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a.
To calculate: The value of synergy from the merger.
Merger:
Merger occurs when the shareholders of two or more companies pool the resources of their company into one separate legal entity and as a result a new company comes into existence. Merger is basically the result of merge of two or more companies into one.
Synergy:
Synergy is a state in which two or more companies are combined to perform better than the sum of their individual efforts in terms of productivity, revenue and so forth.
Net present value is one of the techniques of capital budgeting. Net present value is used to find out the difference between the present value of
Cash vs. Stock Payment Method:
Cash versus stock payment method is one of the methods of payment where the acquiring firm has to decide when do the acquiring firm have to pay with cash or when do the acquiring firm have to pay with stock to the target company.
Purchase Accounting Method for Mergers:
In the purchase accounting method, the assets of the targeted company have to be recorded into the current market value in the books of acquiring company and
b.
To compute: The value of firm FP to Firm FN.
c.
To calculate: The cost of FN of each alternative.
d.
To calculate: The NPV of each alternative.
e.
To decide:-The alternative that must be used by the Firm FN
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Chapter 29 Solutions
EBK CORPORATE FINANCE
- Penn Corp. is analyzing the possible acquisition of Teller Company. Both believes the acquisition will increase its total aftertax annual cash flow by $1,176,015.93 indefinitely. The current market value of Teller is $23,453,722 and that of Penn is $63,348,212. The appropriate discount rate for the incremental cash flow is 13.63%. Penn is trying to decide whether it should offer 36% of its stock or $35,478,193 in cash to Teller's shareholders. What is the equity cost of the acquisition? HINT: Compute the value of the combined firm by adding the current value of the target with the present value of the differential cash flow of the combined firm. To determine the equity cost of the acquisition, add the current value of the acquirer and then multiply by the proposed percentage of the stock that has been offered for the firm.arrow_forwardPenn Corp. is analyzing the possible acquisition of Teller Company. Both believes the acquisition will increase its total aftertax annual cash flow by $1,272,653.1 indefinitely. The current market value of Teller is $23,042,111 and that of Penn is $62,440,594. The appropriate discount rate for the incremental cash flow is 14.22%. Penn is trying to decide whether it should offer 33% of its stock or $36,097,009 in cash to Teller's shareholders. What is the NPV of the stock offer? HINT: Subtract the equity cost (as computed in the previous problem) from the value of the combined firm.arrow_forwardPenn Corporation is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total aftertax annual cash flows by $1.45 million indefinitely. The current market value of Teller is $31.5 million, and that of Penn is $53 million. The appropriate discount rate for the incremental cash flows is 10 percent. Penn is trying to decide whether it should offer 40 percent of its stock or $44.5 million in cash to Teller’s shareholders. a. What is the cost of each alternative? (Enter your answers in dollars, not millions of dollars, e.g, 1,234,567.) b. What is the NPV of each alternative? (Enter your answers in dollars, not millions of dollars, e.g, 1,234,567.)arrow_forward
- Part 1 and Part II are independent. Please answer both parts. Part I: You are advising company ABC on its merger and acquisition case. The buyer company offers ABC two options. Option #1= $100 million cash at the acquisition date. Option #2 = $25 million cash at the acquisition date and another additional $90 million AFTER one year. The management team of ABC perceives a 30 percent annual discount rate. Which option should ABC choose? Show your work. Part II: What is the definition of internal rate of return (IRR) (it is efficient to write down the formula)? What are the given information and what is the unknown variable?arrow_forwardPenn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total aftertax annual cash flows by $3 million indefinitely. The current market value of Teller is $49 million, and that of Penn is $85 million. The appropriate discount rate for the incremental cash flows is 10 percent. Penn is trying to decide whether it should offer 40 percent of its stock or $66 million in cash to Teller's shareholders. a. What is the cost of each alternative? (Enter your answers in dollars, not millions of dollars, e.g., 1,234,567.) Cash cost $66,000,000 Equity cost b. What is the NPV of each alternative? (Enter your answers in dollars, not millions of dollars, e.g., 1,234,567.) NPV cash NPV stockarrow_forwardPizza Palace (PP), is considering purchasing a smaller chain, Western Mountain Pizza. PP's analysts expect the merger to result in incremental net cash flows as follows: Y1=$1,500,000, Y2= $2,000,000, Y3 = $3,000,000, Y4 =$5,000,000. In addition, Western's Y4 cash flows are expected to grow at a constant rate of 5% after Y4. Western's post-merger beta is expected to be 1.5 and its tax rate would be 40%. The risk free rate is presently 5% and the market risk premium is 4%. What is the Terminal value that goes into the calculation of the value of Western to Pizza Palace? O a. 87,500,000.00 Ob. 2,193,574.14 O c. 60,932,615.11 O d. 66,100,785.47arrow_forward
