Donovan Inc. is considering an acquisition of Gilhooly Corp. Donovan has 3,809,153 shares outstanding selling for $41.63. Gilhooly has 1,935,728 shares outstanding selling for $26.71.

What are the market values of both firm's In a stock-for-stock offer how many shares of Donovan stock will each Gilhooly equity holder receive for his share (if they allocate purely on the basis of the current prices)? If there are no synergies, what is the value of the combined entity? How many shares will be outstanding after the acquisition? What is the value of each share? What portion of the stock will the old Donovan shareholders hold in the firm after the acquisition?

Next, assume that Donovan has adequate excess-cash-on-hand to pay each shareholder of Gilhooly $12.50. If they wish to make an acquisition based on a combination of stock and cash, the acquisition how many shares of Donovan stock must each Gilhooly equity holder be given to buy-out the remainder of his share beyond the $12.50? If there are no synergies, what will be the value of the combined firm (recall that each shareholder of the Gilhooly stock is being given $12.50, so the value of the firm will decline accordingly)? How many shares will be outs the acquisition? What is the value of each share? What portion of the stock will the old Donovan share holders own in the firm after the acquisition?

Finally, presume that the merger will create synergies that have a present value of $17,000,000.Assume the two firms execute a straight stock-for-stock offer at the exchange ratio calculated in the first example above. What is the firm value, the number of outstanding shares, and the share price after the acquisition?