Company ABC intends to take over XYZ. One of the arguments propounded by the CEO of ABC is that it intends to undertake the merger as a means to diversification to reduce risk. The present value of ABC is given as $300 million. The present value of XYZ on the other hand is $ 80 million. It is estimated that due to the merger, annual savings of $6 million will be made. After several rounds of negotiations, ABC has agreed to pay a price of $120 million for XYZ. Assume a post merger cost of capital of 10%

a) Calculate the cost of the merger to ABC b) Calculate the NPV of the merger to ABC

c) What will be the gain to the shareholders of XYZ?

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d) Determine the total value of this company assuming the merger takes place.

e) Comment on the argument propounded by the CEO of ABC.