Q1. Systemic Solutions Corp. is evaluating a merger with Technical Products, Inc

Question

Q1.

Systemic Solutions Corp. is evaluating a merger with Technical Products, Inc. Operating independently, Systemic Solutions Corp. expects to generate $30 million of FCFF1 and Technical Products, Inc. expects to generate $40 million of FCFF1. Both firms have a cost of equity of 14.00% and anticipate growing in perpetuity at 4.00% per year. After the merger, the FCFF1 of the combined firms is expected to be $80 million. What is the value of the synergy?

Select one:

A. $70 million

B. $80 million

C. $90 million

D. $100 million

E. None of the above

Q2.

Which of the following is true concerning operating and financial synergy?

Select one:

A. Operating synergy includes economies of scale, cash slack, pricing power, and market growth.

B. Financial synergy includes cash slack, pricing power, debt capacity, and tax benefits.

C. Operating synergy includes economies of scale, pricing power, market growth, and combined functional strengths.

D. Financial synergy includes debt capacity, tax benefits, combined functional strengths, and economies of scale.

E. None of the above

Explanation / Answer

Q1)

Value of synergy:

= Synergy affect on FCF1/(Cost of equity-Groth rate)

= ($80-$40-$30)/(14%-4%)

= $10/10%

= $100

Hence, correct option is D. $100 million.

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