Cfood Co. is considering acquisition of Tfood Co. Some financial information on the two companies is given below (in $ million): Cfood Co.Tfood Co.Price per share4913# of shares102.5Market value49032.5 If Cfood acquires Tfood, the operating cost (after-tax) can be reduced by $2m, and sales (after-tax) can be increased by $3m (the synergies) per year in perpetuity. The cost of capital is 19%. Cfood is considering two alternatives for the acquistion: 1. buying all the shares of Tfood at $15.6 per share. 2. issuing 1 shares for every 3 shares of Tfood Workout on this merger deal and answer the following questions. i. What is the economic gain from the merger? ii. What will be the NPV of merger under cash offer? v. What is the cost of merger under stock offering? Also compute the merger's NPV for Cfood's original shareholders. i. What is the economic gain from the merger? ii. What will be the NPV of merger under cash offer? iii. What will be the market value of merged company (Cfood after the acquition of Tfood) under the cash offer? iv. What is the cost of merger under stock offering?

Given: Operating cost reduction=$2million Sales increment=$3million Cost of capital=19%…

Answered: ter-tax) can be reduced by $2m, and…

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter1: Introduction And Goals Of The Firm

Section: Chapter Questions

Problem 7E

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Cfood Co. is considering acquisition of Tfood Co.
Some financial information on the two companies is given below (in $ million):
	Cfood Co.	Tfood Co.
Price per share	49	13
# of shares	10	2.5
Market value	490	32.5

If Cfood acquires Tfood, the operating cost (after-tax) can be reduced by $2m, and sales (after-tax) can be increased by $3m (the synergies) per year in perpetuity.
The cost of capital is 19%.
Cfood is considering two alternatives for the acquistion:
1. buying all the shares of Tfood at $15.6 per share.
2. issuing 1 shares for every 3 shares of Tfood
Workout on this merger deal and answer the following questions.
i. What is the economic gain from the merger?
ii. What will be the NPV of merger under cash offer?
v. What is the cost of merger under stock offering? Also compute the merger's NPV for Cfood's original shareholders.
i. What is the economic gain from the merger?
ii. What will be the NPV of merger under cash offer?
iii. What will be the market value of merged company (Cfood after the acquition of Tfood) under the cash offer?
iv. What is the cost of merger under stock offering?

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