1 Linfrae plc is a computer software development firm and is considering a hostile takeover of Jaffikake plc, a software distribution firm. Linfrae has been advised by its investment bankers that a combined development and distribution firm would lead to annual cost savings of £7 million for the foreseeable future (in perpetuity). Both firms are financed entirely by equity. Linfrae has 29 million shares outstanding at a price of £4.70 each, whereas Jaffikake has 10 million shares outstanding at a price of £10.07 each.

The investment bank that is advising Linfrae suggests that an initial bid with a premium of 33 per cent would be sufficiently high as to persuade Jaffikake’s shareholders to sell their holdings to Linfrae. Linfrae has enough cash reserves to fund the takeover bid. If the cost of capital of the combined firm is 20 per cent, evaluate the proposed takeover from the perspective of Linfrae’s shareholders. (30 marks)