Velcro Saddles is contemplating the acquisition of Pogo Ski Sticks, Inc. The val
ID: 2645007 • Letter: V
Question
Velcro Saddles is contemplating the acquisition of Pogo Ski Sticks, Inc. The values of the two companies as separate entities are $20 million and $10 million, respectively. Velcro Saddles estimates that by combining the two companies, it will reduce marketing and administrative costs by $500,000 per year in perpetuity. Velcro Saddles considers offering Pogo shareholders a 50% holding in Velcro Saddles. The opportunity cost of capital is 8%.
What is the value of the stock in the merged company held by the original Pogo shareholders? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.)
What is the cost of the stock alternative? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.)
What is the merger's NPV under the stock offer? (A negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.)
Velcro Saddles is contemplating the acquisition of Pogo Ski Sticks, Inc. The values of the two companies as separate entities are $20 million and $10 million, respectively. Velcro Saddles estimates that by combining the two companies, it will reduce marketing and administrative costs by $500,000 per year in perpetuity. Velcro Saddles considers offering Pogo shareholders a 50% holding in Velcro Saddles. The opportunity cost of capital is 8%.
Explanation / Answer
a. Increase in Value due to reduce marketing and administrative costs = 500000/8% = $ 6.25 Million
The merged company will have a total value of: = $20 million + $10 million + $6.25 million
The merged company will have a total value of: = $36.25 million
Since the Pogo shareholders own half of the firm, their stock is now worth $18.125 million.
Answer
b.
The cost of the stock alternative = 18.125 Million - 10 Million =8.125 Million
The cost of the stock alternative is $8.125 million. This is the increase in the value of the stock held by Pogo shareholders.
Answer
c.
NPV = 18.125 - 20
NPV = - $1.875 million.
This equals the decrease in the value of the stock held by Velcro
Value of the stock $ 18.125 millionRelated Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.