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What is the gain from the acquisition

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MERGER AND ACQUISITION

K limited is contemplating the acquisition of B limited. The values of the two companies as separate entities are ?30m and ?10m respectively. K estimate that by combining the two firms it will reduce marketing and administration cost by ?0.7m per year in perpetuity.

K can either pay ?15m cash for B or offer B 50% holding in K. The opportunity cost of capital is 10%.

a) What is the gain from the acquisition?

b) What is the cost of the cash offer to K

c) What is the benefit of the cash offer to B

d) What is the cost of the stock offer to K

e) What is the benefit of the stock offer to B

f) What is the NPV of the cash offer

g) What is the NPV of the stock offer

h) When will manager prefer to finance a deal with a stock

Reference no: EM132785548

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