If it is a cash bid, the acquiring firm will have to pay a premium of $500,000 to the

shareholders of the target firm. The synergy will come from elimination of duplication costs, which is worth $100,000 every year for the foreseeable future. The cost of capital for the company is 16.5%.

i) Identify the net present value of the merger? (5 marks)

ii) Propose if the merger should go ahead and justify why. (2 marks)

(c) The following information reflects the information for the acquiring firm and the target firm: Acquiring firm Target firm $13.00 $5.40 Share price Number of shares 5,000,000 1,000,000 k