Umida Ltd is considering acquiring Trinity Ltd. Both companies are all-equity firms. Umida and Trinity have 5 million and 6 million shares outstanding respectively. Umida generates $2 million in annual cash flows, while Trinity generates $2.5 million in cash flows annually. These cash flows are expected to remain constant perpetually. The risk-free rate is 2%. Umida has a beta of 1.2 and a cost of capital of 11.60%. Trinity’s beta is 1.4. After the takeover, Umida’s annual cash flow is expected to increase to $3 million per annum in perpetuity and its beta will be 1.4, while Trinity’s perpetual cash flow reduces by 0.5and beta remains the same after the takeover.

a) Calculate the synergy of the takeover.

Question

13-06-2024
Business

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Umida Ltd is considering acquiring Trinity Ltd. Both companies are all-equity firms. Umida and Trinity have 5 million and 6 million shares outstanding respectively. Umida generates $2 million in annual cash flows, while Trinity generates $2.5 million in cash flows annually. These cash flows are expected to remain constant perpetually. The risk-free rate is 2%. Umida has a beta of 1.2 and a cost of capital of 11.60%. Trinity’s beta is 1.4. After the takeover, Umida’s annual cash flow is expected to increase to $3 million per annum in perpetuity and its beta will be 1.4, while Trinity’s perpetual cash flow reduces by 0.5and beta remains the same after the takeover.

a) Calculate the synergy of the takeover.

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