VelSad is contemplating the acquisition of Po, Inc. The values of the two companies as separate entities are $32 million and $16

Question

3 years ago

6

VelSad is contemplating the acquisition of Po, Inc. The values of the two companies as separate entities are $32 million and $16

million, respectively. VelSad estimates that by combining the two companies, it will reduce marketing and administrative costs by $560,000 per year in perpetuity. VelSad can either pay $20 million cash for Po or offer Po a 44% holding in VelSad. The opportunity cost of capital is 10%.What is the cost of the stock offer?

Business

1 answer:

svetoff [14.1K] · Answer 1 · 2022-03-02T17:16:12+03:00

Answer:

7.58m

Explanation:

The VelSad is considering to acquire Po, Inc. by offer of 20 million cash or either 44% holding. The cost of acquisition refers to all cost incurred by a company to acquire another company. The benefit VelSad can get after acquiring Po, Inc is that it can save marketing and administrative cost by $560,000 every year. The cost of stock offer is 7.58 million. This is calculated by taking 44% of VelSad value and then discounting it at cost of capital which is 10%.