Velcro Saddles is contemplating the acquisition of Pogo Ski Sticks, Inc. The val

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 its NPV under the stock offer? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.)

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.)

Explanation / Answer

Hi, Please find the answers as follows: Part A 20 million + 10 million + 6.25 million (from cost savings) = 36.25 million Since the Pogo shareholders own half of the firm, their stock is now worth 18.125 million. Part B 8.125 million Part C NPV =

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