Answer to Question #166313 in Management for Isaac Narh

Question

Ghana Cocoa proposes to acquire Adipa Cocoa. The market value of Ghana Cocoa is GHS 800 million whilst the market value of Adipa Cocoa is GHS 200 million. The merger is expected to produce savings of GHS 10,000,000 a year in perpetuity. These savings are expected to grow at 5% a year. Ghana Cocoa has proposed to pay GHS 360 million to acquire Adipa Cocoa. The payment is expected to be made in 2 years.

Ghana Cocoa's cost of capital is given as 30% whilst Adipa Cocoa's cost of capital is given as 25%. Instead of a cash offer, Ghana Cocoa proposes to offer 30 million shares to shareholders of Adipa Cocoa. Ghana Cocoa has 100 million shares outstanding whilst Adipa Cocoa also has 100 million shares outstanding.

 

[Hint: Discount all cash flows with the discount rate of the target company]

 

(a) Calculate the present value of the anticipated merger gains.

(b) How much of the merger gains accrue to the shareholders of Adipa Cocoa with the cash offer?

(c) What is the NPV of the merger to shareholders of Ghana Cocoa with a cash offer?

(d) What is the value of the combined firm assuming the merger takes places using a cash offer?

(e) What is the cost of the stock offer to shareholders of Ghana Cocoa?

(what is the NPV of the stock offer to shareholders of Ghana Cocoa?

(c) Advise the management of Ghana Cocoa as to whether they should complete the acquisition deal using a stock or cash offer. Your advice should be based on the computations in e and f above.

(h) Discuss the principles that guide the regulation of takeovers.

(i) Discuss some of the tactics that firms use to avoid a takeover.

 

Answer 1

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