Brealey. Myers. Allen Chapter 32 Solution

Brealey. Myers. Allen Chapter 32 Solution - CHAPTER 32...

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1 CHAPTER 32 Mergers Answers to Practice Questions 1. Answers here will vary, depending on student choice. 2. a. This is a version of the diversification argument. The high interest rates reflect the risk inherent in the volatile industry. However, if the merger allows increased borrowing and provides increased value from tax shields, there will be a net gain. b. The P/E ratio does not determine earnings. The efficient markets hypothesis suggests that investors will be able to see beyond the ratio to the economics of the merger. c. There will still be a wealth transfer from the acquiring shareholders to the target shareholders. 3. Suppose the market value of the acquiring firm is $150 million and the value of the firm with a merger is $200 million. If the probability of a merger is 70%, then the market value of the firm pre-merger could be: ($150 × 0.3) + ($200 × 0.7) = $185 million If the acquiring managers used this value, they would underestimate the value of the acquisition. 4. a. Use the perpetual growth model of stock valuation to find the appropriate discount rate (r) for the common stock of Dietech (Company B) and Enbonpoint (Company A), respectively: 8.71% 0.0871 r 85 0.025 - r 5.28 = = = 8.50% 0.0850 r 60 0.025 - r 3.60 = = = Therefore, the appropriate discount rate for the combined company is approximately 8.60%.
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2 Under new management, the value of the combination (AB) is determined by first computing the earnings for AB: [(€8.80 × 5.5 million) + (€6 × 10 million)] × 1.15 = €124.660 million Next, we note that the payout ratio for each firm is 60%, so that dividends for AB equal: €124.660 million × 0.60 = €74.796 million Therefore, the value of AB is: 1,226.164 0.025 - 0.086
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This note was uploaded on 04/18/2010 for the course FINANCE 936116531 taught by Professor Wuyiling during the Spring '10 term at Nashville State Community College.

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Brealey. Myers. Allen Chapter 32 Solution - CHAPTER 32...

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