Question: Merger Gains and Costs.

Velcro Saddles is contemplating the acquisition of Pogo Ski Sticks,

Inc. The values of the two companies as separate entities are $20 million and $10 million, respectively.

Velcro Saddles estimates that by combining the two companies, it will reduce marketing

and administrative costs by $500,000 per year in perpetuity. Velcro Saddles is willing to

pay $14 million cash for Pogo. The opportunity cost of capital is 8 percent.

1. What is the gain from merger?
2. What is the cost of the cash offer?
3. What is the NPV of the acquisition under the cash offer?

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