Value of the stock in the merged company

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Velcro Saddles is contemplating the acquisition of Skiers' Airbags Inc. The values of the two companies as separate entities are $42 million and $21 million, respectively. Velcro Saddles estimates that by combining the two companies, it will reduce marketing and administrative costs by $610,000 per year in perpetuity. Velcro Saddles considers offering Skiers' shareholders a 50% holding in Velcro Saddles. The opportunity cost of capital is 10%.

a. What is the value of the stock in the merged company held by the original Skiers' shareholders? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

b. What is the cost of the stock alternative? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

c. What is the merger's NPV under the stock offer? (A negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

Reference no: EM132714160

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