Reference no: EM132560560

KGroup Berhad is considering the acquisition of B-One Berhad, a smaller company in the same technological industry. The following data relates to these two companies:

                                                        KGroup Berhad                     B-One Berhad

No. Of shares outstanding             6,000,000                          2,000,000

Price-earnings ratio                          8 times                            5 times

Total earnings                                 RM10,000,000                   RM3.000,000

Dividend payout ratio                             0.6                                0.75

Both companies have been growing at an average of 7% per year in terms of earnings. However, the management of KGroup Berhad notes that by acquiring B-One Berhad, it will be able to make B-One's former operations achieve an 8% growth rate per year, using the combined companies current resources.

Required:

Question a. Determine the synergy from the merger.

Question b. If KGroup Berhad offers RM8 for every share in B-One Berhad, determine the NPV of the merger to KGroup berhad.

Question c. If KGroup Berhad offers to exchange three of its shares for every five of B-One's shares, determine the net present value of the merger to B-One Berhad.

Question d. Which option, the cash or the share exchange alternative, should KGroup choose and why?