Type 2D: ABC Inc. is considering the acquisition of Togo Company. respectively. ABC's financial managers estimate that by combining the two companies, it will reduce IT and administrative costs by $800,000 per year for the next 15 years. ABC would either pay $18 million cash for Togo or offer Togo a 304 holding in the new combined firm. The market values of the two companies as separate entities are $40 million and $15 million, If the opportunity cost of capital is 124, a) What is the gain from merger? b) What is the cost of the cash offer? c) What is the cost of the atock alternative? d) What is the NPV of the acquisition under the cash offer? e) What is the NPV under the stock offer?
Type 2D: ABC Inc. is considering the acquisition of Togo Company. respectively. ABC's financial managers estimate that by combining the two companies, it will reduce IT and administrative costs by $800,000 per year for the next 15 years. ABC would either pay $18 million cash for Togo or offer Togo a 304 holding in the new combined firm. The market values of the two companies as separate entities are $40 million and $15 million, If the opportunity cost of capital is 124, a) What is the gain from merger? b) What is the cost of the cash offer? c) What is the cost of the atock alternative? d) What is the NPV of the acquisition under the cash offer? e) What is the NPV under the stock offer?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Type 2D: ABC Inc. is considering the acquisition of Togo Company.
respectively.
The market values of the two companies as separate entities are $40 million and $15 million,
ABC's financial managers estimate that by combining the two companies, it will reduce IT and administrative costs by $800,000 per year for the next 15
years.
ABC would either pay $18 million cash for Togo or offer Togo a 30% holding in the new combined firm.
If the opportunity cost of capital is 12%,
a) What is the gain from merger?
b) What is the cost of the cash offer?
c) What is the cost of the stock alternative?
d)
What is the NPV of the acquisition under the cash offer?
e)
What is the NPV under the stock offer?
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