Question:
Smith Devices is contemplating the purchase of National Widget Company. The values of the two companies as separate entities are $20 million and $10 million, respectively. Smith estimates that by combining the two companies it will reduce marketing and administrative costs by $500,000 per year in perpetuity. Smith is willing to pay $14 million cash for National. The opportunity cost of capital is 8 percent.
a. What is the gain from the merger?
b. What is the cost of the cash offer?
c. What is the NPV of the acquisition under the cash offer?