Robson Inc. is considering a possible acquisition of Mason Ltd., and both are all-equity firms. Analysts of Robson estimate that the merger would increase its after-tax cash flow by $575,000 indefinitely. The current price per share of Mason is $25 and the number of shares outstanding is 432,000. The current market value of Robson is $20 million. The appropriate discount rate for the incremental cash flows is 8.5 percent. Robson is negotiating the mode of payment with two alternatives: 35 percent of its stock value after merger or $30 per share cash to Masons shareholders.

a) Calculate the synergy for the merger

b) Calculate the value of Mason to Robson.

c) For each method of payments, calculate

I. Cost of acquisition

II. Takeover premium

III. NPV of acquisition

d) Which alternative should Robson use?

e) What motivates target shareholder to negotiate for exchange of stock instead of cash?

f) Describe briefly how tax gains may be obtained from M&A.