Question

Question 4 (14 marks) Green Rice Smartphone Inc. plans to acquire CCA Technologies Inc. Assume that both firms have no debts outstanding. Before the acquisition, CCA's share price is $16 and there are 1,000 shares outstanding. Green Rice's share price is $25 and there are 1,500 shares outstanding. Green Rice has estimated that, after the acquisition, its annual cash flow will increase by $1,200 permanently. The discount rate of the combined firm will be 10%. Green Rice is thinking about two acquisition offers: Cash offer: to acquire CCA by $18 per share Stock offer: to offer 18 units of its shares for every 25 units of CCA's share Required: (a) Calculate the present value of synergy of the proposed acquisition. marks) (b) Analyze the NPV of cash offer. (4 marks) (c) Analyze the actual cost and the NPV of stock offer. (5 marks) (d) Recommend which acquisition offer that the target firm CCA Technologies Inc. would prefer, and briefly explain your recommendation. (3 marks)

Answer 1

CCAs Share Price = $16

Outstanding Share of CCA = 1000

Value of CCA (VC) = Price * No of Shares = 16 * 1000 = 16,000

Green Rice Share Price = $25

Outstanding Share of CCA = 1500

Value of Green Rice(VG) = Price * No of Shares = 25 * 1500 = 37,500.

Annual Cash flow increase = 1200

Discount Rate = 10%

PV of Incremetal Cash flow = Annual incremental cash flow / discount rate = 1200 / 10% = 12,000

Present Value of Proposed Merger = VC + VG + PV of Incremetal Cash flow

= 16,000 + 37,500 + 12,000 = 65,500

Ans a: Present Value of Proposed Merger = 65,500

Value of Cash offer

CCAs Share Price offered = $18

Outstanding Share of CCA = 1000

Value of CCAs Cash Offer = Price * No of Shares = 18 * 1000 = 18,000

Ans b: Present Value of Cash Offer =  

VC + PV of Incremetal Cash flow - Value of CCAs Cash Offer

= 16,000 + 12,000 - 18,000

=10,000 (Ans)

Ans c:

No of CCAs O/S Share = 1000

No of Equivalent Share of Combined entity required =CCAs O/S Share * Share Ratio = 1000 * ( 18/25) = 720

Value of Combined Entity = 65,500

Value of 720 Share = (720 / 1500) * Value of Combined Entity = ( 720/ 1500) * 65,500 = 31,440

Cost of the Stock offer = 31,440

NPV of the Stock Offer = VC + PV of Incremetal Cash flow - Cost of the Stock offer

= 16,000 + 12,000 - 31,440

= -3,440

Ans : Cost of the Stock offer = 31,440

NPV of the Stock Offer = - 3,440

Ans d: Since NPV of the stock offer is negative while NPV of the cash offer is poitive. So company should consider cash offer only.