increasethecombinedfirm’spretaxoperatingincome
by $200 million.- Thecombined firmwillalsobe able togeneratea
slightlyhigherafter-taxreturnoncapital(anincrease
of about 1%) for the next five years, while
maintaining the same reinvestment rate as the
independent firms would have. As a result, the
growth rate over the next five years will be:
4 - Thebetaofthecombinedfirmwascomputedinthree
steps.WefirstestimatedtheunleveredbetasforP&G
and Gillette.
We thenweighted these unlevered betas by the values of
thesefirmsto estimateanunleveredbetaforthecombined
firm; P&G has a firm value
5 of$128.985billionandGillette’sfirmvaluewas$29.482
billion.
Weused thedebt-to-equity ratiofor thecombined firmto
estimate a new levered beta and cost of capital for the firm.