Question

Green Rice Smartphone Inc. plans to acquire CCA Technologies Inc. Assume that both firms have no debts outstanding.

Before the acquisition, CCA’s share price is $16 and there are 1,000 shares outstanding. Green Rice’s share price is $25 and there are 1,500 shares outstanding.

Green Rice has estimated that, after the acquisition, its annual cash flow will increase by $1,200 permanently. The discount rate of the combined firm will be 10%.

Green Rice is thinking about two acquisition offers:

Cash offer: to acquire CCA by $18 per share

Stock offer: to offer 18 units of its shares for every 25 units of CCA’s share

Required:

(a) Calculate the present value of synergy of the proposed acquisition.

(b) Analyze the NPV of cash offer.

(c) Analyze the actual cost and the NPV of stock offer.

(d)Recommend which acquisition offer that the target firm CCA Technologies Inc. would prefer, and briefly explain your recommendation.

Answer 1

(a) present value of the proposed acquisition=

cash offer=(offered price-share price)xno. of shares

=(18-16)*1000

=2000

stock offer=(no. of shares allotedxshare price of green rice)-(no. of shares of CCA x shares price CCA)

no. of shares to be alloted=(1000/25)*18=720 shares

stock offer =(720 x 25 )- (1000 x16)

=2000

(b) NPV of the cash offer = present value of cash flows x discounting factor(10%)

=2000 x 0.90909

=1818.18

(c) actual cost of stock offer=2000 ( as discussed above)

NPV of stock offer=present value of cost of stock offer x discounting factor

=2000 x 0.90909

=1818.18

(d) As the NPV of both the offers are same so cash offer should be given consideration as cash doesnt doesnt dissolve the ownership of the firm rather stock offer do