The University of Southampton is considering the acquisition of Solent University. The values of the two companies as separate entities are 40m and 20m respectively. The University of Southampton estimates that the acquisition will reduce, starting from the following year, its annual operating costs by 800,000 forever. The University of Southampton can either pay 25m cash for Solent University or offer Solent University a 50% holding in the University of Southampton (in the combined entity). Answer all the following questions assuming that the opportunity cost of capital is 10%.

i) What is the gain from the acquisition?

ii) What is the cost of the cash offer?

iii. What is the cost of the stock alternative?

iv. What is the NPV of the acquisition under the cash offer?

v. What is the NPV of the acquisition under the stock offer? vi. Which form of acquisition should the University of Southampton choose to implement, if any?