1 The Value of Synergy Aswath Damodaran Stern School of Business October 2005 2 The Value of Synergy Many acquisitions and some large strategic investments are often justified with the argument that they will create synergy. In this paper‚ we consider the various sources of synergy and categorize them into operating and financial synergies. We then examine how best to value synergy in any investment and how sensitive this value is to different assumptions. We also look at how this synergy value
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hurdle rates were to be increased the companies growth will decrease. In vice versa if Marriott institutes lower hurdle rates the growth will increase. 2. Below is how we calculated the WACC for The Marriot. BL= 1.11 Cost of Debt (rD): 8.72 + 1.30= 10.02 CapM/Cost of Equity: rf + (mkt risk prem)BL .0872 + (.1201-.0458) 1.11 = .1697 or 16.97% WACC: (1-T) rD (D/V) + rE (E/V) (1-.44) .1002(.60/1) + .1697(.40/1) = .033667 + .067880 = .101547 or 10.15%
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Torrington as a stand-alone entity is $1.181 billion. However‚ the maximum purchase price for Torrington should only be $641 million. The optimum debt amount for this transaction would be $301 million. This amount of debt would result in a total debt to capital ratio for Torrington of 47%‚ within the range for a BBB “investment grade” debt rating. The combined entities‚ Torrington-Timken‚ would produce an interest coverage ratio of 3.2‚ and a debt ratio of 45%‚ again within the range for a BBB “debt rating
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1. How would you evaluate the capital budgeting method used historically by AES? What’s good and bad about it? “When AES undertook primarily domestic contract generation projects where the risk of changes to input and output prices was minimal‚ a project finance framework was employed.” Usually‚ project finance framework is used when the project has predictable cash flows‚ which can easily represent operating targets through explicit contract. When cash flows are certainty‚ the company can have
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Apple ’s financial performance continued to strengthen over the last several quarters. In the most recent earnings announcement‚ Apple reported significant growth in net revenues driven by the strong performance of its iPod product line. Net sales for the 2nd quarter grew to $4.36 billion‚ which is a 34% increase over 2nd quarter 2005 results. Net income increased by 41% to $410 million. (Apple Reports)The iPod product line continues to drive the financial performance of the company. In the 2nd quarter
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Bank Case Study 2011 Question (1): Capital Structure and Financing in the Banking Industry Introduction Australian banks are an interesting case of capital structure and financing considerations as far as companies go‚ in that they are regulated in a number of ways by the Australian Prudential Regulatory Authority (APRA) and the Reserve Bank of Australia (RBA). Considerations of capital structure have the effect of reducing the cost of capital and so in turn increase the value of the
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forms of business organization. 4. Corporations have the ability to raise larger sums of capital than the other forms of business organization. Objective: Explain how financial markets work in the United States. 2. Which of the following is NOT an advantage of a private placement (as compared to a public offering)? 1. Greater financing flexibility 2. Lower flotation costs 3. Lower interest costs 4. Quicker availability of funds Objective: Assess the role of ethics and compliance
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profitable operations every year since 1932‚ and held approximately a 60-65% market share by 1984. Sales had been increasing annually at about a 7% compound rate‚ and the return on average invested capital was about 20%. The cost structure of the company was 100% equity‚ owned solely by Mr. Case. The capital budget was the leftover earnings generated from internal operations minus the amount Mr. Case wished to withdrawal as income (dividends) for the year. Also‚ the seasonal accumulation
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500 per month (฿2‚152‚000/year). The Phuket Hotel is responsible for the repair and maintenance of the facilities (i.e. toilets‚ elevators) and has prorated this cost over the next 4 years to be an additional ฿10‚000 per year for Planet Karaoke. The total revenue over the next 4 years is estimated to be ฿8‚404‚000. The projected capital expenditure for the hotel is between ฿770‚000 and ฿1‚000‚000. We will assume this expenditure is ฿885‚000. It is predicted that unwelcome guests at the Planet Karaoke
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Board of Directors Boeing is currently operating with the majority market share of the commercial sector of aircraft manufacturing. Frank Shrontz‚ our CEO‚ has recently stated his goal to increase the company’s return on equity from its current average of 12%. The following summary will delve into the most appealing project for the future of this firm: the 777 aircraft. The purpose of this new product is to maintain our competitive advantage in commercial airline production by completing a family
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