Reference no: EM133060689

QUT Corp. wants to acquire UQ Corp. via tender offer. Current share prices and number of shares outstanding are as below.

Both firms are unlevered firms, and the cost of capital is 11.5%. The corporate tax rate is 35%. After the merger, production capacity will be enhanced from 4M unit of output to 10M, while the sales price will be decreased from $12 to $10.5 per unit of output. In terms of costs, fixed costs will increase from $20M to $40M per year, but variable costs will be reduced from $6 to $5.5 per unit of output. In addition, there are reorganization costs of $2M per year for the first three years after the merger, including the merger year (i.e. reorganization costs of $2M are incurred from year 0 (the merger year) to year 3), and a one-time decrease in inventory requirement of $0.5M as a result of the merger.

(a) What is the value of the synergic gains from the merger? Your answer should be in millions and accurate to two decimal places (e.g., 10,500,000 should be entered as 10.50).

(b) UQ shares experienced a sudden jump of 30% following rumors of a takeover. QUT decides to make an immediate cash offer of $16 for UQ's shares before further rises in share price. How much was the cash bid premium? If the target shareholders tender their shares will the acquiring shareholders see a profit? Your answer should be in millions and accurate to two decimal places (e.g., 10,500,000 should be entered as 10.50).

(c) The bid was not successful. Not a single shareholder of UQ tendered their shares. The management of QUT concluded that the cash bid was too low considering the synergic gains of the merger. If the shareholders of UQ hold out, what is the highest cash bid that QUT should consider such that the stockholders would benefit from the merger?