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?
a. The gain from merger is the PV of the benefits. The benfits are $500,000 per year for perpetuity. The present value ...
This solution calculates the gain and cost of a merger between Velcro Saddles and Pogo Ski Sticks.