Question

Harris management is considering making an offer to buy B Corporation. B corp's projected operating income (BIT) for the current year is $30 million, but Harris believes that if the two firms were merged, it could consolidate some operations, reduce B Corp expenses, and raise its EBIT to $40 million. Neither company uses any debt, and they both pay income taxes at a 21% rate. Harris has a better reputation among investors, who regard it as better managed and also less risky, so Harris stock has a P/E ratio of 20 versus a P/E of 10 for B Corp. Since Harris's management will be running the entire enterprise after a merger, investors will value the resulting corporation based on Harris's P/E. Based on expected market values, how much synergy should the merger create? A) $237 million B) $395 million C) $500 million D) $300 million

          Harris management is considering making an offer to buy B Corporation. B corp's projected operating income (BIT) for the current year is $30 million, but Harris believes that if the two firms were merged, it could consolidate some operations, reduce B Corp expenses, and raise its EBIT to $40 million. Neither company uses any debt, and they both pay income taxes at a 21% rate. Harris has a better reputation among investors, who regard it as better managed and also less risky, so Harris stock has a P/E ratio of 20 versus a P/E of 10 for B Corp. Since Harris's management will be running the entire enterprise after a merger, investors will value the resulting corporation based on Harris's P/E. Based on expected market values, how much synergy should the merger create?
A) $237 million
B) $395 million
C) $500 million
D) $300 million

Added by Jackson W.

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