BigCo is buying LittleCo, BigCo has a share price of $40 and 600,000 shares outstanding. LittleCo has a share price of $28 and 300,000 shares outstanding. All firms are 100% equity financed. LittleCo's cost of equity is 18%. This merger will allow for a project with an initial cost of $5M and EBIT of $1.5M for 8 years, growing at 4% per year. The corporate tax rate is 22%.

a) What is the net present value of the synergies from this merger?

b) BigCo is paying entirely in shares and is offering LittleCo's shareholders 30% of the synergies of the merger. How many shares should BigCo issue to compensate LittleCo's shareholders?

c) What are two conclusions you could reasonably draw from the fact that BigCo is paying with shares?

Answer rating: 100% (QA)

BigCo LittleCo Merger Analysis a Net Present Value of Synergies Calculate the Projects EBIT stream Y... View the full answer