Rearden Metal has earnings per share of $2. It has 10 million shares outstanding and is trading at $20 per share. Rearden Metal is thinking of buying Associated Steel, which has earnings per share of $1.25, 4 million shares outstanding, and a price per share of $15. Rearden Metal will pay for Associated Steel by issuing new shares. There are no expected synergies from the transaction. Assume Rearden offers an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents a 20% premium to buy Associated Steel.   How many new shares Rearden needs to issue to pay for this deal? What is the exchange ratio? What will be the price per share of the combined corporation after the merger? What will be the price per share of the Rearden immediately after the announcement? What will be the price per share of the Associated Steel immediately after the announcement? What is the actual premium Rearden will pay? Is this an accretive or dilutive deal? Compare the PE ratio before and after acquisition for Rearden. How does the change in PE ratio relates to your answer to the previous question?   You work for a leveraged buyout firm and are evaluating a potential buyout of Associated Steel. Associated Steel's stock price is $20 and it has 10 million shares outstanding. You believe that if you buy the company and replace its management, its value will increase by 100%. You are planning on doing a leveraged buyout of Associated Steel, and will offer $20 per share for control of the company.   How much you have to pay to gain control of the company? Assuming that you use equity (your own money) to pay for this deal, what will be your gain from the deal? What about other shareholders? Explain how using debt instead of equity can solve the free-riding problem here? Now assume you use debt to finance the deal. How does this change your gains vs. other shareholders when compared to part (B)? Next you realize that given that other shareholders do not benefit from the LBO they have no incentive to sell you their shares at $20. So you decide to raise your tender offer to $25 per share. What will be the share price after the LBO for non-tendered shares? Based on the your answer to the previous question, will shareholders tender their share at $25? If you are to choose a tender offer, what would your offer be?

Question

Rearden Metal has earnings per share of $2. It has 10 million shares outstanding and is trading at $20 per share. Rearden Metal is thinking of buying Associated Steel, which has earnings per share of $1.25, 4 million shares outstanding, and a price per share of $15. Rearden Metal will pay for Associated Steel by issuing new shares. There are no expected synergies from the transaction. Assume Rearden offers an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents a 20% premium to buy Associated Steel.

 

  1. How many new shares Rearden needs to issue to pay for this deal?
  2. What is the exchange ratio?
  3. What will be the price per share of the combined corporation after the merger?
  4. What will be the price per share of the Rearden immediately after the announcement?
  5. What will be the price per share of the Associated Steel immediately after the announcement?
  6. What is the actual premium Rearden will pay?
  7. Is this an accretive or dilutive deal?
  8. Compare the PE ratio before and after acquisition for Rearden. How does the change in PE ratio relates to your answer to the previous question?

 

You work for a leveraged buyout firm and are evaluating a potential buyout of Associated Steel. Associated Steel's stock price is $20 and it has 10 million shares outstanding. You believe that if you buy the company and replace its management, its value will increase by 100%. You are planning on doing a leveraged buyout of Associated Steel, and will offer $20 per share for control of the company.

 

  1. How much you have to pay to gain control of the company?
  2. Assuming that you use equity (your own money) to pay for this deal, what will be your gain from the deal? What about other shareholders?
  3. Explain how using debt instead of equity can solve the free-riding problem here?
  4. Now assume you use debt to finance the deal. How does this change your gains vs. other shareholders when compared to part (B)?

Next you realize that given that other shareholders do not benefit from the LBO they have no incentive to sell you their shares at $20. So you decide to raise your tender offer to $25 per share.

  1. What will be the share price after the LBO for non-tendered shares?
  2. Based on the your answer to the previous question, will shareholders tender their share at $25?
  3. If you are to choose a tender offer, what would your offer be?

 

 

 

 

 

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