Two firms are competing to acquire Sanctuary Ltd, a firm with 20 million shares outstanding that are currently trading at $20. Underground Excavators (UE) has a market value of $1 billion and 100 million shares outstanding, while Gnosis Inc. has 500 million shares trading at $15. UE has offered to pay to $600 million cash for the firm while Gnosis has offered to issue 40 million new shares as a payment.

a) Assuming synergies are perpetual and the discount rate is 10% for both companies, what is the minimum yearly synergy benefit created by the merger that would justify each offer?

b) If Sanctuary's shareholders believe that a merger with either suitor would create perpetual yearly synergies of $35 million, which offer are Sanctuary's shareholders most likely to accept and why?

c) Assuming an efficient market, if Sanctuary's shareholders accept Gnosis' offer, what should happen to the share price of Sanctuary AND Gnosis immediately after the announcement that the offer was accepted? Consider both cases: synergies of $20 million and $35 million for both firms - a total of 4 prices should be reported

Lerner Inc. is facing financial distress. There is a 40% chance that the firms assets will be worth $15 million and a 60% chance that the assets are going to be worth $100 million next year. The firm also has a debt claim outstanding with a face value of $45 million due next year. The cost of equity and debt capital is equal to 10%. Lerner Inc. is facing an investment opportunity that requires $20 million upfront and will result in a safe cash flow of $25 million next year. The firm has no internal funds available to finance the project.

a) Will Lerner Inc.s shareholders inject new equity to finance this project? Why?

b) Suppose Lerner Inc. proposes a deal to its creditors. The creditors are asked to write down $10 million in debt face value to $35 million, and shareholders will have to inject new equity to fund the project. Will shareholders agree? Will creditors agree? Why? (1 mark)

c) What is the minimum amount of debt forgiveness required to make both shareholders and creditors agree and fund the investment project?