You have been asked to value the synergy in a merger by your boss,

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You have been asked to value the synergy in a merger by your boss, who also happens to be an avid believer in Economic Value Added (EVA). As a result, you are given the following information on the two firms:

• G & P is a diversified consumer product company with $ 2 billion in capital invested, a return on capital of 13%, and a cost of capital of 11%. The firm is assumed to be in stable growth, and the EVA is expected to grow 5% a year in perpetuity

. • BandAdd is a smaller company that produces only perfumes. It has $ 500 million in capital invested, earning a return on capital of 16% with a cost of capital of 12%. This firm is also in stable growth, and the EVA is expected to grow 5% a year in perpetuity.

• Both firms have 40% tax rates. Using the above information, answer the following questions: a. Value G & P using the EVA approach. ( 20 points) b. Value BandAdd using the EVA approach. ( 20 points) c. As a result of the merger, you expect the firm to be able to lower its cost of capital to 10% (as a result of increased debt capacity) and to post an increase in the combined operating income of 10% (as a result of economies of scale). Estimate the value of synergy in this merger. (60 points) Note: $1,000 equals $1 billion on your spreadsheet

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