A financial manager is evaluating a merger target and wishes to
estimate cost and revenue synergies...
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Accounting
A financial manager is evaluating a merger target and wishes toestimate cost and revenue synergies for years 1 and 2 (i.e., thefirst couple of years, post-merger). The target currently hasrevenues of $80, which is forecasted to grow at a rate of 9%annually over the estimated horizon of 4 years. The analyst assumesthat EBITDA would be approximately 20% of revenues. Depreciationand amortization would be about $6 each year. The applicable taxrate is 25%. The analyst estimates a cost synergy of 5% and arevenue synergy of 15%.
To get full credit, answers must be supported by formulas andcalculations showing relevant inputs. As part of your answer,please compare and contrast the importance of cost and revenuesynergies.
Answer & Explanation
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4.5 Ratings (901 Votes)
Base Year
1st year
2nd year
Revenue
80
87.2
(1.09*80)
95.048
(1.09*87.2)
Cost
64
69.76
(87.2-17.44)
76.0384
(95.048-19.0096)
EBITDA(Revenue-Cost)
16
17.44
(87.2*20%)
19.0096
(95.048*20%)
Dep. & Ammort.
6
6
(Given)
6
(Given)
EBIT(EBITDA-Dep.)
10
11.44
13.0096
Tax Rate (25%)
2.5
2.86
3.2524
Proift(EBIT-Tax)
7.5
8.58
9.7572
Revenue Synergy for 2 Years Â
Revenue for 2 Years
182.248
Revenue synergy
15%
Amount
27.3372
(182.248*15%)
Cost Synergy for 2 Years
Cost for 2 Years
145.7984
Cost Synegy
5%
Amount
7.28992
(145.7984*5%)
Hoping for
a Positive response.Thank You
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