Kelvin Corporation is analysing that whether it should acquire Daisy Limited or not. Neither firm has outstanding debt.

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Kelvin Corporation is analysing that whether it should acquire
Daisy Limited or not. Neither firm has outstanding debt. The
current market value of Kelvin Corporation is $100,000. There are
20,000 outstanding shares in Daisy Limited with a share price of
$3. Kelvin Corporation predicts that the acquisition would result
in an incremental cash flow of $3,000 per year indefinitely, and
the appropriate discount rate is 12%.
a) What is the present value of the synergy from the
acquisition?
b) Suppose the Chief Executive Officer (CEO) of Kelvin
Corporation is considering an offer of $90,000 cash for the
acquisition of Daisy Limited.
(i) Calculate the premium of the acquisition.
(ii) Calculate the estimated market value of the combined
firm.
(iii) Is this offer attractive to Kelvin Corporation? Explain it
with calculation.
c) Suppose the Financial Manager of Kelvin Corporation is
considering an offer of providing 35% of the shares in the combined
firm to the shareholders of Daisy Limited for the acquisition.
(i) Calculate the equivalent dollar cost of this stock offer
(stock payment).
(ii) Calculate the net present value of this stock offer.
d) Suppose Daisy Limited would accept any offer of
acquisition if it can increase its shareholders’ wealth. Should
Kelvin Corporation acquire Daisy Limited by the cash offer as
considered by its CEO or the stock offer as considered by the
Financial Manager? Explain it.