CDF Inc. Is contemplating the acquisition of Fogo company. The values of the two

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

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