Question 6 A) You have been given the following information.

	A	B
Market price per share	GH 200	GH 100
Number of shares	1,000,000	500000
Market value of firm	GH 200million	GH 50 million

Merging the two firms will allow for cost savings with a PV of GH 25million. Firm A has decided to pay GH 65 million in cash for Firm B.

a) What is the cost of the merger to Firm A?

b) Compute the NPV associated with the merger.

c) Re-compute the cost and NPV of the merger assuming Firm Bs stock has anticipated the merger and has risen by GH 12.

B) Kunla Ltd and Kunta Ltd intend to merge. The following were observed just before the merger announcement.

	Kunla Ltd	Kunta Ltd
Market price per share	GH 400	GH200
Number of shares	2,000,000	1,000,000
Market value of firm	GH 800,000,000	GH 200,000,000

The proposed merger will create GH50,000,000 in synergies. Kunla Ltd intends to pay GH 130,000,000 cash for Kunta Ltd.

a) What is the cost of the merger to Kunla Ltd?

b) Compute the NPV of the merger.

c) The managers of these firms have proposed to merge to diversify their activities and to reduce risk. Should you pay a premium for the merged firm?

d) What convincing reasons can these managers give for the proposed merger?

e) What roles do investment banks play in facilitating M&A deals?