Dumb Jack Ltd. has just announced its intention to take over Smart Smith Ltd. Smart Smith has a market value of $120 million as a stand-alone company just before the announcement. Dumb Jack believes that merging with Smart Smith could save an after-tax operation cost of $5 million a year forever. Assume Dumb Jack has an after-tax cost of capital of 8 percent per annum.

1. What is the maximum cash price Dumb Jack will be willing to pay to take over Smart Smith?
2. Immediately after the announcement, the market value of Smart Smith is likely to jump substantially. What could be the reasons?

c. Suppose Dumb Jack in the end pays $145 million in cash to take over Smart Smith. Calculate the NPV of the deal (from Dumb Jacks perspective).