F should the acquisition be attempted and if so

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f. Should the acquisition be attempted, and, if so, should it be as in (c) or as in (e)? g. Plant’s outside financial consultants think that the 7 percent growth rate is too optimistic and a 6 percent rate is more realistic. How does this change your previous answers? 16. Mergers and Shareholder Value The Chocolate Ice Cream Company and the Vanilla Ice Cream Company have agreed to merge and form Fudge Swirl Consolidated. Both companies are Challenge (Questions 15–16)
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27 exactly alike except that they are located in different towns. The end-of-period value of each firm is determined by the weather, as shown below. There will be no synergy to the merger. STATE PROBABILITY VALUE Rainy Warm Hot .1 .4 .5 $100,000 200,000 400,000 The weather conditions in each town are independent of those in the other. Furthermore, each company has an outstanding debt claim of $200,000. Assume that no premiums are paid in the merger. a. What are the possible values of the combined company? b. What are the possible values of end-of-period debt values and stock values after the merger? c. Show that the bondholders are better off and the stockholders are worse off in the combined firm than they would have been if the firms had remained separate. T H E E A S T C O A S T YA C H T S – W E S T C O A S T S A I L B O AT S M E R G E R East Coast Yachts, Inc., has been in merger talks with West Coast Sailboats for the past six months. After several rounds of negotiations, the offer under discussion is a cash offer of $90 million for West Coast Sailboats. Both companies have niche markets in the boating industry, and the companies believe a merger will result in significant synergies due to economies of scale in manufacturing and marketing, as well as significant savings in general and administrative expenses. Larissa Warren, the president of East Coast Yachts, has been instrumental in the merger negotia- tions. In conjunction with Dan Ervin, the company’s financial analyst, they have prepared the follow- ing pro forma financial statements for West Coast Sailboats, assuming the merger takes place. The financial statements include all synergistic benefits from the merger. 2009 2010 2011 2012 2013 Sales Production costs Depreciation Other expenses EBIT Interest Taxable income Taxes (40%) Net income $200,000,000 141,000,000 18,000,000 20,000,000 $ 21,000,000 4,500,000 $ 16,500,000 6,600,000 $ 9,900,000 $225,000,000 155,000,000 20,000,000 22,000,000 $ 28,000,000 5,000,000 $ 23,000,000 9,200,000 $ 13,800,000 $250,000,000 168,000,000 21,000,000 25,000,000 $ 36,000,000 6,000,000 $ 30,000,000 12,000,000 $ 18,000,000 $281,000,000 187,000,000 21,500,000 29,000,000 $ 43,500,000 6,500,000 $ 37,000,000 14,800,000 $ 22,200,000 $312,000,000 211,000,000 21,500,000 31,000,000 $ 48,500,000 7,000,000 $ 41,500,000 16,600,000 $ 24,900,000 C L O S I N G C A S E
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28 Dan is also aware that the West Coast Sailboats division will require investments each year for con- tinuing operations, along with sources of financing. The table below outlines the required invest- ments and sources of financing. 2009 2010 2011 2012 2013 Investments Net working capital Fixed assets Total Sources of financing New debt Profit retention Total $5,000,000 3,500,000 $8,500,000 $8,500,000 0 $8,500,000 $ 5,100,000 4,500,000 $ 9,600,000 $ 4,000,000 6,000,000 $10,000,000 $ 6,500,000 4,800,000 $11,300,000 $ 4,000,000 6,500,000 $10,500,000 $ 7,500,000 3,000,000 $10,500,000 $ 4,500,000 6,500,000 $11,000,000 $7,500,000 1,900,000 $9,400,000 $3,000,000 6,000,000 $9,000,000 Larissa feels that the capital structure at West Coast Sailboats is not optimal. If the merger takes place, West Coast Sailboats will immediately increase its leverage with a $40 million debt issue, which would be followed by a $12 million dividend payment to East Coast Yachts. This will increase
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  • Spring '12
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  • Firm, Firm B

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