Answer: See explanation
Explanation:
a. What is the gain from merger?
This will be calculated by dividing the cost savings by the opportunity cost of capital. This will be:
= $500,000 / 10%
= $500,000 / 0.1
= $5,000,000
= $5 million
b. What is the cost of the cash offer?
This will be the difference between the cash cash paid and the value of the firm acquired which will be:
= $14 million - $10 million
= $4 million
c. What is the cost of the sock alternative?
First, we calculate the value of the merged company which will be:
= $20 million + $10 million + $5 million
= $35 million
Then, cost of stock alternative will be:
= (35 million x 55%) – $10 million
= ($35 million × 0.55) - $10 million
= $19.25 million - $10 million
= $9.25 million
d. What is the NPV of the acquisition under the cash offer?
This will be:
= $5 million - $4 million
= $1 million
e. What is the NPV under the stock offer?
This will be:
= $5 million - $9.25 million
= -$4.25 million
