CDF Inc. Is contemplating the acquisition of Fogo company. The values of the two
ID: 2726568 • Letter: C
Question
CDF Inc. Is contemplating the acquisition of Fogo company. The values of the two companies as separate entities are $20 million and $10 million, respectively. CDF Estimates that by combining the two companies, will reduce marketing and administrative costs by $500,000 per year in perpetuity. CDF can either pay $14 million cash for Pogo or offer Pogo a 55% holding CDF. If the opportunity cost of capital is 10%. -What is the gain from merger? -What is the cost of the cash offer? -What is the cost of the sock alternative? -What is the NPV of the acquisition under the cash offer? -What is the NPV under the stock offer?
Explanation / Answer
Part A)
Gain from merger = cost saving/ opportunity cost of capital
=500,000/ 0.10
= 5,000,000
Part b)
Cost of cash offer = cash paid –value of the firm acquired
= 14 million – 10 million
= 4 million
Part c)
Value of merged company = 20 million + 10 million + 5 million
= 35 million
Cost of stock offer =(35 million x 55%) – 10 million
= 9.25 million
Part d)
NPV of cash offer = gain – cost of cash offer = 5 -4 million
= 1 million
Part e)
NPV of cash offer = gain – cost of stock offer = 5 -9.25 million
= -4.25 million