- A large manufacturing company has offered to purchase Composites, Inc. for$32 per share. Before the merger proposal announcement, Composites wastrading at $20/share and, after the announcement, its share price jumped up to$28/share. It is estimated that, if the merger fails to go through, the price ofComposites will drop to $15/share. a) Assuming that the risk-free interest rate is 0%, how would you describea long position in Composites as a combination of positions in a risk-freebond and a binary put option? Please show your workings in detial.b) Assuming that the risk-free interest rate is 0%, how would you describea long position in Composites as a combination of positions in a risk-freebond and a binary call option? Please show your workings in detial.c) Please explain the event-driven strategies through the selling insuranceview.arrow_forwardYou are advising company ABC on its merger and acquisition case. The buyer company offers ABC two options. Option #1 is $100 million cash at the acquisition date. Option #2 is $50 million cash on the acquisition date and 2 additional payments of $50 million each after the first year and the second year. a) The management team of ABC perceives a 20 percent annual discount rate. Which option should ABC choose? Show your work. b) After reading the offering letter carefully, ABC’s legal team found an additional clause from the buyer. It says that the 2 additional payments of $50 million are conditional on market performance. ABC’s management team accesses the market condition is 50-50 chance. Which option should ABC choose instead? Show your work.arrow_forwardPenn Corporation is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total aftertax annual cash flows by $1 million indefinitely. The current market value of Teller is $53 million, and that of Penn is $87 million. The appropriate discount rate for the incremental cash flows is 10 percent. Penn is trying to decide whether it should offer 40 percent of its stock or $59 million in cash to Teller's shareholders. a. Cash cost= a. Equity cost= b. NPV of cash offer= b. NPV of stock offer=arrow_forward
- 5. Merger analysis - Free cash flow to equity (FCFE) approach Consider the following acquisition data regarding Sunny Squirrel Fabricators Inc. and Purple Turtle Corp.: Sunny Squirrel Fabricators Inc. is considering an acquisition of Purple Turtle Corp. Sunny Squirrel Fabricators Inc. estimates that acquiring Purple Turtle will result in incremental value for the firm. The analysts involved in the deal have collected the following information from the projected financial statements of the target company. Data Collected (in millions of dollars) Year 1 Year 2 Year 3 EBIT $16.0 $19.2 $24.0 Interest expense 5.0 5.5 6.0 Debt 31.9 37.7 40.6 Total net operating capital 121.5 123.9 126.3 Purple Turtle is a publicly traded company, and its market-determined pre-merger beta is 1.40. You also have the following information about the company and the projected statements. • Purple Turtle currently has an $18.00 million market value of equity and $11.70 million in debt. The risk-free rate is 3% with…arrow_forwardGobi Desserts is bidding to take over Universal Puddings. Gobi has 3,500 shares outstanding, selling at $55 per share. Universal has 2,500 shares outstanding, selling at $22.50 a share. Gobi estimates the economic gain from the merger to be $22,500. Required: If Universal can be acquired for $25 a share, what is the NPV of the merger to Gobi? What will Gobi sell for when the market learns that it plans to acquire Universal for $25 a share? (Round your answer to 2 decimal places.) What will Universal sell for? Assume that the market expects the merger to go through without any further bidding. What are the percentage gains to the shareholders of each firm? (Do not round intermediate calculations. Round your answers to 1 decimal place.) Now suppose that the merger takes place through an exchange of stock. On the basis of the premerger prices of the firms, Gobi sells for $55, so instead of paying $25 cash, Gobi issues 0.45 of its shares for every Universal share acquired. What will be…arrow_forwardAsteric Corporation is evaluating acquisition of Jumbo Corporation. Asteric Corporation believes that such a merger will result in cost savings with a present value of DKK 950,000. Asteric plans to make this deal in cash by offering DKK 75 a share for all the 50,000 shares of Jumbo Corporation. While they are still evaluating the offer, Jumbo's share price jumps from DKK 60 to DKK 70 per share. However, Asteric's CEO is not so happy about this jump and still believes that the true stand-alone price of Jumbo Corporation may be DKK 60 per share, and not DKK 70 per share. If you believe the CEO, analyze if this merger would be positive NPV for Asteric Corporation?arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
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