Theexpectedgrowthrateforthenextfiveyearsistheproduct
ofthereinvestmentrateandtheaftertaxreturnoncapital.The
valueofthecombinedfirmisthesumofthefirms valued
independently.
Tovaluesynergy,assumethatthecombinedfirmwillsave
$15millioninpretaxoperatingexpenseseachyear,pushing
upthecombinedfirm’spretaxoperatingincomebythatsame
amount.Thefollowingtablereportsonthecombinedfirm’s
valuewiththecostsavingsandestimatesthevalueofsynergy
(dollar amounts in millions):
Asaresultofthecostsavings,thevalueofthefirmincreases
by $162.90 million.
ILLUSTRATION 15.2: Valuing Growth Synergies
Consideragainthetwocompaniesshowninthelastexample.
Assumeforthis examplethatinsteadofthesynergytaking
the form of cost savings, it had manifested itself as an
increase in marginal after-tax return on capital on new
investmentsfrom10.5%(premergerforbothfirms)to12.6%
for the combined firm. At the same time, assume that