NStar, a gold mining firm, has a current market capitalization of $ 300 million with 80 million shares outstanding. The firm has an annual cash
NStar, a gold mining firm, has a current market capitalization of $ 300 million with 80 million shares outstanding. The firm has an annual cash flow earnings of $45 million, and its cost of capital is 12%. NStar is considering taking over Sarecan Corp which has 20 million shares outstanding with a market capitalization of $ 35 million and annual cash flow earnings of $2.5 million. The cost of capital for Sarecan is 10%. The takeover is expected to result in an annual additional cash flow of $ 0.95 million in the first year, which is expected to remain constant in perpetuity. The cost of capital for synergies is 12%. NStar is considering two different options to finance the take over (i) a cash offer with a 28% premium relative to its market price (ii) a share swap of 1 share of NStar for every 2 shares of Sarecan.
- Calculate (i) overall gain (ii) gain to NStar shareholders and (iii) gain to Sarecan shareholders if the cash offer is made (3.5 marks).
- Calculate (i) gain to NStar shareholders and (ii) gain to Sarecan shareholders if the share-swap offer is made (3.5 marks).
- At what cash offer price (cash offer) would this be a zero NPV investment for NStar? (1 mark)
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