Umida Ltd is considering acquiring Trinity Ltd. Both companies are all-equity firms. Umida and Trinity have 5 million and 6 million shares outstanding respectively. Umida generates $2 million in annual cash flows, while Trinity generates $2.5 million in cash flows annually. These cash flows are expected to remain constant perpetually. The risk-free rate is 2%. Umida has a beta of 1.2 and a cost of capital of 11.60%. Trinity’s beta is 1.4. After the takeover, Umida’s annual cash flow is expected to increase to $3 million per annum in perpetuity and its beta will be 1.4, while Trinity’s perpetual cash flow reduces by 0.5and beta remains the same after the takeover.

a) Calculate the synergy of the takeover. 

b) What is the price per share at which Trinity represents a zero net present value investment to Umida? 

c) If Umida offers $20 m in cash for Trinity, calculate the gains to shareholders of both firms. 

d) If the deal is settled with Umida swapping 8 Umida shares for 9 Trinity shares, calculate the new Umida share price after the deal, and the NPV of the deal for shareholders of both companies. 

Answer rating: 100% (QA)

aThe synergy of the takeover is 05 million The annual cash flow of Umida is expected to increase to 3 million per annum in perpetuity The annual cash flow of Trinity is expected to remain constant at ... View the full answer