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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
Longterm 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
Longterm 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 = Postmerger 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 = Postmerger earnings / Total number of shares = $200/200 = $1
Price per share=value/Total number of shares
=$5,000/200 = $25.00
Answers to EndofChapter Problems
B159
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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 premerger 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 FlashinthePan to FlybyNight is the synergy plus the current market
value of FlashinthePan.
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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 Fall '08
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