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Tarocco Inc. has offered $27mm for all of the common stock of Palmer's Corp. The current...

Tarocco Inc. has offered $27mm for all of the common stock of Palmer's Corp. The current market capitalization of Palmer's Corp. as an independent company is $18mm. Assume the required return on the acquisitions is 11% and the synergy from the acquisition is a perpetuity. What is the minimum annual synergy that Tarocco feels it will gain from the acquisition?

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Answer #1

Given the market capitalization = $18mm

Amount offered by Tarocco is $27mm

Given the required rate of return is 11%

It is pertinent to note that since Tarocco has offered $27mm it need to have synergy benefits of 27-18 = $9mm

Hence the present value of perpetuity will be $9mm

We know the formula for present value of perpetuity is A/i

A = Annual Return

i = Required rate of return

Hence 9 = A/0.11

A = 9*0.11 = 0.99

Hence the required annual return on investment is $0.99mm

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