PART A: Most Valuable Potatoes (MVP) is bidding to take over Tomatoes Kale Operators (TKO). MVP has 10,000 shares outstanding, selling at $60 per share. TKO has 6,000 shares outstanding, selling at $30 per share. Neither firm has debt. Both MVP and TKO have a Cost of Capital of 8.00%. MVP estimates that the synergies from the merger will increase its annual after-tax cash flow by $3,000 indefinitely. Using this information, answer the following using Excel: a) What is the value of the synergy from the merger? b) If TKO can be acquired for $33 cash per share, what is the NPV of the merger to MVP? c) The market is semi-strong efficient. What will MVP sell for when the market learns that it plans to acquire TKO for $33 a share? What will TKO sell for? What amount of the synergies do MVP's shareholders receive vs TKO's shareholders? d) Assuming TKO shareholder would prefer to be paid in MVP shares - how many shares would MVP need to issue in total for both parties to be indifferent between cash or shares? How many MVP shares would need to be offered per 1 TKO share (show your workings to 2 decimal places)?
PART A: Most Valuable Potatoes (MVP) is bidding to take over Tomatoes Kale Operators (TKO). MVP has 10,000 shares outstanding, selling at $60 per share. TKO has 6,000 shares outstanding, selling at $30 per share. Neither firm has debt. Both MVP and TKO have a Cost of Capital of 8.00%. MVP estimates that the synergies from the merger will increase its annual after-tax cash flow by $3,000 indefinitely. Using this information, answer the following using Excel: a) What is the value of the synergy from the merger? b) If TKO can be acquired for $33 cash per share, what is the NPV of the merger to MVP? c) The market is semi-strong efficient. What will MVP sell for when the market learns that it plans to acquire TKO for $33 a share? What will TKO sell for? What amount of the synergies do MVP's shareholders receive vs TKO's shareholders? d) Assuming TKO shareholder would prefer to be paid in MVP shares - how many shares would MVP need to issue in total for both parties to be indifferent between cash or shares? How many MVP shares would need to be offered per 1 TKO share (show your workings to 2 decimal places)?
Chapter14: Capital Structure Management In Practice
Section: Chapter Questions
Problem 26P
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Transcribed Image Text:PART A:
Most Valuable Potatoes (MVP) is bidding to take over Tomatoes Kale Operators (TKO).
MVP has 10,000 shares outstanding, selling at $60 per share. TKO has 6,000 shares
outstanding, selling at $30 per share. Neither firm has debt. Both MVP and TKO have a Cost
of Capital of 8.00%. MVP estimates that the synergies from the merger will increase its
annual after-tax cash flow by $3,000 indefinitely. Using this information, answer the
following using Excel:
a) What is the value of the synergy from the merger?
b) If TKO can be acquired for $33 cash per share, what is the NPV of the merger to MVP?
c) The market is semi-strong efficient. What will MVP sell for when the market learns that it
plans to acquire TKO for $33 a share? What will TKO sell for? What amount of the
synergies do MVP's shareholders receive vs TKO's shareholders?
d) Assuming TKO shareholder would prefer to be paid in MVP shares - how many shares
would MVP need to issue in total for both parties to be indifferent between cash or
shares? How many MVP shares would need to be offered per 1 TKO share (show your
workings to 2 decimal places)?
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