Barone Sanitation

6. Barone Sanitation is considering buying Ramsey Sports. Under current market conditions, Barone will have to pay

a premium in the amount of $29,000,000 in order to get the deal done, in addition to transaction costs and fees of $4,000,000. The acquisition will allow the company to avoid a capital expense this year in new machinery of $8,000,000 that they had been planning on spending. A careful analysis has shown that the merger will permanently reduce combined regular (i.e. non capital) annual expenses by $1,300,000. Based on this information, how much will incremental revenue need to increase each year in order to justify this transaction? Assume that the revenue and regular expense changes will remain the same each year for perpetuity, that the appropriate discount rate is 13%, and that that all taxes should be ignored.

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