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solve  information about B's projected free cash flows (EBIT after...

solve 

information about B's projected free cash flows (EBIT after tax and after planned investments) at

the end of each year after the merger. We are now at the beginning of year 1.

Year Expected free cash flows (in millions of dollars) at the end of the year

1 $150

2 $200

After the second year, cash flows are expected to grow at a constant annual rate of 4%.

Company B has debt of $500 million, and the weighted average cost of capital of B is 15%.

Firm B has 2 million shares; the share price is $500 and the EPS expected at the end of year 1 is

$120. (EPS is earnings or net income per share).

Firm A has 2 million shares; the share price is $1,000 and the EPS expected at the end of year 1

is $100.

a. What is the maximum amount that A should agree to pay per share of B, given the

estimated cash flows? ............

b. If firm A buys B for stock, what is the highest exchange ratio that A should agree to

pay per share of B if A wants its EPS to rise by 20% after the merger?

The maximum exchange ratio is ..........

c. Firm B demands a premium of 10% over its current price. Firm A agrees to that,

paying with new shares of stock that it will issue, using its current price as the basis

for determining the exchange ratio. Firm A recalculates the value of the synergy and

concludes that the total value of the target firm after the acquisition is expected to be

$2,000 million. Given this estimate of B's value, what is the price per share of A after

the deal is completed, assuming that investors agree with the new estimate of the

value of firm B after the acquisition?

The price per share of A will be: $...........

Image transcription text

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