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Consider the following premerger information about two firms, Apache and Titus: Apache Titus Market value of equity $100 million $50 million Price per share $50

Consider the following premerger information about two firms, Apache and Titus:

Apache

Titus

Market value of equity

$100 million

$50 million

Price per share

$50

$20

Assume that the acquisition of Titus by Apache will result in savings of $2.5 million annually in perpetuity for the combined firm. The required rate of return on the combined firm is 8%. The transaction costs will amount to $1 million. Both Apache and Titus have no debt outstanding.

a) What is the present value of the gain from the merger?

b) If a cash offer of $70 million is accepted by Titus shareholders, what is the value

created for Apaches shareholders?

c) If shares are offered in such a way that Titus shareholders would possess one-

third of the merged entity, what is the value created for Apaches shareholders?

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