Question

a. Maxy Ltd is contemplating the acquisition of Bafsco Incorporated. The values of the two companies as separate entities are GH30m and GH10m respectively. Maxy estimates that by combining the two companies, it will reduce marketing and administration cost by GH700,000 per year in perpetuity. Maxy can either pay GH15m cash for Bafsco incorporated or offer Bafsco a 50% holding in Maxy, the opportunity cost of capital is 10%.
i. What is the gain for this merger
ii. What is the cost of the cash offer
iii. What is the cost of the stock alternative
iv. What is the NPV of the acquisition under the cash offer
v. What is the NPV under the stock offer

Answer 1

1). Gain from the merger = reduction in marketing & admin.cost/cost of capital = 700,000/10% = 7,000,000 or 7 million

2). Cost of the cash offer is the actual cash offered = 15 million

3). Cost of the stock offer:

Value of the merged firm Vmb = Value of Maxy + Value of Bafsco + Gain from merger

= 30 + 10 + 7 = 47 million

Cost of the stock offer = %age offered*Vmb = 50%*47 = 23.5 million

4). NPV under the cash offer:

Value of the acquisition = Value of Bafsco + gain from the merger = 10+7 = 17 million

NPV = value of the acquisition - cost of cash offer = 17 - 15 = 2 million

5). NPV under the stock offer = value of the acquisition - cost of stock offer = 17-23.5 = -6.5 million