Practice Questions Lecture 4 solution

Practice Questions Lecture 4 solution - FINA 5512 VALUATION...

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
FINA 5512 VALUATION Lecture 4 Economic evaluation of mergers and real options in M&A Q1: AC is considering a takeover of TT Inc. AC has 10 million shares outstanding, which sell for $40 each. TT has 5 million shares outstanding which sell for $20 each. If the merger gains are estimated at $20 million, what is the highest price per share that AC should be willing to pay to TT shareholders? What is AC’s NPV if it pays the maximum price? Solution Acquiring: value = 10,000,000 $40 = $400,000,000 Target: value = 5,000,000 $20 = $100,000,000 Gain from merger = $20,000,000 The merger gain per share of Target is $20 million/5 million shares = $4 per share. Thus, Acquiring can pay up to $24 per share for Target, $4 above the current price. If it pays this amount, the NPV of the merger to Acquiring will be zero, NPV = -$24 per share × 5 million shares + 100 million + 20 million = 0 Q2. VS is contemplating the acquisition of PSS. The values of the two companies as separate entities are $20 million and $10 million respectively. VS estimates that by combining the two companies, it will reduce marketing and administrative cost by $500,000 per year in perpetuity.
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern