Pike co MTQ

Pike co a listed conglomerate is looking to buy Minnow co an advertising company owned and run by Fred. Fred has agreed to sale and has insisted on cash consideration as he wishes to retire . Pike plc is considering issuing bonds to generate cash required

SOFP of Minnow co

NBV of equity $10.3m
NRV $11.2m
replacement cost $15.3m
bank loan $2.5m

Statement of P&L

Minnow co made a PAT of $7m last year. This expected to grow by 3 % per year. In-spite owning and running company, Fred does not take salary preferring to take money out of business via high dividends . Pike plc estimates that it will need to offer salary of $100000 to replace Fred when he leaves

Cashflow

Pike co anticipates that after making number of changes Minnow co will generate free cashflow of $6m next year. this is expected to grow by 4% per year thereafter

Other info

Trout and co a quoted advertising agency wit similar gearing and growth prospects to Minnow co has a P/E ratio of 7, a WACC of 12% and cost of equity of 15%
Minnow co pays corporation tax at 30%

Which 2 of the following statements about the proposed acquisition are true

a)Fred probably prefers to take dividends due to tax considerations
b)A major risk faced by Pike co is that customers will be loyal to fred rather than the company so may leave when he retires
c)If stick market that Pike co is listed on its strong form efficient then the share price of Pike plc will only react to the acquisition when the conformation is published
d)Directors of Pike co should only be concerned about unsystematic risk of Minnow co

Sir correct ans is A and B but please can you explain me