Fantastic Three Ltd. has 20,000 shares outstanding that are currently trading at $20. Both Yamato Inc and Zoolander International have shown interest in the acquisition of Fantastic Three. Yamato has a market value of $1 million and 100,000 shares outstanding, while Zoolander has 500,000 shares trading at $15. In order to acquire Fantastic Three, Yamato has offered to pay to Fantastic's shareholders $600,000 cash, while Zoolander has offered to issue 40,000 new shares as a payment.
- What is the minimum dollar amount of annual, after-tax synergies created by the merger, for each Yamato and Zoolander, which would justify such offers? Assume synergies are perpetual and a discount rate is 10%. (1 mark)
- Assuming after-tax synergies from the merger would be $25,000 in perpetuity for both Yamato and Zoolander, and that Fantastic’s shareholders are indifferent between a share or cash offer of equal value, which offer should they accept? (1.5 marks)