Chatham Foods, which has 1 million shares outstanding, wishes to merge with Kent
ID: 2658260 • Letter: C
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?
b) Cost of the cash offer?
c) NPV of the offer?
Explanation / Answer
a) PV of Merger gain = 800000/0.14 = $5,714,285,714
b) Cost of Cash Offer = (25 - 18)*2.5 million = $ 17.5 million
c) NPV of the offer = - $ 11,785,714.29