North Antelope Rochelle is analysing the possible acquisition of Black Thunder. North Antelope Rochelle estimated that the potential annual gain from acquiring Black Thunder is $250,000 per annum in perpetuity. At the moment, Black Thunder has 500,000 shares outstanding with the current market price of $5.00 per share. North Antelope owns 6 million shares outstanding at a current market price of $1.50 per share. North Antelope is considering to make an acquisition offer to Black Thunder shareholders by either paying $6.75 per share; or alternatively 3.5 shares in North Antelope for every 1 share in Black Thunder. The appropriate discount rate is 8% per annum. Both North Antelope and Black Thunder operate in the mining industry.

1. Provide at least two specific sources of the potential takeover gains.
2. In present value terms, what is the total gain from this proposed acquisition?
3. You assume that any takeover gains occur at year end and that the acquisition is to proceed immediately. You are to make a recommendation to the shareholders of Black Thunder by commenting on the wealth effect of the cash and scrip offer for Black Thunders shareholders. Show all calculations.
4. What is the maximum cash price per share that North Antelope should offer to Black Thunder shareholders?
5. If the cash offer is restructured so that the North Antelope only receives $1 million of the gain, what price does North Antelope now have to pay to Black Thunder?