Price per share=value/Total number of shares
=$6,250/200 = $31.25
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.
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
The synergy will be the present value of the incremental cash flows of the proposed
Since the cash flows are perpetual, this amount is
$600,000/.08 = $7,500,000
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
The value of each alternative is:
Cash alternative = $25,000,000
Stock alternative = 0.25 ($27,500,000 + $35,000,000)
Since these values are already in PV terms, the NPVs are simply Value – Cost:
NPV of cash alternative = $27,500,000 – $25,000,000
NPV of stock alternative = $27,500,000 – $15,625,000
Use the stock alternative, because its NPV is greater.
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