Velcro Saddles
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Velcro Saddles is contemplating the acquisition of Pogo Ski Sticks, Inc. The values of the two companies as separate entities are $20 million and $10 million, respectively. Velcro Saddles estimates that by combining the two companies, it will reduce marketing and administrative costs by $500,000 per year in perpetuity. Velcro Saddles can either pay $14 million cash for Pogo or offer Pogo a 50 percent holding in Velcro Saddles. The opportunity cost of capital is 10 percent.
a. What is the gain from merger?
b. What is the cost of the cash offer?
c. What is the cost of the stock alternative?
d. What is the NPV of the acquisition under the cash offer?
e. What is its NPV under the stock offer?
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This solution is comprised of a detailed explanation to answer what is the gain from merger.
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a. What is the gain from merger?
The gain from merger is the PV of the benefits. The benefits are $500,000 per year for perpetuity. The present value of perpetuity is ...
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