US CMA Part 2 · Chapter 4 · Question 11 of 15
Kendrick Corp. (stand-alone value $400 million) plans to acquire Lowell Inc. (stand-alone value $120 million). The combined company is expected to be worth $560 million. Kendrick will pay $150 million in cash for Lowell. What is the NPV of the acquisition to Kendrick's shareholders?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) $10 million
Explanation
Synergy = combined value - stand-alone values = $560m - $400m - $120m = $40m. Premium paid = price - target value = $150m - $120m = $30m. NPV to acquirer = synergy - premium = $40m - $30m = $10m. Equivalently, $560m - $150m cash - $400m = $10m. Lowell's shareholders capture the $30m premium.
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