Chapter 29

Question 1 Input Area:

Cash (millions) Value of company

620 585

Output Area:

Minimum estimated value

35

Chapter 29
Question 2 Input Area:

Merger premium Total earnings Shares outstanding Per-share values Market Book

5 (Firm X ) 50,000 26,000 53 21

Firm Y 29,000 20,000 19 9

Output Area:

Book value of equity Pooling of interest: Equity = Assets

(Firm X ) 546,000

Firm Y 180,000

726,000

Purchase method: Asset from X (book value) Asset from Y (market value) Purchase price of Y 480,000 Goodwill Total assets XY = Total equity XY

546,000 380,000 100,000 1,026,000

Chapter 29
Question 3 Input Area:

Current assets Net fixed assets Total

( Jurion Co. ) 8,000 Current liabilities 23,000 (Long-term debt ) (Equity ) 31,000 ( James, Inc. ) 2,600 Current liabilities 7,100 (Long-term debt ) (Equity ) 9,700

4,500 8,500 18,000 31,000

Current assets Net fixed assets Total

1,900 1,200 6,600 9,700

Output Area:

Current assets Net fixed assets Total

( Jurion Co. - Post merger ) 10,600 Current liabilities 30,100 (Long-term debt ) (Equity ) 40,700

6,400 9,700 24,600 40,700

Chapter 29
Question 4 Input Area:

Current assets Net fixed assets Total

(Meat Co. ) Current liabilities (Long-term debt ) (Equity )

Current assets Net fixed assets Total Fair market value Paid

(Loaf, Inc. ) Current liabilities (Long-term debt ) (Equity )

Output Area:

Goodwill ( Current assets Net fixed assets Goodwill Total Meat Co. - Post Merger ) Current liabilities (Long-term debt ) (Equity )

Goodwill created = $17,000 $12,000 (market value FA) $2,600 (market value CA) = $2,400

ed 2,000 (market ,600 (market value

Chapter 29
Question 5 Input Area:

( Current assets Other assets Net fixed assets Total ( Current assets Other assets Net fixed assets Total

Silver Enterprises ) Current liabilities (Long-term debt ) (Equity )

All Gold Mining ) Current liabilities (Long-term debt ) (Equity )

Output Area:

( Silver Enterprises - Post Merger ) Current assets Current liabilities Other assets (Long-term debt ) Net fixed assets (Equity ) Total

Chapter 29
Question 6 Input Area:

( Current assets Other assets Net fixed assets Total

Silver Enterprises ) Current liabilities (Long-term debt ) (Equity )

( All Gold Mining ) Current assets Current liabilities Other assets (Long-term debt ) Net fixed assets (Equity ) Total Market value of fixed assets New long-term debt

Output Area:

Goodwill ( Silver Enterprises - Post Merger ) Current assets Current liabilities Other assets (Long-term debt ) Net fixed assets (Equity ) Goodwill Total

Chapter 29
Question 7 Input Area:

After-tax annual cash flow Teller market value Penn market value Discount rate Stock offer Cash offer

1,600,000 65,000,000 98,000,000 12% 40% 70,000,000

Output Area:

a. V*k Cash cost Equity cost b. NPV cash NPV stock

78,333,333 70,000,000 70,533,333 8,333,333 7,800,000

c. Acquire the company for cash.

Chapter 29
Question 8 Input Area: buyer (Stultz ) 21.00 180,000 675,000 3

Price-earnings ratio Shares outstanding Earnings Shareholders receive

Flannery 5.25 90,000 450,000

1 (for )

Output Area:

a. Earnings after merger 1,125,000 Shares outstanding after merger 210,000 EPS 5.357 The market price will remain unchanged since it is a zero NPV acquisition. Current share price 78.75 New P/E 14.7 b. V* 2,362,500 Cost 2,362,500 V Although there is no economic value to the takeover, it is possible that Stultz is motivated to purchase Flannery for other than financial reasons.

The cost of the acquisition is the number of shares offered times the share Cost = (1/3)(60,000)(78.75) = 1,575,000

f shares offered times the share price, so the cost is:

Chapter 29
Questions 10,11 Input Area:

Shares outstanding Share price Synergy benefits Acquisition price in cash d. Shareholders receive

Firm B 2,900 39.00 5,500 29 3 (for )

(Firm T ) 1,400 26.00

Output Area: 10 a. NPV b. New share price c. Merger premium d. New shares of B VBT Share price e. Value of Firm T Value of stock exchange NPV 1,300 39.45 4,200 840 155,000.00 41.44 36,400.00 34,812.83 7,087.17 1300

11 Value of cash offer 40,600.00 Value of share offer 32,760.00 The shareholders are better off with the cash offer receive a higher value for their shares. Indifferent exchange ratio 1.2393 40600 34813

0.74

1,029.20 39.45 40600

Chapter 29
Question 12 Input Area:

Total earnings Shares outstanding Price per share Acquisition price

Firm A 1,600 600 50 22

(Firm B ) 700 250 20

Output Area:

Cost Shares given up by A a. EPS b. Old P/E New price c. P/E

5,500 110 3.24 18.75 60.74 15.43

d. Price 49.30 P/E 15.22 At the current acquisition price, this is a negative NPV acquisition.

