Vonnegut Company and Heller Company are two identical firms that agree to merge. Both have revenues of $1500, operating margin of 15%, a tax rate of 40%, investment rate of 10%, growth rate of 11%, 5 years of supernormal growth followed by zero growth thereafter, and a 9% cost of capital.
a) what are the values of the companies as stand-alone companies?
b) if the combined firm increases its operating margin by 2%, revenues are combined, and the other value drivers remain unchanged, what is the value of the combined firm?
The value of the combined firm is reiterated.