Reference no: EM133036872

Question - The GAMA firm is proposing to acquire the ACE Products venture described in item 2 above. GAMA estimates that ACE's free cash flow for next year could be improved to $5.5 million because of synergistic benefits in the form of operating or distribution economies. The potential acquirer also believes that ACE's perpetuity growth rate could be increased to 7 % annually. However, the riskiness of the cash flows would be increased causing the appropriate WACC to increase to 16 %. Interest-bearing debt owed by ACE is $17.5 million. In addition, the venture also has surplus cash of $4 million. ACE Products has five million shares of common stock outstanding.

Required -

1. Determine ACE's total value from the perspective of GAMA. What is ACE's equity worth to GAMA in dollar amount and on a per share basis?

2. Use the per share value of ACE from the previous problem (problem 2) above and determine the GAMA's expected per share synergetic benefits from this merger.

3. If one-half of the synergy derived benefits were allocated to ACE's VCs and founders, what price per share would the merger take place.

4. GAMA has thirty million shares of stock outstanding with a market capitalization value of $600 million.

5. What is GAMA's intrinsic value per share?

6. Determine the exchange ratio between ACE's share and GAMA's share at ACE's value established in Part C. That is, what would ACE's venture investors and founders receive for the shares they exchange with GAMA's shares.