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A financial manager is evaluating a merger target and wishes to estimate cost and revenue synergies...

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Accounting

  1. A financial manager is evaluating a merger target and wishes toestimate cost and revenue synergies for years 1 and 2 (i.e., thefirst couple of years, post-merger). The target currently hasrevenues of $80, which is forecasted to grow at a rate of 9%annually over the estimated horizon of 4 years. The analyst assumesthat EBITDA would be approximately 20% of revenues. Depreciationand amortization would be about $6 each year. The applicable taxrate is 25%. The analyst estimates a cost synergy of 5% and arevenue synergy of 15%.

    To get full credit, answers must be supported by formulas andcalculations showing relevant inputs. As part of your answer,please compare and contrast the importance of cost and revenuesynergies.

Answer & Explanation Solved by verified expert
4.5 Ratings (901 Votes)

Base Year 1st year 2nd year
Revenue 80 87.2 (1.09*80) 95.048 (1.09*87.2)
Cost 64 69.76 (87.2-17.44) 76.0384 (95.048-19.0096)
EBITDA(Revenue-Cost) 16 17.44 (87.2*20%) 19.0096 (95.048*20%)
Dep. & Ammort. 6 6 (Given) 6 (Given)
EBIT(EBITDA-Dep.) 10 11.44 13.0096
Tax Rate (25%) 2.5 2.86 3.2524
Proift(EBIT-Tax) 7.5 8.58 9.7572
Revenue Synergy for 2 Years  
Revenue for 2 Years 182.248
Revenue synergy 15%
Amount 27.3372 (182.248*15%)
Cost Synergy for 2 Years
Cost for 2 Years 145.7984
Cost Synegy 5%
Amount 7.28992 (145.7984*5%)
Hoping for a Positive response.Thank You

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