Reference no: EM133007604

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.

3) What type of merger is this?