Chapter 29
Question 13 Output Area:

NPV

= VB* - cost = = =

Chapter 29
Question 14 Input Area:

Incremental aftertax cash flows Flash-in-the-Pan market value Fly-by-Night market value Discount rate Stock offer Cash offer

500,000 10,000,000 26,000,000 8% 30% 13,000,000

Output Area:

a. Synergy value b. Value to acquirer c. Cost of cash acquisition Cost of stock acquisition d. NPV of cash acquisition NPV of stock acquisition e. Aquire the company for stock.

6,250,000 16,250,000 13,000,000 12,675,000 3,250,000 3,575,000

Chapter 29
Question 15 Input Area:

Harrod's market value Harrod's shares outstanding Selfridge market value Selfridge shares outstanding Combined firm value Merger premium a. Shares offered b. Cash offer

500,000,000 30,000,000 180,000,000 20,000,000 720,000,000 25,000,000 12,000,000 205,000,000

Output Area:

a. New shares outstanding New stock price b. Fractional ownership of target shareholders New shares issued Exchange ratio

42,000,000 17.14 28.47% 11,941,748 0.5971 (to 1. ) X/(30+X)=28.47% X=.2847x30+.2847X (1-.2847)X=.2847*30 X=(.2847x30)/(1-.2847)

Chapter 29
Question 16 Input Area:

Boom Recession Bentley outstanding debt

Probability 0.70 0.30

Bentley 280,000 100,000 125,000

(Rolls ) 250,000 70,000

Output Area:

a. Value of Bentley Value of Rolls b. Value of Bentley: Boom Recession Value of Bentley equity Value of Bentley debt Value of Rolls equity

226,000 196,000

Probablility 0.70 0.30 108,500 117,500 196,000

(Equity value ) 155,000 -

(Debt value ) 125,000 100,000

c. Total value of individual companies Total value of equity as individual companies Total value of debt as individual companies

422,000 304,500 117,500

d. Boom Recession

Probablility (Merged value ) 0.70 530,000 0.30 170,000 422,000 297,000 125,000 (7,500) 7,500

(Debt value ) 125,000 125,000

Equity value 405,000 45,000

Value of combined company Value of equity in combined company Value of debt in merged company e. Gain to stockholders Gain to bondholders

f. If the value of Bentley's debt before the merger is less than the lowest firm value, there is no coinsurance effect. Since there is no possibility of default before the merger, bondholders do not gain after the merger.

Chapter 29
Question 17 Input Area:

Plant Price-earnings ratio Shares outstanding Earnings Dividends Analyst growth rate Management growth rate c. Cash offer e. Shares offered g. Consultant growth rate 14.50 1,000,000 2,800,000 700,000 4% 6% 13.00 150,000 5%

(Palmer ) 10.00 500,000 640,000 380,000

Output Area:

a. Palmer EPS Palmer stock price Value before merger Palmer DPS Equity required return P with new growth rate Value after merger b. Gain c. Cash offer value NPV d. Highest bid price e. Market value of Plant Value combined Shares combined PCombined

1.28 12.80 6,400,000.00 0.76 10.18% 9,647,904.19 3,247,904.19 6,500,000.00 3,147,904.19 19.30 40,600,000.00 50,247,904.19 1,150,000.00

43.69 Stock offer value 6,554,074.46 NPV 3,093,829.73 f. The acquisition should go forward. The company should offer cash. g. P with new growth rate Value after merger Value before merger Gain Cash offer value NPV cash Value combined Shares combined PCombined Stock offer value NPV stock

The acquisition should not go forward. The company should offer cash.

Chapter 29
Question 18 Input Area:

Rainy Warm Hot Outstanding debt value

Probability 0.10 0.40 0.50 350,000

(Firm value ) 200,000 350,000 800,000

Output Area:

a. Possible states Rain-Rain Rain-Warm Rain-Hot Warm-Rain Warm-Warm Warm-Hot Hot-Rain Hot-Warm Hot-Hot Total Possible states Rain-Rain Rain-Warm Rain-Hot Warm-Warm Warm-Hot Hot-Hot Total Possible states Rain-Rain Rain-Warm Rain-Hot Warm-Warm Warm-Hot Hot-Hot b. Possible states Rain-Rain Rain-Warm Rain-Hot Warm-Warm Warm-Hot Hot-Hot

(Joint probability ) 0.01 0.04 0.05 0.04 0.16 0.20 0.05 0.20 0.25 1.00 (Joint probablility ) 0.01 0.08 0.10 0.16 0.40 0.25 1.00 (Joint value )

(Joint probablility ) 0.01 0.08 0.10 0.16 0.40 0.25

(Joint value ) -

Debt value

Stock value

c. Value of debt before merger for either company Probability 0.10 (Debt value ) 200,000

Rainy

Warm Hot Expected value of debt

0.40 0.50

350,000 350,000

Expected combined value of debt, pre-merger Expected value of debt in post-merger firm