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Q5) Lenzie Corporation, which has 1 million shares outstanding, wishes to merge with Kent Drinks with 2
Q5) Lenzie Corporation, which has 1 million shares outstanding, wishes to merge with Kent Drinks with 2.5 million shares outstanding. The market prices for Lenzie Corporation and Kent Drinks are $49 and $28 per share, respectively. The merger could create an estimated savings of $900,000 annually for the indefinite future. If Lenzie Corporation were willing to pay $30 per share for Kent Drinks, and the appropriate cost of capital is 6%, what would be the:
a) Present value of the merger gain? (1 Point)
b) Cost of the cash offer? (1 Point)
c) NPV of the offer? (2 Points)
Expert Solution
a)
Present value of merger gain = Savings / cost of capital
Present value of merger gain = 900,000 / 0.06
Present value of merger gain = $15,000,000
b)
Cost of cash offer = (30 - 28) * 2,500,000
Cost of cash offer = $5,000,000
c)
NPV of the offer = Present value - cost
NPV of the offer = 15,000,000 - 5,000,000
NPV of the offer = $10,000,000
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