Q1. The following projections relate to two recently merged firms: Revenue = $7,

Question

Q1.

The following projections relate to two recently merged firms:

Revenue = $7,280,000
Cost of Goods Sold (without operating synergy) = 88% of revenue
Cost of Goods Sold (with operating synergy) = 85% of revenue
Depreciation Expense (not included in the Cost of Goods Sold) = $380,000
Tax Rate = 40%
Change in Working Capital = $26,000
Capital Spending = $220,000
Cost of Capital = 12.50%
Expected perpetual growth rate = 4.50%

What is the value of the operating synergy for the combined firms?

Select one:

A. $1,450,000

B. $1,638,000

C. $1,965,000

D. None of the above

Q2.

The following information relates to Aberdeen Petroleum Corporation:

Aberdeen Petroleum:

Dividend payout ratio = 25%
Beta = 1.10
Growth rate = 4%

Peer Group:

Dividend payout ratio = 40%
Beta = 1.20
Growth rate = 5%

Aberdeen Petroleum had earnings per share in the current year of $3.00. The U.S. T-bill rate of return is 3.00% and the market rate of return is 9.50%.

What is the value of Aberdeen Petroleum's stock without managerial control?

Select one:

a. $8.21

b. $10.35

c.  $12.68

d. $14.18

e. $19.50

Explanation / Answer

Q2. Required return as per CAPM = risk free rate+beta*(market return-risk free rate) = 3+1.1*(9.5-3) = 10.15% Last dividend = 3*0.25 = $0.75 per share Value share as per constant dividend growth formula = D1/(r-g) where D1 = next expected dividend. Hence, value of the stock = 0.75*1.04/(0.1015-0.04) = $      12.68 Answer: Option [c] Q1. Difference in Gross margin = 7280000*(88%-85%) = 218400 Difference in gross margin net of tax = 218400*0.60 = 131040 Tax shield on depreciation = 380000*40% = 152000 Capital spending 220000 Change in NWC 26000 FCF 37040 Value of the synergy = 37040*1.045/(0.125-0.045) = 483835 Answer: Option [D]

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