The Watro Personal Computer Company is considering merger to achieve better growth and profitability. It has narrowed potential merger candidates to two firms. The Alber Company, a producer of PBXs, has a strong research department and a good record of internal profitability. The Saben Company operates a chain of variety stores and has a very high expansion rate. Data on all three firms are given below:

Each firm pays 15% interest on its debt and has a 40% tax rate. Ten years of supernormal growth are forecast, followed by no growth.
(a) What are the total assets of each firm?
(b) What is each company's NOi if it earns its before-tax r on total assets?
(c) What is the indicated market value of each firm?
(d) Compare Watro's increase in value as a result of merger at market value with the cost of acquiring Alber or Saben if the combined firms have the following financial parameters:

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Book value per share Number of shares (millions) Deblequity ratio Watro Alber Saben $10 $10 $10 5 20 20 Internal profitability rate, r (after tax) 09 8 10 0 15 Investment rate, K Growth rate, g Kr WACC 09 18 225 % 11% 12% Watro-Alber Watro-Saben Net operating income Internal profitability rate, r WACC Investment rate, K Growth rate, g Kr $30 n 20.09% 11% 1.1 221 $23 million 16% 12% 1.0 .16