Question 3 (26 marks) ICCs stock price is $40 per share and the firm has 100 million shares outstanding. QPs EPS is $1.30 and its P/E ratio is 12. QP has 50 million shares outstanding. The finance department of ICC predicts that if QP is acquired by the firm, the estimated incremental net cash flows of the combined company will be at least $40 million per year. The finance department also estimates the appropriate discount rate for the incremental cash flows to be 16%.

(a)Calculate the present value of synergy from the acquisition. Assume the incremental net cash flows are perpetual. (Show your calculations). (3 marks)

(b) Suppose ICC pays $1 billion in cash for the acquisition. Calculate the net present value of the acquisition. (Show your calculations). (6 marks)

(c) Suppose ICC exchanges one of its shares for every two of QPs shares. Calculate the net present value of the acquisition. (Show your calculations). (10 marks)

(d) What exchange ratio between the two stocks would make the value of a stock offer equivalent to the $1 billion cash offer? (Show your calculations). (7 marks)