Ross5eChap30sm - Chapter 30: Mergers and Acquisitions 30.1...

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Chapter 30: Mergers and Acquisitions 30.1 The salient point here is that both firms are shown at market value. Therefore, Blue Lager is paying $546,000 for an asset valued at $364,000 (the total value of Pickering Pickle shown on the balance sheet). This is a purchase. Assume only the assets are transferred. The merger creates $182,000 of goodwill (546,000 – 364,000). Assume that the current liabilities are not transferred. Balance Sheet Blue Lager Brewery (in $ thousands) Current assets $873 Current liabilities $364 Other assets 255 Long–term debt 728 Net fixed assets 1056 Equity 1,274 Goodwill 182 Total assets $2,366 Total liabilities $2,366 30.2 In this problem, Blue Lager is paying $546,000 for an asset worth $330,000. Since the balance sheet for Pickering Pickle shows assets at book value instead of market value, the goodwill will be $216,000 (=$546,000 – $330,000). Thus, the net fixed assets are $1,022,000 (=$2,366,00 – $873,000 – $255,000 – $216,000). Balance Sheet Blue Lager Brewery (in $ thousands) Current assets $873 Current liabilities $364 Other assets 255 Long–term debt 728 Net fixed assets 1022 Equity 1,274 Goodwill 216 Total assets $2,366 Total liabilities $2,366 30.3 a. Value = $25 x 200 = $5,000 b. EPS = Post–merger earnings / Total number of shares =($250)/200 =$1.25 c. Price per share = Value/Total number of shares =$5,000/200 =$25 d. If the market is “fooled”and suppose P/E remains at 25:. Value = P/E * Total number of shares = 25 * 250 = $6,250 EPS = Post–merger earnings / Total number of shares = $250/200 = $1.25 Answers to End–of–Chapter Problems B– 159
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Price per share=value/Total number of shares =$6,250/200 = $31.25 30.4 a. After the mergerGardia Financial will have 204,100 [=160,000 + (84,000)(0.525)] shares outstanding. The earnings of the combined firm will be $514,000. The earnings per share of the combined firm will be $2.518 (=$514,000/204,100). The acquisition will decrease the EPS for the stockholders from $2.64 to $2.52. b. First, find the pre–merger stock prices: Share price of Gardia = (18 x $423,000) / 160,000 = $47.6 Share price of Skywalker = (11 x $91,000)/ 84,000 = $11.91 Since the relative value of these prices ( 0.2502= $11.91/47.6) is lower than the ratio of 0.525 shares that the shareholders in Skywalker would receive, the synergies does not exist. 30.5 a. The synergy will be the present value of the incremental cash flows of the proposed purchase. Since the cash flows are perpetual, this amount is $600,000/.08 = $7,500,000 b. The value of Flash–in–the–Pan to Fly–by–Night is the synergy plus the current market value of Flash–in–the–Pan. Value = $7,500,000 + $20,000,000 = $27,500,000 c. The value of each alternative is: Cash alternative = $25,000,000 Stock alternative = 0.25 ($27,500,000 + $35,000,000) = $15,625,000 d. Since these values are already in PV terms, the NPVs are simply Value – Cost: NPV of cash alternative = $27,500,000 – $25,000,000 = $2,500,000 NPV of stock alternative = $27,500,000 – $15,625,000 = $11,875,000 e. Use the stock alternative, because its NPV is greater. 30.6 a. The value of Dryden Industries before the merger is $1,800,000 (=$100,000x18). This value is also the discounted value of the expected future dividends. Answers to End–of–Chapter Problems B– 160
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05 . 0 05 . 1 ) 000 , 400 25 . 0 ($ 000 , 800 , 1 $ - = r x 10.83333% or 1083333 . 0 = r r r is the risk–adjusted discount rate for Dryden’s expected future dividends.
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This note was uploaded on 07/18/2010 for the course ECONMICS ECM359 taught by Professor Matazi during the Summer '10 term at University of Toronto- Toronto.

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Ross5eChap30sm - Chapter 30: Mergers and Acquisitions 30.1...

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