Practice Questions Lecture 5

Practice Questions Lecture 5 - FINA 5512 VALUATION Lecture...

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FINA 5512 VALUATION Lecture 5 Applying Financial Modeling Techniques to Value and Structure Mergers and Acquisitions 9.1 Why should a target company be valued as a standalone business? Give examples of the types of adjustments that might have to be made if the target company is part of a larger company? 9.2 Define the minimum and maximum purchase price range for a target company. 9.7 Dow Chemical, a leading manufacturer of chemicals, announced in 2008 that they had an agreement to acquire competitor Rhom and Haas Company. Dow expects to broaden its current product offering by offering the higher margin Rohm and Haas products. What would you identify as possible synergies between these two businesses? In what ways could the combination of these two firms erode combined cash flows? Practice Problems and solutions: 1. An acquirer agrees to purchase a target firm in an exchange of shares. The acquiring firm’s share price is $12 and the offer price for the target firm is $10. What is the implied share exchange ratio? What does the share exchange ratio mean? 2. The acquirer’s current share price is $12 and its number of shares outstanding is 1,000,000. The offer price for the target firm is $15 in a share for share exchange. The target firm has 100,000 shares outstanding. The combined earnings of the two firms including synergy is $500,000. What is the postmerger EPS of the combined firms? 3. For the question above, assume that the purchase price consists of .5 acquirer shares and the balance in cash. Ignoring the cost associated with financing the cash portion of the purchase price, what is the postmerger EPS of the combined firms? 4. For the question above, what is the postmerger ownership distribution? 5. For the question above, assume the purchase price is an all cash offer. Ignoring the cost associated with financing the cash portion of the purchase price, what is the postmerger EPS of the combined firms? 9.15 Acquiring Company is considering buying Target Company. Target Company is a small biotechnology firm, which develops products that are licensed to the major pharmaceutical firms? Development costs are expected to generate negative cash flows during the first two years of the forecast period of $(10) and $(5) million, respectively. Licensing fees are expected to generate positive cash flows during years three through five of the forecast period of $5, $10, and $15 million, respectively. Due to
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