Mergers and Acquisition

Reims plc isinvestigating a possible takeover of California plc. Reims is in the hotelindustry while California is a manufacturer of high tech computer chips. Youare given the following information for the two companies:

Both companies are solelyequity financed. The managing director of Reims is very keen to acquireCalifornia as part of the diversification strategy. The market return isexpected to be 10% p.a. for the foreseeable future. The corporate tax rate forReims is 35%. Required:
(b) What are the cost and netcost of acquisition if Reims pays £36 in cash for each share of California? (2marks) (c) What are the cost and netcost of acquisition if Reims offers two shares for every five shares ofCalifornia? (4 marks) (d) What would be the combinedcompany’s beta after the acquisition in the case of (b) and (c) above? Does itmake any economic sense for such acquisition to go ahead? (6 marks) (e) What would be the cost andgain of acquisition if Reims issues 10% perpetual debt with a total face valueof £20 million? The proceeds are used to acquire the 100% shareholding ofCalifornia. The debt is assumed to be risk-free with an expected rate of returnat 6% per annum. State the market value, share price and the beta of thecombined firm after the acquisition. (9 marks) Total 25marks

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