Corporate_Finance_9th_edition_Solutions_Manual_FINAL0

2847 new shares issued new shares issued 30000000 new

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Unformatted text preview: term debt Equity Total $ 6,400 9,700 24,600 $40,700 4. Since the acquisition is funded by long-term debt, the post-merger balance sheet will have long-term debt equal to the original long-term debt of Jurion’s balance sheet plus the new long-term debt issue, so: Post-merger long-term debt = $8,500 + 17,000 = $25,500 Goodwill will be created since the acquisition price is greater than the market value. The goodwill amount is equal to the purchase price minus the market value of assets. Generally, the market value of current assets is equal to the book value, so: Goodwill created = $17,000 –$12,000 (market value FA) – $2,600 (market value CA) = $2,400 Current liabilities and equity will remain the same as the pre-merger balance sheet of the acquiring firm. Current assets will be the sum of the two firm’s pre-merger balance sheet accounts, and the fixed assets will be the sum of the pre-merger fixed assets of the acquirer and the market value of fixed assets of the target firm. The post-merger balance sheet will be: 541 Jurion Co., post-merger Current assets Fixed assets Goodwill Total 5. $10,600 35,000 2,400 $48,000 Current liabilities Long-term debt Equity Total $ 4,500 25,500 18,000 $48,000 In the pooling method, all accounts of both companies are added together to total the accounts in the new company, so the post-merger balance sheet will be: Current assets Other assets Net fixed assets Total Silver Enterprises, post-merger $ 5,600 Current liabilities 1,350 Long-term debt 11,800 Equity $18,750 Total $ 3,800 1,800 13,150 $18,750 6. Since the acquisition is funded by long-term debt, the post-merger balance sheet will have long-term debt equal to the original long-term debt of Silver’s balance sheet plus the new long-term debt issue, so: Post-merger long-term debt = $1,800 + 9,100 = $10,900 Goodwill will be created since the acquisition price is greater than the market value. The goodwill amount is equal to the purchase price minus the market value of assets. Since the market value of fixed assets of the target firm is equal to the book value, and the book value of all other assets is equal to market value, we can subtract the total assets from the purchase price, so: Goodwill created = $9,100 – ($5,650 market value TA) = $3,450 Current liabilities and equity will remain the same as the pre-merger balance sheet of the acquiring firm. Current assets and other assets will be the sum of the two firm’s pre-merger balance sheet accounts, and the fixed assets will be the sum of the pre-merger fixed assets of the acquirer and the market value of fixed assets of the target firm. Note, in this case, the market value and the book value of fixed assets are the same. The post-merger balance sheet will be: Silver Enterprises, post-merger Current assets Other assets Net fixed assets Goodwill Total $ 5,600 1,350 11,800 3,450 $22,200 Current liabilities Long-term debt Equity Total $ 2,600 10,900 8,700 _______ $22,200 542 7. a. The cash cost is the amount of cash offered, so the cash cost is $70 million. To calculate the cost of the stock offer, we first need to calculate the value of the target to the acquirer. The value of the target firm to the acquiring firm will be the market value of the target plus the PV of the incremental cash flows generated by the target firm. The cash flows are a perpetuity, so V* = $65,000,000 + $1,600,000/.12 = $78,833,333 The cost of the stock offer is the percentage of the acquiring firm given up times the sum of the market value of the acquiring firm and the value of the target firm to the acquiring firm. So, the equity cost will be: Equity cost = .40($98,000,000 + 78,833,333) = $70,533,333 b. The NPV of each offer is the value of the target firm to the acquiring firm minus the cost of acquisition, so: NPV cash = $78,333,333 – 70,000,000 = $8,333,333 NPV stock = $78,333,333 – 70,533,333 = $7,800,000 c. 8. a. Since the NPV is greater with the cash offer, the acquisition should be in cash. The EPS of the combined company will be the sum of the earnings of both companies divided by the shares in the combined company. Since the stock offer is one share of the acquiring firm for three shares of the target firm, new shares in the acquiring firm will increase by one-third of the number of shares of the target company. So, the new EPS will be: EPS = ($450,000 + 675,000)/[180,000 + (1/3)(90,000)] = $5.357 The market price of Stultz will remain unchanged if it is a zero NPV acquisition. Using the P/E ratio, we find the current market price of Stultz stock, which is: P = 21($675,000)/180,000 = $78.75 If the acquisition has a zero NPV, the stock price should remain unchanged. Therefore, the new PE will be: P/E = $78.75/$5.357 = 14.70 b. The value of Flannery to Stultz must be the market value of the company since the NPV of the acquisition is zero. Therefore, the value is: V* = $450,000(5.25) = $2,362,500 543 The cost of the acquisition is the number of shares offered times the share price, so the cost is...
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