A plc is analysing the possible acquisition of M plc. Assume both firms have no debt. A believes the acquisition will increase its total after-tax cash flows by £150 million indefinitely. The current market value of A is £3 billion and that of M is £1.5 billion. The appropriate discount rate for the incremental cash flows is 10%. A is trying to decide whether it should offer 50% of its equity or £2 billion in cash to M’s shareholders.
i) What is the value of the M acquisition to A?
ii) What is the cost of cash offer and that of Equity offer?
iii) What is the NPV of the cash offer?
iv) What is the NPV of the share offer?
v) State your recommendation and why?