Vonnegut Company and Heller Company are two identical firms that agree to merge. Both have revenues (R0) of $1,500, operating margin (m) of 15%, a tax rate (T) of 40%, investment rate (I) of 10%, growth rate (g) of 11%, 5 years of supernormal growth (n) followed by zero growth thereafter, and a 9% cost of capital (k).
a. What are the values of the firms 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?