If the acquisition has a zero npv the stock price

This preview shows page 8 - 10 out of 10 pages.

We have textbook solutions for you!
The document you are viewing contains questions related to this textbook.
Fundamentals of Financial Management
The document you are viewing contains questions related to this textbook.
Chapter 15 / Exercise ST-2
Fundamentals of Financial Management
Brigham
Expert Verified
If the acquisition has a zero NPV, the stock price should remain unchanged. Therefore, the new PE will be: P/E = $81/$4.125 = 19.64 b. The value of Tilbury to Dover must be the market value of the company since the NPV of the acquisition is zero. Therefore, the value is: V * = $180,000(13.5) = $2,430,000 The cost of the acquisition is the number of shares offered times the share price, so the cost is: Cost = (1/3)(90,000)($81) = $2,430.000 So, the NPV of the acquisition is: NPV = 0 = V * + V – Cost = $2,430.000+ V – 2,430.000 V = $0 Although there is no economic value to the takeover, it is possible that Dover is motivated to purchase Tilbury for other than financial reasons. EOCE#12: Consider the following pre-merger information: Firm A: Share outstanding 1000 shares, selling at $43, total earnings = $1400 Firm B: Share outstanding 200 shares, selling at $47, total earnings = $600. If A acquires B via an exchange of stock at a price of $49 for each share of B’s stock. Both A and B have no debt. 1. What will be the EPS of firm A be after the merger? 2. What will firm A’a price per share be after the merger if the market incorrectly analyzes this reported earnings growth (that the P/E ratio does not change)? 3. What will the P/E ratio be if the market correctly analyzes the transactions? 4. If there are no synergy gains, what will the share price of A be after the merger? What will the P/E ratio be? 5. At what amount did A bid for B? Was it too high or too low?
We have textbook solutions for you!
The document you are viewing contains questions related to this textbook.
Fundamentals of Financial Management
The document you are viewing contains questions related to this textbook.
Chapter 15 / Exercise ST-2
Fundamentals of Financial Management
Brigham
Expert Verified
Since the stock price of the acquiring firm is $43, the firm will have to give up: Shares offered = $9,800/$43 = 227.907 shares (assuming NPV = 0) a. The EPS of the merged firm will be the combined EPS of the existing firms divided by the new shares outstanding, so: EPS = ($1,400 + 600)/(1000 + 227.907) = $1.6288 b. The PE of the acquiring firm is: Original P/E = $43/($1,400/1000) = 30.714 times Assuming the PE ratio does not change, the new stock price will be: New P = $1.6288(30.714) = $50.03 c. If the market correctly analyzes the earnings, the stock price will remain unchanged since this is a zero NPV acquisition, so: New P/E = $43/$1.6288 = 25.41 times d. The new share price will be the combined market value of the two existing companies divided by the number of shares outstanding in the merged company. So: P = [(1000)($43) + 200($47)]/(1000 + 227.907) = $42.673 And the PE ratio of the merged company will be: P/E = $42.67/$1.6288 = 26.19 times At the proposed bid price, this is a negative NPV acquisition for A since the share price declines. They should revise their bid downward until the NPV is zero. Maths on accounting for Mergers: Firm X Firm Y Total earnings $50000 $18000 Share outstanding 25000 15000 Per share values:
Market value p.s. $49 $18 Book value p.s. $20 $7 The transaction is cash based with a merger premium of $5 p.s. If no firm has debt then use the purchase method to construct the balance sheet of the new firm Since neither company has any debt, using the pooling method, the asset value of the combined must equal the value of the equity, so: Assets = Equity = 25,000($20) + 15,000($7) = $605,000 b) With the purchase accounting method, the assets of the combined firm= = book value of Firm X, + the market value of Firm Y, Assets from X = 25,000($20) = $500,000 (book value) Assets from Y = 15,000($18) = $270,000 (market value) The purchase price of Firm Y is the number of shares outstanding times the sum of the current stock price per share plus the premium per share, so: Purchase price of Y = 15,000($18 + 5) = $345,000 The goodwill created will be: Goodwill = $345,000 – 270,000 = $75,000 And the total asset of the combined company will be: Total assets XY = Total equity XY = $500,000 + 270,000 + 75,000 = $845,000

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture