In April 1994, Novell, Inc. announced its plan to acquire WordPerfect Corporation for
Atthetimeoftheacquisition,therelevantinformationaboutthetwo companies was as follows:
Costof Goods Sold (w/o Depreciation)
ExpectedGrowth Rate in Revenues/EBIT
ExpectedPeriod of High Growth
Capital spending will be offset by depreciation after the high-growth period. Neither firm has any debt outstanding. The treasury bond rate is 7%.
a. Estimate the value of Novell, operating independently.
b. Estimate the value of WordPerfect, operating independently. c. Estimate the value of the combined firm, with no synergy.
d. As a result of the merger, the combined firm is expected to grow 24% a year for the high-growth period. Estimate the value of the combined firm with the higher growth.
e. Whatis thesynergyworth? Whatisthe maximumpriceNovell canpayfor WordPerfect?