Stock v e r sus Cash Offe r s. Sweet Cola Corp. (SCC) is bidding to take over Salty Dog Pret- zels (SDP). SCC has 3,000 shares outstanding, selling at $50 per share. SDP has 2,000 shares outstanding, selling at $17.50 a share. SCC estimates the economic gain from the merger to be $10,000.
a. If SDP can be acquired for $20 a share, what is the NPV of the merger to SCC?
b. What will SCC sell for when the market learns that it plans to acquire SDP for $20 a share? What will SDP sell for? What are the percentage gains to the shareholders of each firm?
c. Now suppose that the merger takes place through an exchange of stock. Based on the premerger prices of the firms, SCC sells for $50, so instead of paying $20 cash, SCC is- sues .40 of its shares for every SDP share acquired. What will be the price of the merged firm?
d. What is the NPV of the merger to SCC when it uses an exchange of stock? Why does
your answer differ from part (a)?
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