Lg3 174 asset acquisition decision zarin printing

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Unformatted text preview: he tax advantage of the merger each year for Webster? c. What is the maximum cash price each interested firm would be willing to pay for Hahn Textiles? (Hint: Calculate the present value of the tax advantages.) d. Use your answers in parts a through c to explain why a target company can have different values to different potential acquiring firms. LG3 17–4 Asset acquisition decision Zarin Printing Company is considering the acquisition of Freiman Press at a cash price of $60,000. Freiman Press has liabilities of $90,000. Freiman has a large press that Zarin needs; the remaining assets would be sold to net $65,000. As a result of acquiring the press, Zarin would experience an increase in cash inflow of $20,000 per year over the next 10 years. The firm has a 14% cost of capital. a. What is the effective or net cost of the large press? b. If this is the only way Zarin can obtain the large press, should the firm go ahead with the merger? Explain your answer. CHAPTER 17 747 Mergers, LBOs, Divestitures, and Business Failure c. If the firm could purchase a press that would provide slightly better quality and $26,000 annual cash inflow for 10 years for a price of $120,000, which alternative would you recommend? Explain your answer. LG3 17–5 Cash acquisition decision Benson Oil is being considered for acquisition by Dodd Oil. The combination, Dodd believes, would increase its cash inflows by $25,000 for each of the next 5 years and by $50,000 for each of the following 5 years. Benson has high financial leverage, and Dodd can expect its cost of capital to increase from 12% to 15% if the merger is undertaken. The cash price of Benson is $125,000. a. Would you recommend the merger? b. Would you recommend the merger if Dodd could use the $125,000 to purchase equipment that will return cash inflows of $40,000 per year for each of the next 10 years? c. If the cost of capital did not change with the merger, would your decision in part b be different? Explain. LG3 17–6 Ratio of exchange and EPS Marla’s Cafe is attempting to acquire the Victory Club. Certain financial data on these corporations are summarized in the following table. Item Earnings available for common stock Number of shares of common stock outstanding Market price per share Marla’s Cafe Victory Club $20,000 $8,000 20,000 4,000 $12 $24 Marla’s Cafe has sufficient authorized but unissued shares to carry out the proposed merger. a. If the ratio of exchange is 1.8, what will be the earnings per share (EPS) based on the original shares of each firm? b. Repeat part a if the ratio of exchange is 2.0. c. Repeat part a if the ratio of exchange is 2.2. d. Discuss the principle illustrated by your answers to parts a through c. LG3 17–7 EPS and merger terms Cleveland Corporation is interested in acquiring Lewis Tool Company by swapping 0.4 share of its stock for each share of Lewis stock. Certain financial data on these companies are given in the following table. Item Earnings available for common stock Number of shares of co...
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