Wolfco management is currently considering a merger with Lambco. Both companies are in the same industry, and both companies’ shares sell at a ratio of price to free cash flow of 10. If the two companies merged, there is no reason to believe that this valuation multiple would change. 3 Wolfco has 20 million shares outstanding, selling at a price of $22.50 per share. Lambco has 10 million shares outstanding. Neither company has any debt. Lambco has revenues of $400 million per year and cash operating costs of $200 million per year. Annual depreciation expense is $100 million and annual capital expenditures are $110 million per year. Lambco also invests $20 million each year in additional net working capital. The corporate tax rate is 35%. If Wolfco and Lambco were to merge, Wolfco believes that it could apply its superior inventory control and accounts receivable management techniques to Lambco and thereby cut Lambco’s annual investment in net working capital in half. The two companies’ management teams are now trying to negotiate the terms of a merger.
a) What is the value of Lambco to Wolfco?