At the beginning of the year Ham Inc.’s management is considering making an offer to buy Egg Corporation.

At the beginning of the year Ham Inc.’s management is considering making an offer to buy Egg Corporation. Egg’s

At the beginning of the year Ham Inc.’s management is considering making an offer to buy Egg Corporation. Egg’s

projected operating income (EBIT) for the current year is $30 million, but Ham believes that if the two firms were merged, it could consolidate some operations, reduce Egg’s expenses, and raise its EBIT to $40 million. Neither company uses any debt, and they both pay income taxes at a 40% rate. Ham has a better reputation among investors, who regard it as better managed and also less risky, so Ham’s stock has a P/E ratio of 15 versus a P/E of 12 for Egg. Since Ham’s management will be running the entire enterprise after a merger, investors will value the resulting corporation based on Ham’s P/E. Based on expected market values, how much synergy should the merger create?