What is the total gain in present value term from takeover

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Reference no: EM133615997

Problem

VERA Ltd is considering taking over KORU Ltd. VERA and KORU have 4 million and 5 million shares outstanding respectively. The annual net cash flows of VERA and KORU are $1.5million and $2million respectively. These cash flows are expected to remain constant in perpetuity. Both companies are all-equity firms. The risk free rate is 5%. VERA has a beta of 1.2 and a cost of capital of 13.40% while KORU's beta is 1.4

After the takeover, VERA's annual cash flow is expected to increase to $2.2m per annum in perpetuity and its beta will be 1.4, while KORU's perpetual cash flow reduces to $1.7m per annum and beta remains the same after the takeover.

1. What is the total gain, in present value term, from the takeover?

2. What is the price per share at which KORU represents a zero net present value investment to VERA?

3. If VERA offers $14million in cash for KORU, calculate the gains to shareholders of both companies.

4. If the deal is settled with VERA swapping 7 VERA shares for 8 KORU shares, calculate the new VERA share price after the deal, and the NPV of the deal for shareholders of both companies.

Reference no: EM133615997

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