To calculate: The NPV of the merger, and whether the merger should be undertaken or not.
Introduction:
Merger:
An agreement between two existing companies that combines them to form one single company is termed as a merger. This is done for the expansion of business, share in the market and value of shareholders.
Synergistic benefits:
Synergistic benefits arise out of the merger of two or more entities, which is a basic term meaning that the performance and value of the combined entity will be more than those of the individual entities.
It is the difference between the PV (present value) of
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- J & J Enterprises is considering a cash acquisition of Patterson Steel Company for $5,800,000. Patterson will provide the following pattern of cash inflows and synergistic benefits for the next 20 years. There is no tax loss carryforward. Use Appendix D as an approximate answer, but calculate your final answer using the formula and financial calculator methods. Cash inflow (aftertax) Synergistic benefits (aftertax) Net present value b. Should the merger be undertaken? The cost of capital for the acquiring firm is 11 percent. a. Compute the net present value. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) Yes 1-5 $620,000 58,000 O No Years 6-15 $780,000 78,000 16-20 $980,000 88,000arrow_forwardCompany A is preparing a deal to acquire company B.  One analyst estimated that the merger would produce 85 million dollars of annual cost savings, from operations, general and administrative expenses and marketing. These annual cost savings are expected to begin two years from now, and grow at 2.5% a year. In addition the analyst is assuming an after-tax integration cost of 0.1 billion, and taxes of 20%. Assume that the integration cost of 0.1 billion happens one year after the merger is completed (year 1). The analyst is using a cost of capital of 10% to value the synergies.   Company B’s equity is trading at 2.3 B dollars (market value of equity). Company A is planning to pay a 32% premium for company B.   a)  Compute the value of the synergy as estimated by the analyst. b)  does the estimate of synergies justify the premium? Could you show me how to work this out in an excel sheet?arrow_forwardCompany A is preparing a deal to acquire company B. One analyst estimated that the merger would produce 375 million dollars of annual cost savings, from operations, general and administrative expenses and marketing. These annual cost savings are expected to begin four years from now and grow at 2.5% a year. Also, the analyst is assuming an after-tax integration cost of 0.75 billion and taxes of 20%. Assume that the integration cost of 0.75 billion happens when the merger is completed (year 0). The analyst is using a cost of capital of 10% to value the synergies. Company B's equity is trading at 5.3 B dollars (market value of equity). Given this, Company A is planning to pay a 30% premium for company B. Compute the value of the synergy (In $ Million) as estimated by the analyst. (Please show your calculations in Detail). Does the estimate of synergies in A, justify the premium that company A offered to company B?     (Please briefly explain the rationale in Detail).arrow_forward
- Company A is preparing a deal to acquire company B. One analyst estimated that the merger would produce 175 million dollars of annual cost savings, from operations, general and administrative expenses and marketing. These annual cost savings are expected to begin three years from now, and grow at 3% a year. In addition the analyst is assuming an after-tax integration cost of 0.25 billion, and taxes of 21%. Assume that the integration cost of 0.25 billion happens right when the merger is completed (year 0). The analyst is using a cost of capital of 9% to value the synergies.                           Company B’s equity is trading at 4.3 B dollars (market value of equity). Company A is planning to pay a 32% premium for company B.                                a)   Compute the value of the synergy as estimated by the analyst. Please show your calculations. b)  Does the estimate of synergies in a) justify the premium that company A offered to company B?arrow_forwardVelcro Saddles is contemplating the acquisition of Skiers’ Airbags Inc. The values of the two companies as separate entities are $50 million and $25 million, respectively. Velcro Saddles estimates that by combining the two companies, it will reduce marketing and administrative costs by $650,000 per year in perpetuity. Velcro Saddles is willing to pay $27 million cash for Skiers’. The opportunity cost of capital is 10%.  