The synergy of a business combination can be determined by

Calculating the change in revenue minus the change in cost.
Calculating the change in revenue minus the change in taxes.
Using the risk adjusted discount rate to discount the incremental cash flows of the newly-formed entity.
Using the risk adjusted discount rate to discount the change in revenues of the newly-formed entity.Show Result

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

Answer (C) is correct. Synergy equals the value of the combined firm minus the sum of the values of the separate firms. These values can be calculated using the capital budgeting technique of discounted cash flow analysis. The difference between the cash flows of the combined firm and the sum of the cash flows of the separate firms is discounted at the appropriate rate, usually the cost of equity of the acquired firm. The components of the incremental cash flows are the incremental revenues, costs, taxes, and capital needs.