JH Bhd. is contemplating the acquisition of KI Sdn Bhd. The values of the two companies as separate entities are RM10 million and RM5 million, respectively.
JH estimates that by combining the two companies, it will improve the overall profitability by RM300,000 per year in perpetuity.
There are two methods of acquisition:
(i) JH can either pay RM6 million cash to KI; or (ii) offer KI a 40% holding in JH. The opportunity cost of capital is 15%.
(a) Calculate the gain from merger.
(b) Calculate the cost of the cash offer.
(c) Calculate the cost of stock alternative.
(d) Calculate the NPV of the acquisition under the cash offer and under the stock offer.