Reference no: EM133018708
Question - Blue-Light (BL) Plc. and Red-Switch (RS) Plc. are two firms which produce glass and electrical components for lighting manufactures. BL Plc. has 8.2m shares and currently trades at £4.52 per share. RS Plc. which is smaller has a total market value of £6.84m. In terms of market valuation, the debt amount of this total in market value terms is £1.8m. RS Plc. has 3 million shares.
If the firms merge, then the due diligence has revealed the following: The cost savings between the firms would be £129,000 in perpetuity, with an immediate costs savings of £89,400. The debt would need to be repaid to the debt holders. The costs of the merger would be £48,200 in year 3, and then a further £50,500 in year 5. The advisors conducting the due diligence feel that an offer of £0.25 per share would induce the owners of RS Plc. to sell their shares.
The firms compete in a very similar industry, which is mainly classified as a defensive stock. They both have a Beta (β) of 0.65. The risk-free rate is 2% per annum and the market risk premium is 10% per annum
Required -
1) Calculate an appropriate discount rate for the merger between Blue-Light Plc. and Red-Switch Plc.
2) Calculate the NPV of the merger depending on the assumptions as presented stating whether should be approved on wealth creation grounds.
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