over the past 10 years as a result of a balanced program of acquisitions and internal growth. One segment of the food business in which Admiral has only recently begun to compete, however, is the fast-food business. The present top management of Admiral Foods feels that good future growth in the fast-food business is still possible, regardless of the rapid expansion of the last two decades. During the past year, members of the Admiral staff have examined and analyzed a number of independent fast-food firms. One company that the analysis indicated as potentially suitable for acquisition by Admiral is Favorite Food Systems Inc. Favorite Food Systems Inc. which was founded by John Favorite in 1994, is a West Coast chain with current annual sales of approximately $75 million. Favorite's history can best be described as up and down, with the general trend up. The company survived several brief shaky periods during the late 1990s. In 2003, the company went public. (The Favorite family now controls about 57 percent of the common stock.) By 2006, Favorite Foods was recommended by two brokerage firms and was touted by one investment service as "another potential McDonald's." This and other predictions never came true. In fact, Favorite Food Systems' growth rate has slowed appreciably during the past five years. One reason frequently given in the trade for Favorite's growth slowdown is Mr. Favorite's apparent indecision regarding expansion. As a result, the competition has increasingly gotten the jump on Favorite with the best locations in new residential growth areas. The following table shows last year's balance sheets and income statements for both Admiral and Favorite. The following table shows last year's balance sheets and income statements for both Idmiral and Favorite. Favorite Food Systems, Inc. Balance Sheet (in Millions of Dollars) \begin{tabular}{lrlr} \hline Current assets & $10.6 & Current liabilities & $6.5 \\ Fixed assets, net & 12.1 & Long-term debt & 2.2 \\ & & Common equity \\ Total assets & $22.7 & (2,000,000 shares) & 14.0 \\ & & Total liabilities and equity & $22.7 \\ \hline \end{tabular} Favorite Food Systems, Inc. Income Statement (in Millions of Dollars) Sales Less: Expenses, excluding depreciation Less: Depreciation Earnings before interest and taxes Less: Interest Earnings before taxes Less: Taxes (40\%) Earnings after taxes $75.265.4$8.41.4$8.00.4$4.83.2 Additional Information \begin{tabular}{lcc} \hline & AdmiralFoodsCorporation & FavoriteFoodSystems \\ \hline Dividends per share & $2.50 & $0.60 \\ Common stock (price per share) & $50 & $15 \\ \hline \end{tabular} Admiral Foods Corporation is a diversified food processing and distributing company that has shown excellent growth over the past 10 years as a result of a balanced program of acquisitions and internal growth. One segment of the food business in which Admiral has only recently begun to compete, however, is the fast-food business. The present top management of Admiral Foods feels that good future growth in the fast-food business is still possible, regardless of the rapid expansion of the last two decades. During the past year, members of the Admiral staff have examined and analyzed a number of independent fast-food firms. One company that the analysis indicated as potentially suitable for acquisition by Admiral is Favorite Food Systems Inc. Favorite Food Systems Inc. which was founded by John Favorite in 1994, is a West Coast chain with current annual sales of approximately $75 million. Favorite's history can best be described as up and down, with the general trend up. The company survived several brief shaky periods during the late 1990s. In 2003, the company went public. (The Favorite family now controls about 57 percent of the common stock.) By 2006, Favorite Foods was recommended by two brokerage firms and was touted by one investment service as "another potential McDonald's." This and other predictions never came true. In fact, Favorite Food Systems' growth rate has slowed appreciably during the past five years. One reason frequently given in the trade for Favorite's growth slowdown is Mr. Favorite's apparent indecision regarding expansion. As a result, the competition has increasingly gotten the jump on Favorite with the best locations in new residential growth areas. The following table shows last year's balance sheets and income statements for both Admiral and Favorite. The following table shows last year's balance sheets and income statements for both Idmiral and Favorite. Favorite Food Systems, Inc. Balance Sheet (in Millions of Dollars) \begin{tabular}{lrlr} \hline Current assets & $10.6 & Current liabilities & $6.5 \\ Fixed assets, net & 12.1 & Long-term debt & 2.2 \\ & & Common equity \\ Total assets & $22.7 & (2,000,000 shares) & 14.0 \\ & & Total liabilities and equity & $22.7 \\ \hline \end{tabular} Favorite Food Systems, Inc. Income Statement (in Millions of Dollars) Sales Less: Expenses, excluding depreciation Less: Depreciation Earnings before interest and taxes Less: Interest Earnings before taxes Less: Taxes (40\%) Earnings after taxes $75.265.4$8.41.4$8.00.4$4.83.2 Additional Information \begin{tabular}{lcc} \hline & AdmiralFoodsCorporation & FavoriteFoodSystems \\ \hline Dividends per share & $2.50 & $0.60 \\ Common stock (price per share) & $50 & $15 \\ \hline \end{tabular}