C what is the cost to fly by night of each

This preview shows page 25 - 27 out of 28 pages.

c. What is the cost to Fly-by-Night of each alternative? d. What is the NPV to Fly-by-Night of each alternative? e. Which alternative should Fly-by-Night use? 13. Merger NPV Harrods PLC has a market value of £450 million and 18 million shares outstanding. Selfridge Department Store has a market value of £120 million and 11 million shares outstanding. Harrods is contemplating acquiring Selfridge. Harrods’s CFO concludes that the combined firm with synergy will be worth £625 million and Selfridge can be acquired at a premium of £55 million. a. If Harrods offers 4 million shares of its stock in exchange for the 11 million shares of Self- ridge, what will the stock price of Harrods be after the acquisition? b. What exchange ratio between the two stocks would make the value of a stock offer equiva- lent to a cash offer of £140 million? Intermediate (Questions 9–14)
Image of page 25

Subscribe to view the full document.

26 14. Mergers and Shareholder Value Bentley Corp. and Rolls Manufacturing are considering a merger. The possible states of the economy and each company’s value in that state are shown below: STATE PROBABILITY BENTLEY ROLLS Boom Recession .60 .40 $310,000 $180,000 $280,000 $110,000 Bentley currently has a bond issue outstanding with a face value of $195,000. Rolls is an all- equity company. a. What is the value of each company before the merger? b. What is the value of each company’s debt and equity before the merger? c. If the companies continue to operate separately, what is the total value of the companies, the total value of the equity, and the total value of the debt? d. What would be the value of the merged company? What would be the value of the merged company’s debt and equity? e. Is there a transfer of wealth in this case? Why? f. Suppose that the face value of Bentley’s debt was $175,000. Would this affect the transfer of wealth? 15. Calculating NPV Plant, Inc., is considering making an offer to purchase Palmer Corp. Plant’s vice president of finance has collected the following information: PLANT PALMER Price-earnings ratio Shares outstanding Earnings Dividends 14 1,000,000 $1,800,000 $ 600,000 11 620,000 $580,000 $290,000 Plant also knows that securities analysts expect the earnings and dividends of Palmer to grow at a constant rate of 5 percent each year. Plant management believes that the acquisition of Palmer will provide the firm with some economies of scale that will increase this growth rate to 7 percent per year. a. What is the value of Palmer to Plant? b. What would Plant’s gain be from this acquisition? c. If Plant were to offer $17 in cash for each share of Palmer, what would the NPV of the acquisition be? d. What’s the most Plant should be willing to pay in cash per share for the stock of Palmer? e. If Plant were to offer 250,000 of its shares in exchange for the outstanding stock of Palmer, what would the NPV be?
Image of page 26
Image of page 27
You've reached the end of this preview.
  • Spring '12
  • Scott
  • Firm, Firm B

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern