Question
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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