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Best Foods, which has 1.2 million shares outstanding, wishes to merge with Good Drinks with 0.5 million shares outstanding. The market prices for Best Foods and Good Drinks are $49 and $18 per share, respectively. The merger could generate an estimated savings of $800,000 annually for the indefinite future. If Best Foods were willing to pay $25 per share for Good Drinks, and the appropriate cost of capital is 14 percent, what would be the:
i) Present value of the merger gain or synergy?
ii) Cost of the cash offer?
iii) NPV of the cash offer?
iv) Break-even cash offer?
2) What would be the NPV if same offer is made for exchange of stock?
3) What should be the main objective of the management while considering a merger?
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