Question

#Question 1A

Sweet Coco Corporation (SCC) is contemplating the acquisition of Salty Pretzels (SP). The Value of the two companies as separate entities is $20 million and $10 million, respectively. SCC estimates that by combing the two companies, it will generate additional revenue of $1 million and reduce operating costs of $500,000 per year in perpetuity. SCC is willing to pay $20 million in cash for Salty Pretzels. Assuming the opportunity cost of capital is 8%.

1) What is the Gain of the merge?

2)what is the cost of the cash offer?

3)What is the net present value (NPV) of the acquisition under the cash offer?

#Question 2A

Suppose that instead of making a cash offer, Sweet Coco Corporation considers offering Salty Pretzels' shareholders a 50% holding in Sweet Coco Corporation.

1) What is the value of the stock in the merged company held by the original Salty Pretzels shareholders?

2)What is the cost of the stock alternative?

3)What is the merger's net present value (NPV) under the stock offer?

#Question 3A

Currently, you are working as a finance manager in Sweet Coco Corporation, Which strategy will you recommend to the board of directors? Justify your suggestion.

Answer 1