Practice Questions Lecture 4 solution

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

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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.

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