a. What is the gain from the merger? (Enter your answer in millions rounded to 2 decimal places.)      b. What is the cost of the cash offer? (Enter your answer in millions.)      c. What is the NPV of the acquisition under the cash offer? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)arrow_forwardVelcro Saddles is contemplating the acquisition of Skiers’ Airbags Inc. The values of the two companies as separate entities are $20 million and $10 million, respectively. Velcro Saddles estimates that by combining the two companies, it will reduce marketing and administrative costs by $500,000 per year in perpetuity. Velcro Saddles is willing to pay $14 million cash for Skiers’. The opportunity cost of capital is 8%. a. What is the gain from the merger? b. What is the cost of the cash offer? c. What is the NPV of the acquisition under the cash offer? Please answer fast i give you upvote.arrow_forward
- Atlantic Corporation is considering the purchase of the linerboard mill and corrugated box plants of Royal Paper for a total price of $260 million. The estimated incremental cash flows that would result if Atlantic acquired the facilities are presented below. Atlantic's marginal tax rate is 36% and their after-tax cost of capital is 13%.a) Calculate the NPV, IRR, and payback period for the acquisition and indicate what you think Atlantic should doarrow_forwardThe Hamilton company wants to acquire another company at a cost of $10,000. The new company will add cash flows of $2,000 in year 1, $4,000 in year 2, $3,000 in year 3, $3,000 in year 4 and $4,000 in year 5. Assuming Hamilton has a discount rate of 10% and a payback requirement of 3.75 years, should the company do the investment according to simple payback and IRR?arrow_forwardJ & J Enterprises is considering a cash acquisition of Patterson Steel Company for $4,200,000. Patterson will provide the following pattern of cash inflows and synergistic benefits for the next 20 years. There is no tax loss carryforward. Use Appendix D as an approximate answer, but calculate your final answer using the formula and financial calculator methods. Cash inflow (aftertax) Synergistic benefits (aftertax) 1 to 5 $ 460,000 42,000 Years 6 to 15 $ 620,000 62,000 16 to 20 $ 820,000 72,000 The cost of capital for the acquiring firm is 11 percent. a. Compute the net present value. Note: Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places. es Net present value b. Should the merger be undertaken? Yes Noarrow_forward
- Velcro Saddles is contemplating the acquisition of Skiers Airbags Incorporated. The values of the two companies as separate entities are $46 million and $23 million, respectively. Velcro Saddles estimates that by combining the two companies, it will reduce marketing and administrative costs by $630,000 per year in perpetuity, Velcro Saddles is willing to pay $28 million cash for Skiers'. The opportunity cost of capital is 7%. What is the gain from the merger? Note: Enter your answer in millions rounded to 2 decimal places. What is the cost of the cash offer? Note: Enter your answer in millions. What is the NPV of the acquisition under the cash offer? Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.arrow_forwardSchultz Industries is considering the purchase of Arras Manufacturing. Arras is currently a supplier for Schultz and the acquisition would allow Schultz to better control its material supply. The current cash flow from assets for Arras is $7.1 million. The cash flows are expected to grow at 7 percent for the next five years before leveling off to 4 percent for the indefinite future. The costs of capital for Schultz and Arras are 11 percent and 9 percent, respectively. Arras currently has 3 million shares of stock outstanding and $25 million in debt outstanding. What is the maximum price per share Schultz should pay for Arras? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Price per share $ 67.63arrow_forwardOrca Industries is considering the purchase of Shark Manufacturing. Shark is currently a supplier for Orca, and the acquisition would allow Orca to better control its material supply. The current cash flow from assets for Shark is $6.4 million. The cash flows are expected to grow at 9 percent for the next five years before leveling off to 6 percent for the indefinite future. The cost of capital for Orca and Shark is 13 percent and 11 percent, respectively. Shark currently has 3 million shares of stock outstanding and $25 million in debt outstanding. What is the maximum price per share Orca should pay for Shark? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16, Price per share $ 45 47arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT