ans-odd-problems-ch29 - CHAPTER 29 MERGERS AND ACQUISITIONS...

CHAPTER 29
MERGERS AND ACQUISITIONS
Solutions to Odd-Numbered Questions and Problems
NOTE: All end-of-chapter problems were solved using a spreadsheet. Many problems require
multiple steps. Due to space and readability constraints, when these intermediate steps are
included in this solutions manual, rounding may appear to have occurred. However, the final
answer for each problem is found without rounding during any step in the problem.
Basic
1. For the merger to make economic sense, the acquirer must feel the acquisition will increase
value by at least the amount of the premium over the market value, so:
Minimum economic value = $740,000,000 – 650,000,000 = $90,000,000
3. 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:
Jurion Co., post-merger
Current assets $13,400 Current liabilities $ 4,700
Fixed assets 19,600 Long-term debt 2,800
Equity 25,500
Total $33,000 $33,000
5. 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:
Silver Enterprises, post-merger
Current assets $ 3,700 Current liabilities $ 2,700
Other assets 1,150 Long-term debt 900
Net fixed assets 6,700 Equity 7,950
Total $11,550 $11,550
7. a. The cash cost is the amount of cash offered, so the cash cost is $94 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 * = $78,000,000 + $3,100,000/.12 = $103,833,333

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($135M + 103,833,333) = $95,533,333