Calculating the Gain from Merger
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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 is willing to pay $14 million cash for Pogo. The opportunity cost of capital is 8 percent.
a. What is the gain from merger?
b. What is the cost of the cash offer?
c. What is the NPV of the acquisition under the cash offer?
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Solution Summary
The solution explains how to calculate the cost, gain and the NPV of a merger in easy-to-follow, step-by-step calculations.
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a. What is the gain from merger?
The gain from merger is the PV of the benefits. The benfits are $500,000 per year for perpetuity. The present ...
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