Argo has a current market capitalization of $ 320 million with 65 million shares outstanding. The firm
Question:
Argo has a current market capitalization of $ 320 million with 65 million shares outstanding. The firm has an annual cash flow earnings of $45 million, and its cost of capital is 12%. Argo is considering taking over Bylo, which currently has 25 million shares outstanding with a market capitalization of $ 75 million and annual cash flow earnings of $3.5 million. The cost of capital for Bylo is 10%. The takeover is expected to result in annual additional cash flow of $ 0.9 million in the first year, which is expected to remain constant in perpetuity. The cost of capital for synergies is 12%. Argo is considering two different options to finance the take over (i) a cash offer with a 45% premium relative to its market price (ii) a share swap of 3 shares of Argo for every 4 shares of Bylo.
- Calculate (i) overall gain (ii) gain to Argo shareholders and (iii) gain to Bylo shareholders if the cash offer is made.
- Calculate (i) gain to Argo shareholders and (ii) gain to Bylo shareholders if the share-swap offer is made.
- At what cash offer price (cash offer) would this be a zero NPV investment for Argo Corp?
Foundations of Finance The Logic and Practice of Financial Management
ISBN: 978-0132994873
8th edition
Authors: Arthur J. Keown, John D. Martin, J. William Petty