Velcro Saddles is contemplating the acquisition of Pogo Ski Sticks, Inc. The val
ID: 2647257 • Letter: V
Question
Velcro Saddles is contemplating the acquisition of Pogo Ski Sticks, Inc. The values of the two companies as separate entities are $21.5 million and $11.5 million, respectively. Velcro Saddles estimates that by combining the two companies, it will reduce marketing and administrative costs by $350,000 per year in perpetuity. Velcro Saddles can either pay $14.0 million cash for Pogo or offer Pogo a 50% holding in Velcro Saddles. The opportunity cost of capital is 10%.
What is the gain from merger? (Enter your answer in millions rounded to 1 decimal place.)
What is the cost of the cash offer? (Enter your answer in millions rounded to 1 decimal place.)
What is the cost of the stock alternative? (Enter your answer in millions rounded to 2 decimal places.)
What is the NPV of the acquisition under the cash offer? (Enter your answer in millions rounded to 1 decimal place.)
What is its NPV under the stock offer? (Negative amount should be indicated by a minus sign.Enter your answer in millions rounded to 2 decimal places. )
Velcro Saddles is contemplating the acquisition of Pogo Ski Sticks, Inc. The values of the two companies as separate entities are $21.5 million and $11.5 million, respectively. Velcro Saddles estimates that by combining the two companies, it will reduce marketing and administrative costs by $350,000 per year in perpetuity. Velcro Saddles can either pay $14.0 million cash for Pogo or offer Pogo a 50% holding in Velcro Saddles. The opportunity cost of capital is 10%.
Explanation / Answer
a.
What is the gain from merger? (Enter your answer in millions rounded to 1 decimal place.)
Gain from merger = 350000/10%
Gain from merger = 3,500,000
Gain $ 3.50 million
b. What is the cost of the cash offer? (Enter your answer in millions rounded to 1 decimal place.)
Cost of the cash offer = $ 14 Million - $ 11.50 Million
Cost of the cash offer $ 2.50 million
c.What is the cost of the stock alternative? (Enter your answer in millions rounded to 2 decimal places.)
Total Market Value of after acquisition = $ 21.50 + 11.50 + 3.50 = $ 36.50 Milion
Stock offer = 36.50 * 50% = $ 18.25 Million
Cost of the stock offer = $ 18.25 - 11.50 = $ 6.75 Million
Cost of the stock offer $ 6.75 million
d.
What is the NPV of the acquisition under the cash offer? (Enter your answer in millions rounded to 1 decimal place.)
NPV of the acquisition under the cash offer = Gain from Merger - Cost of Merger
NPV of the acquisition under the cash offer = 3.50 - 2.50
NPV of the acquisition under the cash offer = $ 1
NPV $ 1 million
e.What is its NPV under the stock offer? (Negative amount should be indicated by a minus sign.Enter your answer in millions rounded to 2 decimal places. )
NPV of the acquisition under the cash offer = Gain from Merger - Cost of Merger
NPV of the acquisition under the cash offer = 3.50 - 6.75
NPV of the acquisition under the cash offer = -$ 3.25
NPV - $ 3.25 million
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