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    Velcro Saddles: Merger and Gains Cost

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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 Preview

    a. The gain from merger is the PV of the benefits. The benfits are $500,000 per year for perpetuity. The present value ...

    Solution Summary

    This solution calculates the gain and cost of a merger between Velcro Saddles and Pogo Ski Sticks.