Question 1 2.5 marks

Fantastic Three Ltd. has 20,000 shares outstanding that are currently trading at $20. Both Yamato Inc

and Zoolander International have shown interest in the acquisition of Fantastic Three. Yamato has a

market value of $1 million and 100,000 shares outstanding, while Zoolander has 500,000 shares trading

at $15. In order to acquire Fantastic Three, Yamato has offered to pay to Fantastic's shareholders

$600,000 cash, while Zoolander has offered to issue 40,000 new shares as a payment.

a)

What is the minimum dollar amount of annual, after-tax synergies created by the merger, for

each Yamato and Zoolander, which would justify such offers? Assume synergies are perpetual

and a discount rate is 10%. (1 mark)

b)

Assuming after-tax synergies from the merger would be $25,000 in perpetuity for both Yamato

and Zoolander, and that Fantastics shareholders are indifferent between a share or cash offer of

equal value, which offer should they accept? (1.5 marks)