Kelvin Corporation is analysing that whether it should acquire Daisy Limited or not. Neither firm has outstanding debt. The current market value of Kelvin Corporation is $100,000. There are 20,000 outstanding shares in Daisy Limited with a share price of $3. Kelvin Corporation predicts that the acquisition would result in an incremental cash flow of $3,000 per year indefinitely, and the appropriate discount rate is 12%. 

 

a) What is the present value of the synergy from the acquisition? 

 

b) Suppose the Chief Executive Officer (CEO) of Kelvin Corporation is considering an offer of $90,000 cash for the acquisition of Daisy Limited. 

(i) Calculate the premium of the acquisition. 

(ii) Calculate the estimated market value of the combined firm. 

(iii) Is this offer attractive to Kelvin Corporation? Explain it with calculation. 

 

c) Suppose the Financial Manager of Kelvin Corporation is considering an offer of providing 35% of the shares in the combined firm to the shareholders of Daisy Limited for the acquisition. 

(i) Calculate the equivalent dollar cost of this stock offer (stock payment). 

(ii) Calculate the net present value of this stock offer. 

 

 d) Suppose Daisy Limited would accept any offer of acquisition if it can increase its shareholders' wealth. Should Kelvin Corporation acquire Daisy Limited by the cash offer as considered by its CEO or the stock offer as considered by the Financial Manager? Explain it.