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.

 

1. Calculate (i) overall gain (ii) gain to NStar shareholders and (iii) gain to Sarecan shareholders if the cash offer is made.
2. Calculate (i) gain to NStar shareholders and (ii) gain to Sarecan shareholders if the share-swap offer is made.
3. At what cash offer price (cash offer) would this be a zero NPV investment for NStar?