Sweet Cola Corp. (SCC) is bidding to take over Salty Dog Pretzels (SDP). SCC has
ID: 2645006 • Letter: S
Question
Sweet Cola Corp. (SCC) is bidding to take over Salty Dog Pretzels (SDP). SCC has 3,000 shares outstanding, selling at $50 per share. SDP has 2,000 shares outstanding, selling at $17.50 a share. SCC estimates the economic gain from the merger to be $15,000.
If SDP can be acquired for $20 a share, what is the NPV of the merger to SCC?
What will SCC sell for when the market learns that it plans to acquire SDP for $20 a share? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
What are the percentage gains to the shareholders of each firm? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)
Now suppose that the merger takes place through an exchange of stock. On the basis of the premerger prices of the firms, SCC sells for $50, so instead of paying $20 cash, SCC issues .40 of its shares for every SDP share acquired. What will be the price of the merged firm? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
What is the NPV of the merger to SCC when it uses an exchange of stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Sweet Cola Corp. (SCC) is bidding to take over Salty Dog Pretzels (SDP). SCC has 3,000 shares outstanding, selling at $50 per share. SDP has 2,000 shares outstanding, selling at $17.50 a share. SCC estimates the economic gain from the merger to be $15,000.
Explanation / Answer
a.If SDP can be acquired for $20 a share, what is the NPV of the merger to SCC?
NPV of Merger = 15000 - (20-17.5)X2000 = 10000
b.What will SCC sell for when the market learns that it plans to acquire SDP for $20 a share?
Net Gain to SCC = 10000
Hence each SCC stock would sell for = 50+10000/3000 = $53.33
c. Now suppose that the merger takes place through an exchange of stock. On the basis of the premerger prices of the firms, SCC sells for $50, so instead of paying $20 cash, SCC issues .40 of its shares for every SDP share required.
What will be the price of the merged firm?
Value of Merged Firm = 3000*50 +2000*17.5 + 15000 = 200,000
No. of New stock issued = 2000*.4=800
Total No. of Share outstandig = 3000+800=3800
Hence the price of the merged firm = 200,000/3800 = 52.63
d. What is the NPV of the merger to SCC when it uses an exchange of stock?
NPV in case of Exchange of $15000
The answer is different from part(a) because it was a cash offer and hence the takeover premium (of 5000) which was paid in cash is subtraced from the total synergy gained.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.