Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

Theterminalvalueisestimatedusingthecashflowsinthe
terminalyear,thecostofcapitalinperpetuity(7.39%),and
the expected growth rate of 4.25%:

Discountingtheexpectedfreecash flowsfor thenextfive
yearsandtheterminalvaluebacktothepresentyieldsavalue
for Gillette of $29,482 million.

Return on capital after year 5 = 7.39%

Thevalueof thecombinedfirm(P&G+ Gillette)with no
synergyshouldbethesumofthevaluesofthefirmsvalued
independently.

Value of P&G $128,985 million

Value of Gillette $ 29,482 million

Value of combined firm$158,467 million

Thiswouldbethevalueofthecombinedfirmintheabsence
of synergy.

To valuethesynergy, wemade thefollowingassumptions
aboutthewayinwhichsynergywouldaffectcashflowsand
discount rates at the combined firm.

• The combined firm will have some economies of
  scale, allowing it to increase its current aftertax
  operatingmarginslightly.Theannualdollarsavings
  will be approximately $200 million. This will