A Ltd is considering the acquisition of B Ltd. Both companies are wholly equity financed and each has 5 million shares on issue. The annual net cash flows of A and B are $1.2million and $1million respectively and these cash flows are expected to remain constant in perpetuity. The risk free rate is 6%. A shareholders require a rate of return of 14% per annum. A has a beta of 0.8, but B's operations are of higher risk and its beta is 1. After the takeover, A's net cash flow is expected to increase to $1.8m per annum in perpetuity and its beta is expected to increase to 1, and B's net cash flow is expected to decrease to $0.9m per annum in perpetuity with no change in risk.

a).Calculate the deal synergy.
b).What is the price per share at which B represents a zero net present value investment to A?  
c). If A offers $8m in cash for B, calculate the gains to shareholders of both firms.      
d). If the deal is settled with A swapping 4 A shares for 5 B shares, calculate the new A share price after the deal, and the NPV of the deal for shareholders of both companies.  
e) Show the assumption(s) you have made to solve the questions above. 

Answer rating: 100% (QA)

As per CAPM Before takeover Cost of equity of A risk free rate beta of A market risk premium 14 608 ... View the full answer