Question

Question 32: You work for a paper mill wanting to acquire a lumber company to reduce costs. You estimate that the present value of the lumber mill as it currently operates is $500 million, based on the DCF analysis. By purchasing the lumber company, you believe you could create synergies with a present value of $50 million, in the form of reduced costs and vertical integration. The lumber mill is publicly traded, so you are able to see what the market is valuing the company at $400 million (considering the stock price, the number of shares, and accounting for debt and cash). If you want to retain all the synergy value creation for the paper mill, what is your highest bid for the company?

A. 50 million

B. 400 million

C. 500 million

D. 550 Million

E. 600 Million

Answer 1

Answer: (C) 500 Million

Value of Lumber Mill to Paper Mill on Acquisition:

a) Present Value of Lumber Mill at Current Operations: $ 500 Million

b) Synergies on account of reduced costs on acquisition: $ 50 Million

c) Total Value of Lumber Mill on Acquisition : (a+b) = $ 550 Million.

Given, we have to retain Synergy value creation for the paper Mill:

Highest Bid = Value of Lumber Mill on Acquisition - Synergy Value

Highest Bid = $ 550 Million - $ 50 Million

Therefore, Highest Bid = $ 500 Million