Reference no: EM133122072

SoyGen Corporation, a 100%-equity capitalized soy bean processing company, wants to diversify into the corn wet milling business by buying Fructalore Corporation, also 100%-equity capitalized. SoyGen estimates that by reducing overhead and combining marketing efforts, it could increase after-tax cash flow by $2,925,000 per year in perpetuity above the standalone cash flow of the two companies on their own. The current stock market value of Fructalore (which you consider to be its fair value as well) is $70,200,000 and the current market value of SoyGen is $202,500,000. SoyGen has calculated that its cost of capital is 10%. Fructalore has tentatively agreed to be acquired for either an all-cash offer of $99,000,000; or for 30% of SoyGen stock. (Assume that SoyGen has more than enough cash on its balance sheet if it pays cash; and that it would exchange newly-issued shares of the combined company for a stock purchase. HINT: You do not need to make a multi-year pro forma forecast, since you can assume that the market values of the two companies equal the NPV of the forecasted cash flows of the two companies on a standalone basis.)

a) What is the synergy value of the merger?

b) What is the total value of Fructalore to SoyGen?

c) What is the cost of the cash purchase? What is the NPV to SoyGen of the cash purchase?

d) What is the cost of the stock purchase? What is the NPV to SoyGen of the stock purchase?

e) Which alternative form of payment should SoyGen pick?

f) Say that, for tax reasons, Fructalore withdraws its current proposal and instead demands 35% of the stock of the combined company. What does this do to SoyGen's NPV? Should SoyGen meet the new demand?