Chatham Foods, which has 1 million shares outstanding, wishes to merge with Kent

Question

  Chatham Foods, which has 1 million shares outstanding, wishes to merge with Kent Drinks with 2.5 million shares outstanding. The market prices for Chatham Foods and Kent Drinks are $49 and $18 per share, respectively. The merger could create an estimated savings of $800,000 annually for the indefinite future. If Chatham Foods were willing to pay $25 per share for Kent Drinks, and the appropriate cost of capital is 14%, what would be the:

a)         Present value of the merger gain? (1 Point)

b)        Cost of the cash offer? (1 Point)

c)         NPV of the offer? (2 Points)

Explanation / Answer

a) The PV of Merger Gain = Annual savings/ Cost of Capital = 800,000/14% = 5,714,285.71
b) Cost of cash offer = Offer Price per share * Number of oustanding share sof Kent *  cost of capital = 25 * 2,500,000 * 14% = 50,000,000 * 14% = 8,750,0000

c) NPV of Offer = PV of merger gian - Cost of cash offer = 5714285.71 - 8,750,000 = -3,035,714.29

Best of Luck. God Bless

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