ABCDEFGHIJKLMNOPQRSTUVWXYZ
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SYNERGY VALUATION WORKSHEET
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Enter the following information on the bidding firm
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Current Financial Information
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Revenues in current year =
$1,000.00
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COGS as % of Revenues =
70.00%
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Tax Rate on income =
35.00%
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Interest Expenses =
$100.00
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Current Depreciation =
$50.00
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Current Capital Spending =
$75.00
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Working Capital as % of Revenue =
5.00%
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Projections of growth in earnings
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Expected growth rate - next 5 years =
15.00%
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Expected growth rate - after 5 years =
6.00%
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Risk measures
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Beta of the stock =
1.10
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Enter the following information on the target firm
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Current Financial Information
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Revenues in current year =
$800.00
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COGS as % of Revenues =
75.00%
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Tax Rate on income =
35.00%
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Interest Expenses =
$100.00
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Current Depreciation =
$75.00
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Current Capital Spending =
$100.00
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Working Capital as % of Revenue =
5.00%
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Projections of growth in earnings
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Expected growth rate - next 5 years =
20.00%
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Expected growth rate - after 5 years =
7.00%
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Risk measures
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Beta of the stock =
1.25
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General Information
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Current riskfree rate =
6.00%
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Risk premium over riskfree rate =
5.50%
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Information on Synergy benefits
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What form does the synergy benefit take?
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(1: Cost reduction ; 2:Cost reduction and Increase growth: 3: Only increase growth)
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I. The cost of goods sold without synergy is
72.22%
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If the synergy is going to reduce costs, enter the new cost of goods sold
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IIa. The growth rate in earnings in the next five years without synergy is
16.26%
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If the synergy will increase growth, enter the new growth rate
20.00%
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IIb. The growth rate after year 5 is expected to be
6.30%
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If the synergy will increase this growth rate, enter the new growth rate
7.00%
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BidderTargetA+B: No synergyA+B (Synergy)
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Free Cashflow to Equity
$98.48 $33.33 $131.81 $131.81
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Growth rate for first 5 years
15%20%16.26%20.00%
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Growth rate after five years
6%7%6.30%7.00%
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Beta1.101.251.141.14
Weighted by present values of A and B
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Req. rate of return
12.05%12.88%12.29%12.29%
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Riskfree Rate6.00%
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YEARFCF (A)Term Val (A)FCF (B)Term. Val (B)FCF (A+B)TV (A+B)FCF (A+B:S)TV (A+B:S)
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1$113.25 $40.00 $153.25 $158.17
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2$130.24 $48.00 $178.24 $189.81
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3$149.77 $57.60 $207.37 $227.77
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4$172.24 $69.12 $241.36 $273.32
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5$198.07 $3,470.40 $82.94 $1,510.64 $281.02 $4,981.04 $327.99 6634.009716
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PRESENT VALUE
$2,497.48 $1,025.48 $3,523.56 $4,523.83
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Gains from synergy =
$1,000.27
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Most that bidder firm can bid for target =
$2,025.74
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% Premium over the market price =
97.54%
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NOTES:
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(1) It is not simple to back out the growth rates for the combined firm when there is no synergy because growth rates will change.
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(2) It is far simpler to remember that in the absence of synergy the cashflows, terminal value and present value of the combined firm
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will always be equal to the sum of the same for the individual firms.
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(3) To back out the terminal growth rate of the combined firm in the absence of synergy, use the combined terminal value estimated
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in conjunction with the required rate of return to solve for the terminal growth rate.
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STEPS IN VALUING SYNERGY
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1. Value each firm separately, projecting out free cashflows and terminal value.
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2. Value the combined firm assuming no synergy. (Add up the present values for the two firms estimated in step 1)
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3. Prepare a cashflow statement for the combined firm by just adding up the items on the individual firms' statements.
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4. Evaluate where the gains from synergy are going to come from. (Higher revenue growth or lower costs)
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5. Translate the synergy gain into dollars on the combined statement. If revenues are going to grow faster because of the synergy
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apply a faster growth rate to revenue in the combined statement. If costs are going to be cut, show the reductions in costs on the statement.
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6. Calculate the value of the combined firm with the changes made in step 5.
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7. Compare to the value in step 2. The difference is the synergy gain. This is the MOST that one should as a takeover premium.
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