Velcro Saddles is contemplating the acquisition of Pogo Ski Sticks, Inc. The values of the two companies as separate entities are $20 million and $10 million, respectively. Velcro Saddles estimates that by combining the two companies, it will reduce marketing and PROBLEM SETS Visit us at www.mhhe.com/bma 818 Part Ten Mergers, Corporate Control, and Governance administrative costs by $500,000 per year in perpetuity. Velcro Saddles can either pay $14 million cash for Pogo or offer Pogo a 50% holding in Velcro Saddles. The opportunity cost of capital is 10%.

a. What is the gain from merger?

b. What is the cost of the cash offer?

c. What is the cost of the stock alternative?

d. What is the NPV of the acquisition under the cash offer?

e. What is its NPV under the stock offer?

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