You have been asked to estimate the value of synergy in the merger of StraightCom, a movie streaming firm, and Movie Sor

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You have been asked to estimate the value of synergy in the
merger of StraightCom, a movie
streaming firm, and Movie Sorcery, an entertainment company and
have been provided with
the following information on the two companies:
StraightCom
Movie Sorcery
Revenues
$760.00
$260.00
After-tax Operating Income next year
$70.00
$40.00
Cost of capital
12.00%
9.00%
Return on capital
10.00%
12.00%
Net Debt
$100.00
$50.00
Number of shares (millions)
125
50
Both firms are in stable growth, growing 3% a year in
perpetuity.
a. Estimate the value per share of StraightCom, prior to the
merger.
b. Estimate the value per share of Movie Sorcery, prior to the
merger.
c. Now assume that combining the two firms will be able to cut
annual operating
expenses by $22 million (on an after-tax basis), though it will
take three years for these
costs savings to show up. Estimate the value of synergy in this
merger.
d. Assume that both companies were fairly priced before the
acquisition and that
StraightCom pays a 25% premium over market price to buy Movie
Sorcery. Estimate the
value per share for StraightCom after the acquisition.