chprobSM_ch30

# chprobSM_ch30 - Chapter 30 Mergers and Acquisitions 30.1...

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Chapter 30: Mergers and Acquisitions 30.1 The salient point here is that both firms are shown at market value. Therefore, Lager is paying 390,000 for an asset valued at 260,000 (the total value of Moncton Pretzel shown on the balance sheet). This is a purchase. Assume only the assets are transferred. The merger creates \$130,000 of goodwill (390,000 - 260,000). Assume that the current liabilities are not transferred. Balance Sheet Lager Brewing (in \$ thousands) Current assets \$624 Current liabilities \$260 Other assets 182 Long-term debt 520 Net fixed assets 754 Equity 910 Goodwill 130 Total assets \$1,690 Total liabilities \$1,690 30.2 In this problem, Lager is paying 390,000 for an asset worth 240,000. Since the balance sheet for Moncton Pretzel shows assets at book value instead of market value, the goodwill will be \$150,000 (=\$390,000 - \$240,000). Thus, the net fixed assets are \$734,000 (=\$1,690,000 - \$624,000 - \$182,000 - \$150,000). Balance Sheet Lager Brewing (in \$ thousands) Current assets \$624 Current liabilities \$260 Other assets 182 Long-term debt 520 Net fixed assets 734 Equity 910 Goodwill 150 Total assets \$1,690 Total liabilities \$1,690 30.3 If the market is “smart,” the P/E ratio will not be constant. a. Value = \$2,500 + \$1,000 = \$3,500 b. EPS = Post-merger earnings / Total number of shares =(\$100 + \$100)/200 =\$1 c. Price per share = Value/Total number of shares =\$3,500/200 =\$17.50 d. If the market is “fooled,” the P/E ratio will be constant at \$25. Value = P/E * Total number of shares = 25 * 200 = \$5,000 EPS = Post-merger earnings / Total number of shares = \$200/200 = \$1 Price per share=value/Total number of shares =\$5,000/200 = \$25.00 Answers to End-of-Chapter Problems B-159

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a. After the merger, Arcadia Financial will have 125,000 [=10,000 + (50,000)(1/2)] shares outstanding. The earnings of the combined firm will be \$325,000. The earnings per share of the combined firm will be \$2.60 (=\$325,000/125,000). The acquisition will increase the EPS for the stockholders from \$2.25 to \$2.60. b. First, find the pre-merger stock prices: ( 29 16 * \$225,000 Share price of Arcadia = 100,000 = \$36 ( 29 12 * \$100,000 Share price of Coldran = 50,000 = \$24.00 Now, compare the relative value of these prices: \$24.00/\$36 = 0.6667 Since the problem states that Coldran’s shareholders receive 0.5 shares of Arcadia for every share of Coldran, synergies exist. 30.5 a. The synergy will be the present value of the incremental cash flows of the proposed purchase. Since the cash flows are perpetual, this amount is \$600,000 \$6,000,000 0.10 = b. The value of Flash-in-the-Pan to Fly-by-Night is the synergy plus the current market value of Flash-in-the-Pan. V \$6,000,000 \$20,000,000 \$26,000,000 = + = c. The value of each alternative is: Cash alternative = \$15,000,000 Stock alternative = 0.25 (\$26,000,000 + \$35,000,000) = \$15,250,000 d. Since these values are already in PV terms, the NPVs are simply Value - Cost: NPV of cash alternative \$26,000,000 - \$15,000,000
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## This note was uploaded on 03/17/2009 for the course ACTSC 371 taught by Professor Wood during the Fall '08 term at Waterloo.

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chprobSM_ch30 - Chapter 30 Mergers and Acquisitions 30.1...

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