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blsea [12.9K]
3 years ago
7

CDF Inc. is contemplating the acquisition of Pogo Company. The values of the two companies as separate entities are $20 million

and $10 million, respectively. CDF estimates that by combining the two companies, it will reduce marketing and administrative costs by $500,000 per year in perpetuity. CDF can either pay $14 million cash for Pogo or offer Pogo a 55% holding in CDF. If the opportunity cost of capital is 10%,a. What is the gain from merger? b. What is the cost of the cash offer? c. What is the cost of the sock alternative? d. What is the NPV of the acquisition under the cash offer? e. What is the NPV under the stock offer?
Business
1 answer:
S_A_V [24]3 years ago
7 0

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

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Explanation:

Solution

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6 0
3 years ago
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Answer:

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As robin uses her computer to write a report of her team’s investigation she is struggling to keep the foot notes numbered in th
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The functions of Word Processing Software are performed automatically and saves a lot of time and man-hours.

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2 years ago
Consider a competitive market with a large number of identical firms. The firms in this market do not use any resources that are
lakkis [162]

Answer:

a. increase price in the short run but not in the long run.

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3 years ago
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Answer:

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