Question

1. A financial manager is evaluating a merger target and wishes to estimate cost and revenue synergies for years 1 and 2 (i.e., the first couple of years, post-merger). The target currently has revenues of $80, which is forecasted to grow at a rate of 9% annually over the estimated horizon of 4 years. The analyst assumes that EBITDA would be approximately 20% of revenues. Depreciation and amortization would be about $6 each year. The applicable tax rate is 25%. The analyst estimates a cost synergy of 5% and a revenue synergy of 15%.
   
   To get full credit, answers must be supported by formulas and calculations showing relevant inputs. As part of your answer, please compare and contrast the importance of cost and revenue synergies.

Answer 1

	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