Consider the following companies:

	A	B
Earnings per share (recent)	50p	10p
Dividends per share (recent)	25p	5p
Number of shares	5m	3m
Share price	9.00	75p

The cost of equity capital for both firms is 12 per cent. B is expected to produce a growth in dividends of 5 per cent per annum to infinity with its current strategy and management. However if A acquired B and applied superior management and gained benefits from economies of scale the growth rate would rise to 8 per cent on the same capital base. The transaction costs of the merger would amount to 400,000.

A. What value could be created from a merger?

B. If A paid 1.20 cash for each of B's shares what value created by the merger would be available for each group of shareholders?

C. If A gave one of its shares for seven of B's what value created by the merger would be available for each group of shareholders?

D. If none of the merger benefits is realised, because of problems of integration, what is the loss or gain in value to A and B shareholders under both the cash offer and the shares offer?