Reference no: EM132969814

Boston Brewery (BB)plc and My bottling experience (MBE) Plc are firms which are involved in the brewing and retailing of Spirits and Alcohol. Boston Brewery is a brewery and (MBE) is responsible for the bottling and distribution network of various drinks. Boston Brewery has 5.6m shares and MBE has 7.8m. Both firms are financed entirely by equity.

• Boston Brewery is considering launching a bid to acquire all the share capital of MBE, which is currently valued at £34,800,000 in the equity market. Boston Brewery has share price of £6.84 and today paid a dividend of 45p [D0] per share. The firm has an historic dividend growth rate of 4% per annum.
• Savings through the two companies cash flows been brought together, are expected to amount to £920,000 per annum, starting in one year. The firm's due diligence, which cost, Boston Brewery Plc. £28,900, identifies that through the sale of redundant assets the firm should expect cash flows of £328,000 in year 4 and then £640,000 in year 5. In terms of costs, the firm is expected to identify £570,000 by the end of the first year.
• The due diligence completed, expects that the shareholders of MBE would be willing to sell their equity to the management of Boston Brewery for a bid premium of 34p per share.

Problem 1: What is the NPV of the merger and should the firm make the offer at 34p per share?