Hi there, the top is the question and the answer is on the bottom. And my question is that how did they find 2.5/12.5 (look Net cost to Mayfair). Thanks

Mergers & Takeovers 1. Redo Lecture 11, Example - Mayfair. Assume Mayfair maintains all Board's assets without any additional investments. Board has 5 million shares with a market price of $2.00 per share and per-share dividends of So.24. At present, Board has no growth in earnings or dividends. However, Mayfair believes that if the merger goes ahead, there will be a perpetual growth rate of 2% per year. Mayfair has 10 million shares with a market price of $4.60 per share. If Mayfair offers to pay $11.5 million in cash or shares to acquire Board, calculate the following: i) Board's cost of equity with no growth in dividends. i) The maximum price Mayfair should pay for Board. iii) The net cost to Mayfair and the NPV for its shareholders for a cash offer. If the NPV benefit is on Mayfair's share price, calculate the share price of the merged firm and the number of shares based on this price. iv) How many shares of Mayfair would be offered for each share of Board? Find the net cost to Mayfair and the NPV for its shareholders for a share bid. Answers iv) Share bid: Bid price for Board's share = $11.5m/5m= $2.30 Ratio of exchange = $2.30/S4.60 = 0.5 Var= $46m + $10m + $2.24m=558.24m Net cost to Mayfair = (2.5/12.5) * $58.24m - $10m = $1.648m NPV for Mayfair's shareholders = $2.24m - $1.648m = $592,000