25. Acquirer Corporation (ACQ) is considering a friendly merger with Target Corporation (TGT). Both ACQ and TGT have no debt. ACQ estimates that the merger will generate incremental after-tax cash flows of $1,500,000 per year indefinitely and that the cash flows will grow at an annual rate of 2 percent forever. The appropriate discount rate for the incremental cash flows is 12 percent. The following information shows the pre-merger stock price and the number of shares outstanding of each corporation.

	ACQ	TGT
Pre-merger stock price	$50	$20
Number of shares outstanding	3,500,000	1,250,000

ACQ and TGT have agreed on a transaction value of $25 per share for TGTs stock, but are negotiating methods of payment for an all-cash offer, and a stock exchange offer.

a) What is the synergy from the merger?

b) Calculate the takeover premium of each alternative.

c) Calculate the NPV of each alternative.

d) Determine the takeover premium for a cash and stock exchange offer ($12 cash per share of TGT plus 0.4 of a share of ACQ for each share of TGT).

e) What is the Break-Even Synergy of the cash and stock offer as described in part (d)?