Assignment:
Vonnegut Company and Heller Company are two identical firms that agree to merge. Both have revenues of $1500, operating margin of 15%, a tax rate of 40%, investment rate of 10%, growth rate of 11%, 5 years of supernormal growth followed by zero growth thereafter, and a 9% cost of capital.
a) What are the values of the companies as stand-alone companies?
b) If the combined firm increases its operating margin by 2%, revenues are combined, and the other value drivers remain unchanged, what is the value of the combined firm?
Provide complete and step by step solution for the question and show calculations and use formulas.