In this workout, Printer has acquired Fax for a premium of 2,000 We're given forecast synergies for the first three years and we're told the synergies are expected to stay flat after year 3 We're asked to calculate the value created or destroyed using the assumptions below If we go into the calculation, we can see that they first three year synergies are already in there Years 1, 2, 3 50, 100 and 200 We need to find the present value of those three figures and of the terminal value as well So we start off by calculating the post tax synergies That's where I take the pre tax synergies and I multiply it by one minus the tax rate Now I've got two to choose from, the effective and the marginal. I'm going to go with the marginal Because these synergies have a marginal impact on the company's net income I lock onto that cell, which means that I can now copy it to the right And I've found the post tax synergies Next up we need the terminal value and for the terminal value, what I'll do is I'll take the post tax synergies in year 3 And I'll divide them by the discount rate and that will find the present value of a perpetuity We haven't got our discount rate yet, so if we go up and calculate it It's going to be the sum of Faxes current WACC and a risk premium And we add that on because synergies, we're not too certain of those cash flows There's an element of risk that they might be quite volatile, so we increase the WACC up So my terminal value, I take that post tax synergy of 130 and divide it by the discount rate of 10 to get me 1,300 I can now find the present value of those first 3 years of synergies Because there is no mid year adjustment required, I can cheat a little bit and I can use the NPV formula to help me out This asks, what is the rate (discount rate) you want to use? I'm going to use 10%, it then asks "when are your cash flows?" I've got them here, D22 to F22 That will now discount them back to the present date and we get the figure of 180.9 I now need to do present value the terminal as well So I take the 1,300 and I divide that by one plus the discount rate, all to the power of the year we're in And we're in year 3 Which gets me a present value of the terminal of 976.7 So the value of my synergies is the sum of the two above Fantastic! By acquiring Fax, we should be able to earn 1,157.6 (the present value that is) I now want to compare that to the premium paid and the premium paid was "oh dear, 2,000" The premium paid is higher than the synergies That destroys value, so if I take the 1,157.6, subtract the 2,000 This suggest we have overpaid and value is destroyed