Yam Ltd (Y) has been evaluating the acquisition of Xavier Ltd (X). The annual expected cash flows of Y and X are, respectively, $1.16 million per annum in perpetuity and $640 000 per annum in perpetuity. These cash flows are expected to be unaffected by the takeover. The systematic risk (beta) of Y is 0.75 and of X is 1.0. The risk-free interest rate is 10 per cent and the expected excess return on the market portfolio is 6 per cent. Calculate the price at which X represents a zero net present value investment.

1. Is it likely that Ys shareholders will benefit from the takeover?
2. Assume the information above exceptthat X is expected to increase its annual cash flows by $150,000 per annum. If Y were to pay a control premium of $1m, would this deal be of benefit to Y shareholders?