Let's solve the problems step by step: --- ### **2. Velcro Saddles is contemplating the acquisition of Pogo Ski Sticks Inc.** #### **Given Data:** - Value of Velcro (V): **$20 million** - Value of Pogo (P): **$10 million** - Synergy (cost savings): **$500,000 per year in perpetuity** - Cost of capital (r): **8%** - Cash offer for Pogo: **$14 million** --- #### **(a) What is the gain from merger?** The gain from the merger is the present value of the synergies: \[ \text{PV of Synergy} = \frac{\text{Annual Savings}}{r} \] \[ = \frac{\$500,000}{0.08} = \$6,250,000 \] So, **Gain from merger = $6.25 million** --- #### **(b) What is the cost of the cash offer?** The cost of the cash offer is the cash paid minus the standalone value of Pogo: \[ \text{Cost of Cash Offer} = \text{Cash Paid} - \text{Pogo's Value} \] \[ = \$14,000,000 - \$10,000,000 = \$4,000,000 \] --- #### **(c) What is the NPV of the acquisition under the cash offer?** \[ \text{NPV} = \text{Gain from Merger} - \text{Cost of Cash Offer} \] \[ = \$6,250,000 - \$4,000,000 = \$2,250,000 \] --- ### **3. Suppose that instead of making a cash offer, Velcro considers offering Pogo shareholders a 50% holding of Velcro shares.** #### **(a) What is the value of the stock in the merged company held by Pogo shareholders?** After the merger, the total value of the merged company is: \[ \text{Total Value} = \text{Velcro} + \text{Pogo} + \text{Synergy} \] \[ = \$20,000,000 + \$10,000,000 + \$6,250,000 = \$36,250,000 \] Pogo shareholders will hold 50%, so: \[ \text{Value held by Pogo shareholders} = 0.5 \times \$36,250,000 = \$18,125,000 \] --- #### **(b) What is the cost of the stock alternative?** The cost is the value of the new shares given to Pogo shareholders minus the standalone value of Pogo: \[ \text{Cost of Stock Alternative} = \text{Value of Stock Given} - \text{Value of Pogo} \] \[ = \$18,125,000 - \$10,000,000 = \$8,125,000 \] --- #### **(c) What is merger’s NPV under the stock offer?** \[ \text{NPV} = \text{Gain from Merger} - \text{Cost of Stock Alternative} \] \[ = \$6,250,000 - \$8,125,000 = -\$1,875,000 \] --- ## **Final Answers (Summary):** ### 2. Cash Offer - **a. Gain from merger:** $6,250,000 - **b. Cost of cash offer:** $4,000,000 - **c. NPV under cash offer:** $2,250,000 ### 3. Stock Offer (50% shares) - **a. Value of stock held by Pogo shareholders:** $18,125,000 - **b. Cost of stock alternative:** $8,125,000 - **c. NPV under stock offer:** -$1,875,000 Let me know if you need further explanations or clarifications!

Certainly! Here are two-line, pure theory responses for each part of Question 2: **a.** The gain from merger is the present value of synergies created by the combination, reflecting increased total value due to cost savings. **b.** The cost of the cash offer equals the cash paid for Pogo minus Pogo's standalone value, representing the net expenditure to acquire the company.