You have been asked to value the synergy in a merger by your boss, who also happens
to be an avid believer in Economic Value Added (EVA). As a result, you are given the
following information on the two firms:
 Company A is a diversified consumer product company with $ 2 billion in capital
invested, a return on capital of 13%, and a cost of capital of 11%. The firm
is assumed to be in stable growth, and the EVA is expected to grow 5% a
year in perpetuity.
 Company B is a smaller company that produces only cleaning supplies. It has $ 500
million in capital invested, earning a return on capital of 16% with a cost of
capital of 12%. This firm is also in stable growth, and the EVA is expected
to grow 5% a year in perpetuity.
 Both firms have 40% tax rates.
Using the above information, answer the following questions:
a. Value Company A using the EVA approach.
b. Value Company B using the EVA approach. c. As a result of the merger, you expect the firm to be able to lower its cost of capital to
10% (as a result of increased debt capacity) and to post an increase in the combined
operating income of 10% (as a result of economies of scale). Estimate the value of
synergy in this merger.