Question

Assume that if Allan purchases Brock that the primary benefit will be an increase in operating income. If the firms combine, based on last year’s income, operating income will be $4300. If all other costs remain constant and the combined firm will grow at 5.5% annually, with a WACC of 10%, what is the merged firm’s value? Would you recommend that the firms merge?

Answer 1

Operating income expected = $4300

WACC rate = 10% or 0.10

Growth rate = 5.5% or 0.055

Merged firm Value shall be calculated as per Dividend growth rate formula=

Income next year /(wacc rate - growth rate)

4300/(0.10 - 0.055)

95555.5556

So, merged firm Value is $95,555.56.