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