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RSM333 ASSIGNMENT#2 SOLUTION

# RSM333 ASSIGNMENT#2 SOLUTION - UNIVERSITY OF TORONTO Joseph...

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UNIVERSITY OF TORONTO Joseph L. Rotman School of Management RSM333 PROBLEM SET #2 SOLUTIONS 1. (a) Before the acquisition V A = \$10 ° 25 m = \$250 m and V B = \$8 ° 5 m = \$40 m . Consider the three possible values of the synergies: i) In this case the combined °rm AB [the former A] is worth \$250 m ± \$50 m ( cash out ) + \$50 m ( value of assets purchased + value of synergy ) = \$250 m . AB still has 25 million shares, and so the share price is \$250 m= 25 m = \$10 , so is unchanged. There is no net change/bene°t for the shareholders of A. The shareholders of B gained \$10 million (premium ± V B = \$50 m ± \$40 m ), so all the bene°t due to the synergies accrued to the shareholders of B. ii) In this case the combined °rm AB is worth \$250 m ± \$50 m +\$45 m = \$245 m . AB still has 25 million shares, and so the share price is \$245 m= 25 m = \$9 : 80 . The shareholders of A have experienced a loss of \$ : 20 ° 25 m = \$5 m . Again, the shareholders of B gained \$10 million, but only \$5 million of synergies was created, so the shareholders of A took a \$5 million hit. iii) In this case, the combined °rm is worth \$255 million. AB still has 25 million shares, and so the price/share is \$255 m= 25 m = \$10 : 20 , and so the shareholders of A have gained \$ : 20 ° 25 m = \$5 m of wealth, as a result of the transaction. The shareholders of B gained \$10 million. (b) Consider the three possible values of the synergies: i) AB has 30 million shares outstanding, and the combined °rm is worth \$250 m + \$40 m + \$10 m = \$300 m . The shares should trade at \$300 m= 30 m = \$10 . Hence there is no bene°t to the shareholders of A, but the shareholders of B end up with shares of AB worth \$10 ±they started with shares of B worth \$8, so they bene°ted to the tune of \$10 million as before.

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RSM333 ASSIGNMENT#2 SOLUTION - UNIVERSITY OF TORONTO Joseph...

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