Series 79 practice questioneasyFinancial Modeling
A buyer expects $15 million of annual cost synergies but must incur one-time integration costs to capture them. How should the annual synergy estimate be treated in a merger model?
- AAs an operating benefit that improves forward EBITDA, separate from one-time non-recurring integration costs✓ Correct answer
- BAs a financing inflow below EBITDA
- CAs a reduction to purchase price goodwill
- DAs a tax item with no operating effect
Explanation
Why A — As an operating benefit that improves forward EBITDA, separate from one-time non-recurring integration costs
As an operating benefit that improves forward EBITDA, separate from one-time non-recurring integration costs Ongoing cost synergies raise projected earnings power, while implementation costs are usually modeled as separate non-recurring cash uses. Keeping them separate prevents bankers from overstating recurring profitability.
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