8. Merger gains and costs (S32.4) Velcro Saddles is contemplating the acquisition of Skiers’

Airbags 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 administrative costs by $500,000 per year in perpetuity. Velcro Saddles can either pay $14 million cash for Skiers’ or offer Skiers’ a 50% holding in Velcro Saddles. The opportunity cost of capital is 10%.

a. What is the gain from merger?