Alpha Corp is a mature firm in the manufacturing sector and currently has a market capitalization of $ 500 million with 100 million shares outstanding. The firm has an annual cash flow earnings of $60 million and its cost of capital is 12%. Alpha Corp is considering taking over Beta Corp which has done reasonably well in the recent past. Beta Corp currently has 10 million shares outstanding with a market capitalization of $ 20 million and annual cash flow earnings of $2 million. The cost of capital for Beta Corp is 10%. The takeover is expected to result in annual additional cash flow of $ 0.75 million in the first year, which are expected to remain constant in perpetuity. The cost of capital for synergies is 12%. Alpha Corp is considering two different options to finance the take over (i) a cash offer with a 20% premium relative to its market price (ii) a share swap of 1 share of Alpha Corp for every 2 shares of Beta Corp (6 marks).

1. Calculate (i) overall gain (ii) gain to Alpha shareholders and (iii) gain to Beta shareholders if the cash offer is made (2.5 marks).
2. Calculate (i) gain to Alpha shareholders and (ii) gain to Beta shareholders if the share-swap offer is made (2.5 marks).
3. At what cash offer price (cash offer) would this be a zero NPV investment for Alpha Corp? (1 mark)