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a.
To calculate: The stock price of firm H after acquisition.
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 perform better than the sum of their individual efforts in terms of productivity, revenue and so forth.
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 find: Exchange ratio.
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Chapter 29 Solutions
EBK CORPORATE FINANCE
- Gobi 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_forwardNataro, Inc is planning on merging with Celestia Corp. Nataro, Inc with will pay shareholders the current value of their stock using shares of Nataro as the form of payment. Nataro has 5600 shares outstanding at a market price of $27.25 per share. Celestia Corp has 8,000 shares outstanding at a market price of $5.75 per share. The expected synergy created by the merger is $4200. What is the value of the merged firm (excludes cost of acquisition)? A. 205600 B. 201400 C. 159600 D. 54400 E. 68750arrow_forwardWinterbourne is considering a takeover of Monkton Incorporated. Winterbourne has 29 million shares outstanding, which sell for $78 each. Monkton has 24 million shares outstanding, which sell for $96 each. If the merger gains are estimated at $120 million, what is the highest price per share that Winterbourne should be willing to pay to Monkton shareholders? Highest price per sharearrow_forward
- Both of Firm A and Firm B are 100 equity firms. You estimate that the incremental value of the acquisition is $100,000. Firm B has indicated that it will agree to a sale if the price is $150,000, payable in cash or stock. Firm B is worth $100 as a stand-alone, so this is the minimum value that we could assign to Firm B. Calculate the value of firm A after merger. Firm A Firm B Price per share $2 $1 Number of shares 50,000 100,0000arrow_forwardDenali Inc. is acquiring Whitney Corp. at an exchange ratio of 2:1. After the deal is announced, Denali’s stock price is $25 and Whitney’s stock price is $47. Create a trade that would take advantage of the merger arbitrage opportunity, starting with 100 shares of Whitney’s stock. Show in detail the profit from your portfolio if between today and the deal being completed, Denali’s stock price falls to $20.arrow_forwardFirm B is willing to be acquired by firm A at a price of $16 a share in either cash or stock. The incremental value of the proposed acquisition is estimated at $180,000. Number of shares Firm A: 50000 Firm B: 80000 Price per share Firm A: $18.00 Firm B: $14.00 Debt A: $0 B: $0 What is the value of firm B to firm A?arrow_forward
- Bin plc is taking over Sum plc and has offered two Bin shares for every three Sum shares. You have the following information: Bin plc Sum plc Current share price: £3.01 £1.48 Number of shares: 20m 10m Market value: £60.2m £14.8m Distributable earnings: £5.6m £1.23m Synergy is expected to produce a 5% increase of the combined earnings. The market will apply a price/earnings ratio of 10.75 times to the new entity. What is the expected change in the wealth of Sum's shareholders? Answers: 10.2% 15.2% 25.7% 30.3% 35.6%arrow_forwardMerger Valuation with the CAPV Model Hastings Corporation is interested in acquiring Vandell Corporation. Vandell currently has 1 million shares outstanding and a target capital structure consisting of 30% debt; its current beta is 1.60 (i.e., based on its target capital structure). Vandell’s debt interest rate is 7.7%. Assume that the risk-free rate of interest is 4% and the market risk premium is 8%. Both Vandell and Hastings face a 40% tax rate. Hastings Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell’s free cash flows to be $2.6 million, $2.7 million, $3.4 million, and $3.62 million at Years 1 through 4, respectively, after which the free cash flows will grow at a constant 6% rate. Hastings plans to assume Vandell’s $10.73 million in debt (which has a 7.7% interest rate) and raise additional debt financing at the time of the acquisition. Hastings estimates that interest payments will be $1.6 million each year for Years 1, 2, and 3. After…arrow_forwardExcel Online Structured Activity: Merger Valuation with Change in Capital Structure Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt. Vandell's debt interest rate is 7.2%. Assume that the risk-free rate of interest is 3% and the market risk premium is 8%. Both Vandell and Hastings face a 35% tax rate. Vandell's beta is 1.20. Hastings estimates that if it acquires Vandell, interest payments will be $1,600,000 per year for 3 years. The free cash flows are supposed to be $2.3 million, $2.8 million, $3.3 million, and then $3.97 million in Years 1 through 4, respectively. Suppose Hastings will increase Vandell's level of debt at the end of Year 3 to $31.2 million so that the target capital structure will be 45% debt. Assume that with this higher level of debt the interest rate would be 8.0%, and assume that interest payments in Year 4 are based on the new debt level from the…arrow_forward
- Merger Valuation with the CAPV Model Hastings Corporation is interested in acquiring Vandell Corporation. Vandell currently has 1 million shares outstanding and a target capital structure consisting of 30% debt; its current beta is 1.60 (i.e., based on its target capital structure). Vandell’s debt interest rate is 7.7%. Assume that the risk-free rate of interest is 4% and the market risk premium is 8%. Both Vandell and Hastings face a 40% tax rate. Hastings Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell’s free cash flows to be $2.6 million, $2.7 million, $3.4 million, and $3.62 million at Years 1 through 4, respectively, after which the free cash flows will grow at a constant 6% rate. Hastings plans to assume Vandell’s $10.73 million in debt (which has a 7.7% interest rate) and raise additional debt financing at the time of the acquisition. Hastings estimates that interest payments will be $1.6 million each year for Years 1, 2, and 3. After…arrow_forwardABC and XYZ have total equity values of P5,000,000 and P10,000,000 respectively. If they merged, a total of 30,000 P500-par value shares may be issued. Each share can provide investors a rate of return of 18%, a growth rate of 3% and annual dividends of P78 per share for the first year. What is the total value of synergy that the merger will provide?arrow_forwardKclub has market value of 680million and Gclub has marketvalue of 170 million. Mergerresult in cost savings of, 500, 000 a year forever. Costsavings will grow at 5% a year.Kclub proposes to buy Gclub for306 million. Payment will be intwo years. Cost of capital is30%. K has 100million shareaand G has 100million shares.Find: A. Present value of mergerB. Cost to shareholders of Kclubfrom merger C. Npvmergerto Kclub shareholdersarrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
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