Three Guys Burgers Inc has offered 205 million for all of th

Three Guys Burgers, Inc., has offered $20.5 million for all of the common stock in Two Guys Fries, Corp. The current market capitalization of Two Guys as an independent company is $15.3 million. Assume the required return is 8.4 percent and the synergy from the acquisition is a perpetuity. What is the minimum annual synergy that Three Guys feels it will gain from the acquisition? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)

Solution

Minimum annual synergy = $436800

Explanation;

First of all let’s calculate minimum synergy gain;

Minimum synergy gain = Value of common stock offered – Market capitalization

Value of common stock offered is given = $20500000

Market capitalization is given = $15300000

So, minimum synergy gain will be ($20500000 – $15300000) = $5200000

Now, let’s calculate minimum annual synergy;

Minimum synergy = Annula synergy / Required return

Minimum synergy gain = $5200000

Required return = .084

Mow, let’s put the values in above given formula;

$5200000 = Annual synergy / .084

Thus, minimum annual synergy ($5200000 * .084) = $436800