Ready Food Inc (RFI) is planning to acquire Precise Canning Services (PCS). RFI currently has 400 shares outstanding and the market price per share is $100. PCS has 300 shares outstanding and the market price is $80 per share. RFI estimates that acquiring PCS will generate incremental cash flows over the next 12 years as follows:

o  Revenues will increase $2,000 per year
o  Costs will increase $950 per year
o  Taxes will increase $150 per year
o  Working capital and financing costs will increase $150 per year
o  The required return on PCS assets is 10%.
o  The acquisition costs (fees to investment Bankers and lawyers) are $650 to be paid at the time of acquisition?

a.    What are the annual incremental cash flows from the merger? (2 Marks)

b.    What is the value of PCS to RFI? (2 Marks)

c.    What would be the maximum bid price per share RFI can offer to acquire PCS? (2 Marks)

d.    RFI offers PCS shareholders $90 cash per share of PCS and the offered is accepted. What should be the market price of each RFI share after the acquisition? (2 Marks)

Answer rating: 100% (QA)

The annual incremental cash flows from the merger are as follows ... View the full answer