4. Smith Devices is contemplating the purchase of National Widget Company. The values of the two companies as separate entities are $20 million and $10 million, respectively. Smith estimates that by combining the two companies it will reduce marketing and administrative costs by $500,000 per year in perpetuity. Smith is willing to pay $14 million cash for National. The opportunity cost of capital is 8 percent.
a. What is the gain from the merger? ____________
b. What is the cost of the cash offer? ____________
c. What is the NPV of the acquisition under the cash offer? _______________
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 ...
The solution explains how to calculate the gain, cost and NPV of a merger