Question One (10 Marks) Merger Gains and Costs.

As Finance Director of Ngulu Products Ltd, you are investigating the possible acquisition of Muggie Toys Company. You have the following basic data:

Ngulu Products Muggie Toys Forecast earnings per share K5.00 K1.50 Forecast dividend per share K3.00 K.80 Number of shares 1,000,000 600,000 Stock price K90.00 K20.00

You estimate that investors currently expect a steady growth of about 6 percent in Muggie Toys earnings and dividends. You believe that Ngulu Products could increase Muggie Toys growth rate to 8 percent per year, without any additional capital investment required. a. What is the gain from the acquisition? b. What is the cost of the acquisition if Ngulu Products pays K25 in cash for each share of Muggie Toys? c. What is the cost of the acquisition if Ngulu Products offers one share of Ngulu Products for every three shares of Muggie Toys? d. How would the cost of the cash offer and the share offer alter if the expected growth rate of Muggie Toys were not increased by the merger?