Question 8

a. Merger gain = PVSavings

Merger gain = $500,000 / .10 = $5 million

b. Cost of cash offer = Cash paid – PVB

Cost of cash offer = $14m – 10m = $4 million

c. Cost of stock offer = N × PV(AB) – PV(B)

Cost of stock offer = .5($20m + 10m + 5m) – $10m = $7.5 million

d. NPV of cash offer = Merger gain – Cost of cash offer

NPV of cash offer = $5m – 4m = $1 million

e. NPV of stock offer = Merger gain – Cost of stock offer

NPV of stock offer = $5m – 7.5m = –$2.5 million

Question 9
Corton Denham
EPS 5 1.5
DPS 3 0.8
N Shares (million) 1 0.6
Stock price 90 20
M.Cap 90 12

(a) Gain from acquisition

P0 20
D1 0.8
growth 6%
rE 10%
revised growth 8%
Stock price with revised growth 40

Gain from the acquisition 12.00 million

(b) Cost of acquisition at 25 per share cash

Acquisition premium 3 million

(c) Cost of acquisition at 1:3 exchange of shares

No. of shares offered in the exchange 0.2

Total shares post-acquisition 1.2
Total value of the combine post-acquisition 114.00

Price post-acquisition 95
Price paid in shares 19
Acquisition premium 7 million

(d) cost if the growth rate remains at 6%

Acquisition premium - cash acquisition 3 million

Acquisition premium - stock offer

Total value of the combine post-acquisition 102

Price post-acquisition 85
Price paid in shares 17
Acquisition premium 5 million