Velcro Saddles is contemplating the acquisition of Pogo Ski Sticks, Inc. The val
ID: 2688326 • 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 is willing to pay $14 million cash for Pogo. The opportunity cost of capital is 8%.
What is the gain from merger? (Enter your answer in millions rounded to 2 decimal places.)
What is the cost of the cash offer? (Enter your answer in millions.)
What is the NPV of the acquisition under the cash offer? (Enter your answer in millions rounded to 2 decimal places.)
a.What is the gain from merger? (Enter your answer in millions rounded to 2 decimal places.)
Explanation / Answer
Hi, Please find the answers as follows: Part A: The present value of the 500,000 annual savings is: 500,000/0.08 = 6.25 million (Gain) Part B: =14 million
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