Velcro Saddles is contemplating the acquisition of Skiers’ Airbags Inc. The values of the two companies as separate entities are $50 million and $11 million, respectively. Velcro Saddles estimates that by combining the two companies, it will reduce marketing and administrative costs by $515,000 per year in perpetuity. Velcro Saddles can either pay $15 million cash for Skiers’ or offer Skiers’ a 48% holding in Velcro Saddles. The opportunity cost of capital is 10%. Required:What is the gain from merger? (Enter your answer in millions rounded to 2 decimal places.)What is the cost of the cash offer? (Enter your answer in millions.)What is the cost of the stock alternative? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)What is the NPV of the acquisition under the cash offer? (Enter your answer in millions rounded to 2 decimal places.)What is its NPV under the stock offer? (Do not round intermediate calculations. A negative answer should be indicated by a minus sign. Enter your answer in millions rounded to 2 decimal places.)

A merger can be evaluated by considering three elements such as economic gain , cost of merger and…

Answered: Velcro Saddles is contemplating the…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Velcro Saddles is contemplating the acquisition of Skiers’ Airbags Inc. The values of the two companies as separate entities are $50 million and $11 million, respectively. Velcro Saddles estimates that by combining the two companies, it will reduce marketing and administrative costs by $515,000 per year in perpetuity. Velcro Saddles can either pay $15 million cash for Skiers’ or offer Skiers’ a 48% holding in Velcro Saddles. The opportunity cost of capital is 10%.

Required:

What is the gain from merger? (Enter your answer in millions rounded to 2 decimal places.)
What is the cost of the cash offer? (Enter your answer in millions.)
What is the cost of the stock alternative? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)
What is the NPV of the acquisition under the cash offer? (Enter your answer in millions rounded to 2 decimal places.)
What is its NPV under the stock offer? (Do not round intermediate calculations. A negative answer should be indicated by a minus sign. Enter your answer in millions rounded to 2 decimal places.)

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