Corporate_Finance_9th_edition_Solutions_Manual_FINAL0

19 d the most the acquiring firm should be willing to

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Unformatted text preview: : Cost = (1/3)(90,000)($78.75) = $2,362,500 So, the NPV of the acquisition is: NPV = 0 = V* + ∆ V – Cost = $2,362,500 + ∆ V – 2,362,500 ∆ V = $0 Although there is no economic value to the takeover, it is possible that Stultz is motivated to purchase Flannery for other than financial reasons. 9. The decision hinges upon the risk of surviving. That is, consider the wealth transfer from bondholders to stockholders when risky projects are undertaken. High-risk projects will reduce the expected value of the bondholders’ claims on the firm. The telecommunications business is riskier than the utilities business. If the total value of the firm does not change, the increase in risk should favor the stockholder. Hence, management should approve this transaction. If the total value of the firm drops because of the transaction, and the wealth effect is lower than the reduction in total value, management should reject the project. 10. a. The NPV of the merger is the market value of the target firm, plus the value of the synergy, minus the acquisition costs, so: NPV = 1,400($26) + $5,500 – 1,400($29) = $1,300 b. Since the NPV goes directly to stockholders, the share price of the merged firm will be the market value of the acquiring firm plus the NPV of the acquisition, divided by the number of shares outstanding, so: Share price = [2,900($39) + $1,300]/2,900 = $39.45 c. The merger premium is the premium per share times the number of shares of the target firm outstanding, so the merger premium is: Merger premium = 1,400($29 – 26) = $4,200 d. The number of new shares will be the number of shares of the target times the exchange ratio, so: New shares created = 1,400(3/5) = 840 new shares The value of the merged firm will be the market value of the acquirer plus the market value of the target plus the synergy benefits, so: VBT = 2,900($39) + 1,400($26) + 5,500 = $155,000 544 The price per share of the merged firm will be the value of the merged firm divided by the total shares of the new firm, which is: P = $155,000/(2,900 + 840) = $41.44 e. The NPV of the acquisition using a share exchange is the market value of the target firm plus synergy benefits, minus the cost. The cost is the value per share of the merged firm times the number of shares offered to the target firm shareholders, so: NPV = 1,400($26) + $5,500 – 840($41.44) = $7,087.17 Intermediate 11. The cash offer is better for the target firm shareholders since they receive $29 per share. In the share offer, the target firm’s shareholders will receive: Equity offer value = (3/5)($29) = $15.60 per share From Problem 10, we know the value of the merged firm’s assets will be $155,000. The number of shares in the new firm will be: Shares in new firm = 2,900 + 1,400x that is, the number of shares outstanding in the bidding form, plus the number of shares outstanding in the target firm, times the exchange ratio. This means the post merger share price will be: P = $155,000/(2,900 + 1,400x) To make the target firm’s shareholders indifferent, they must receive the same wealth, so: 1,400(x)P = 1,400($29) This equation shows that the new offer is the shares outstanding in the target company times the exchange ratio times the new stock price. The value under the cash offer is the shares outstanding times the cash offer price. Solving this equation for P, we find: P = $29 / x Combining the two equations, we find: $155,000/(2,900 + 1,400x) = $29 / x x = 0.7351 There is a simpler solution that requires an economic understanding of the merger terms. If the target firm’s shareholders are indifferent, the bidding firm’s shareholders are indifferent as well. That is, the offer is a zero sum game. Using the new stock price produced by the cash deal, we find: Exchange ratio = $26/$39.45 = .7351 545 12. The cost of the acquisition is: Cost = 250($22) = $5,500 Since the stock price of the acquiring firm is $50, the firm will have to give up: Shares offered = $5,500/$50 = 110 shares a. The EPS of the merged firm will be the combined EPS of the existing firms divided by the new shares outstanding, so: EPS = ($1,600 + 700)/(600 + 110) = $3.24 b. The PE of the acquiring firm is: Original P/E = $50/($1,600/600) = 18.75 times Assuming the PE ratio does not change, the new stock price will be: New P = $3.24(18.75) = $60.74 c. If the market correctly analyzes the earnings, the stock price will remain unchanged since this is a zero NPV acquisition, so: New P/E = $50/$3.24 = 15.43 times d. The new share price will be the combined market value of the two existing companies divided by the number of shares outstanding in the merged company. So: P = [(600)($50) + 250($20)]/(600 + 110) = $49.30 And the PE ratio of the merged company will be: P/E = $49.30/$3.24 = 15.22 times At the proposed bid price, this is a negative NPV acquisition for A since the share price declines. They should revise their bid downward until the NPV is zero. 13. Beginning with the fact that the NPV of a merger...
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