The following information reflects the information for the acquiring firm and the target firm: Acquiring firm Target firm

Share price $13.00 $5.40

Number of shares 5,000,000 1,000,000

If it is a cash bid, the acquiring firm will have to pay a premium of $500,000 to the shareholders of the target firm. The synergy will come from elimination of duplication costs, which is worth $100,000 every year for the foreseeable future. The cost of capital for the company is 16.5%.

(i) Identify the net present value of the merger? (5 marks)

(ii) Propose if the merger should go ahead and justify why.