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Unformatted text preview: Chapter 29 Mergers. Acquisitions, and Divestitures 949 Silver Enterprises All Gold Mining fimfmfiém-ty‘v . l. .. . . ‘ ...i W1mlrm.m—m , ‘ Incorporating Goodwill In the previous problem, construct the. balance sheet for the new corporation assuming that the: transactidn is treated as a purchase for accounting purposes. The market value of All Gold Mining’s fixed assets is $5,800; the market values for current and other assets are the same as the book values. Assume that Silver Enterprises issues $10,500 in new long—term debt to finance the acquisition. Cash versus Stock Payment Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase it's total aftertax annual cash flow by $1.1 million indefinitely The current market value of Teller is $45 IniIlion, and that of Penn is $62 million. The appropriate discount rate fer the incremental cash flows is 12 percent. Penn is trying to. decide whether it should offer 40 percent of its. stock or $48 million in cash to Teller’s shareholders. a. What is the cost of each alternative? I]. What is the NPV of each alternative? c. Which alternative should Penn choose? EPS, PE, and Mergers The shareholders of Flannery Company have voted in favor of a buyout offer from Stul'tz Corporation. Information about each firm is given here: F lanneryls shareholders will receive one share of Stultz stock for every'three shares they hold-in Flannery. a. What will the EPS of Stultz be after the merger? What will the PE ratio be if the NPV of the acquisition is zero? b. What must Stultz feel is the value of the synergy between these two firms? Explain how your answer can be reconciled with the decision to go ahead with the takeover. Merger Rationale Cholern Electric Company (CBC) is a public utility that provides electricity to the central Colorado area. Recent events at its Mile-:High Nuclear '5‘ g 5'13,- 1:: :o _ E. o ?: E E e as Jim .MEDIATE :ions l |—|6) Part VH1 Special Topics 11. x 12. Station have been discoura ' ging. Several shareholders have ex ressed last year’s financial statements. P COHCCID eve; Income Statement Last Year ($ in millions) Balance Sheet End of Year (35 in millions) ' lif‘Fl-V—J—‘T‘I ”-51:16”. Recently, a‘wealthy grOup of individuals has offered to purchase half of CEO“ assets atflfair market price. Management recummends that this offer be acce to; because IWe believe our expertise in the energy industry can be better ex lciitedrI by CEC if we sell our electricity generating and transmission assets and enlier th 7" telecommunications business. Although telecommunications is a riskier busin 8‘- than prov1ding electricity as a public utility, it is also. potentially 'very profitab'l Mess. I Should the management approve this transaction? Why or why not? 8. Cash versus Stock as Payment Consider the following premerger information: about a bidding firm (Firm B) and a tar et f1 F‘ ' have no debt outstanding. g ml ( um I). Assume that how firms. -‘ "‘h c“ d‘wHit-N‘W Firm B h t' - _ _ . . is $9,500 .513 es imated that the value of the synergistic benefits from acquiring Firm 1'?“ a. If Firm Tis i]]' ' . . the merger? w ing to be vaUIIed for $30 per share in cash, what is the NPV of ' b“ i’ hat will the price per share of the mer - - - _ . god-firm be assum th " ' , In part (a), what is the merger premium? mg e conditions in (a)? C d. Suppose Firm T is agreeable to a merger by an exchange of stock. If B offers four of its. share f ' . . , _ merged firm be: or every five of TS shares, what Will the price per share of the '_ e. What is the NPV of the merger assuming the conditions in (d)? Cash versus Stock as Payment In Problem 10 ' _ . , are the shareholder f F'- - -' ' better off With the cash offer or the stock offer? At what exchange rati: :f 3312;: to T shares would the shareholders in The indifferent between the two offers? Effects of a St k ' ' - - Firm A and F 11;; Exchange Consider the followrng premerger information about Chapter 29 Mergers, Acquisitions, and Divestitures 951 13. 14. 15. 16. Assume that Firm A acquires Firm B via an exchange of stock at a price of $18 for each share of B’s stock. Both A and B have no debt outstanding. a. What will the earnings per share, EPS, of Firm A be after the merger? b. What will Firm A’s price per share be after the merger if the market incorrectly analyzes this reported earnings growth (that is, the price—earnings ratio does not change)? c. What will the price-earnings ratio of the postmerger firm be if the market cor- rectly analyzes the transaction? 11. If there are no synergy gains, what will the share price of A be after the merger? What willthe price—earnings ratio be? What does your answer for the share price tell you about the amount A bid for B?'Was it too high? Too low? Explain. Merger NPV Show that the NPV of a merger can be expressed as the value of the synergistic benefits, A V, less the merger premium. Merger NPV Fly-By-Night Couriers is analyzing the possible acquisition of Flash—.in-the‘Pan Restaurants. Neither firm has debt. The forecasts of Flway-Night show that the purchase would increase its annual aftertax cash flow by $390,000 indefinitely. The current market value of Flash-in-the’Pan is $7 million. The current market value .of' FlyhBy-Night is $22 million. The appropriate discount rate for the incremental cash flows is 8 percent. Fly—By-Night is trying to decide whether it would offer 30 percent of its stock or $9 million in cash to Flash-in—the-Pan. a. What is the synergy from the merger? b. What is the value of Flash-imthe-Pan to Fly-By—Night? c. What is the cost to Fly-By—Night of each alternative? d. What is the NPV to Fly-By-Night of each alternative? e. What alternative should Fly-By-Night use? Merger NPV Harrods PLC has a market value of £400 million and 30 million shares outstanding. Selfridge Department Store has a market value of £160 million and 18 million shares outstanding. Harrods is contemplating acquiring Selfridge. Harrods’s CFO concludes that the combined firm with synergy will be worth £590 million, and Selfridge can be acquired at a premium of £15 million. a. If Harrods offers 12 million shares of its stock in exchange for the 18 mil- lion shares of Selfridge, what will the stock price of Harrods be after the acquisition? b. What exchange ratio between the two stocks would make the value of the stock offer equivalent to a cash offer of £175 million? Mergers and Shareholder Value Bentley Corp. and Rolls Manufacturing are considering a merger. The possible states of the economy and each company’s value in that state are shown here: Bentley currently has a bond issue outstanding with a face value of $125,000. Rolls is an all-equity company. a. What is the value of each company before the merger? b. What are the values of each company’s debt and-equity before the merger? c. If the companies continue to operate separately, what are the total value of the campanies, the total value of the equity, and the total value of the debt? ...
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