Principles of Corporate Finance
13th Edition
ISBN: 9781260465099
Author: BREALEY, Richard
Publisher: MCGRAW-HILL HIGHER EDUCATION
expand_more
expand_more
format_list_bulleted
Question
Chapter 31, Problem 13PS
Summary Introduction
To discuss: The PE ratio of merged firm.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
As a merger arbitrageur you are considering an investment in two target companies of a merger, A and B. The deal spread for A is 16 % and for B the deal spread is 8 %. Which of the following statements is
correct?
O A. If both deals fail, then A will have a more negative return than B.
O B. If both deals fail, then B will have
more negative return than A.
As a merger arbitrageur you are considering an investment in two target companies of a merger, A and B. The deal spread for A is 16 % and for B the deal spread is 8 %. Which of the following statements is
correct?
O A. The probability of deal failure is higher for A than for B.
O B. The probability of deal failure is higher for B than for A.
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…
Knowledge Booster
Similar questions
- 3. Suppose you are the sole owner of company ABC. The market value of your company is $100 and there are 20 shares. Now you are thinking about acquiring the target company XYZ with a standing alone market value of $50 with 25 shares outstanding. The synergy of the two companies is $20. We assume the cost of the merger is zero, meaning target shareholders break even. a) Suppose you pay XYZ's shareholders in cash from your company ABC. What is the total firm value post-merger? What is the share price? b) Suppose you instead create new shares to pay XYZ's shareholders. How many shares do you need to create? How many shares do you need to pay for each share in XYZ? Instead of $20, in the remainder of the question, we assume the synergy is -$10. c) Redo part a) under the new synergy. Would you choose to acquire company XYZ? Discuss your finding in comparison with a).arrow_forwardA 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_forwardParentis Ltd. has a value of $150million while the value of Sandis Ltd. is $70million. A merger between the two has just gone through and cost savings with a present value of $ 10million is expected to be achieved. Parentis Ltd. paid cash of $85million for the entire paid up capital of Company B.Requiredi. What is the value of the two firms after the merger? ii. Calculate the cost of the merger to the shareholders of Parentis Ltd.iii. What is the portion of the gain/loss due Parentis Ltd.’s shareholders?iv. From the perspective of the shareholders of Company A, is there an economicjustification for the merger?arrow_forward
- In recent years Constable Inc. has suffered losses, and its stock currently sells for only $0.50 per share. Management wants to use a reverse split to get the price up to a more "reasonable" level, which it thinks is $21 per share. How many of the old shares must be given up for one new share to achieve the $21 price, assuming this transaction has no effect on total market value?arrow_forwardConsider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that both firms have no debt outstanding. Firm B Firm T Shares outstanding 4,600 1,000 Price per share $ 40 $ 14 Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $8,800. If Firm T is willing to be acquired for $16 per share in cash, what is the NPV of the a. merger? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) What will the price per share of the merged firm be assuming the conditions in b. (a)? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) If Firm T is willing to be acquired for $16 per share in cash, what is the merger c. premium? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) d. Suppose Firm T is agreeable to a merger by an exchange of stock. If B offers one of its shares for…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_forward
- Consider the following two merger candidates. The merger is for diversification purposes only with no synergies involved. Risk-free rate is 4%. Market value of assets Company A $700 Face value of zero coupon debt Debt maturity Asset return standard deviation $700 4 years 50% The asset return standard deviation for the combined firm is 20%. How much more value will debtholders collectively receive after the merge(keep two decimal places)?arrow_forwardConsider the following two merger candidates. The merger is for diversification purposes only with no synergies involved. Risk-free rate is 4%. Market value of assets Face value of zero coupon debt Debt maturity Asset return standard deviation Company A $500 $500 4 years 50% The asset return standard deviation for the combined firm is 20%. How much more value will debtholders collectively receive after the merge(keep two decimal places)?arrow_forwardConsider the following two merger candidates. The merger is for diversification purposes only with no synergies involved. Risk-free rate is 4%. Market value of assets Face value of zero coupon debt Company A $900 $900 4 years Debt maturity Asset return standard deviation The asset return standard deviation for the combined firm is 20%. How much more value will debtholders collectively receive after the merge(keep two decimal places)? 50% Company $800 $800 4 years 50%arrow_forward
- 3. Merger valuation and discounted cash flows When a merger takes place between two companies to form a single firm, the target company does not continue identity. Consider the following scenario: continues does not continue to operate as a separate Newtown Propane Inc. is considering an acquisition of Pirtucon Co., and estimates that acquiring Pirtucon will result in incremental after- tax net cash flows in years 1-3 of $5 million, $7.5 million, and $9 million, respectively. After the first three years, the incremental cash flows contributed by the Pirtucon acquisition are expected to grow at a constant rate of 5% per year. Newtown's current beta is 0.80, but its post-merger beta is expected to be 1.04. The risk-free rate is 4.5%, and the market risk premium is 6.60%. Based on this information, complete the following table by selecting the appropriate values. (Note: Round your intermediate calculations to two decimal places.) Post-merger cost of equity Projected value of the cash…arrow_forwardHow is beta affected by mergers in the airline industry. For example, is the beta of merged American Airlines/U.S. Airways higher, lower, or unchanged from their betas as stand-alone companies? Prior to their merger in December 2013, the beta of American was 1.7 and the beta of U.S. Airways was .37. Consider whether the merged company is riskier or less risky than the 2 stand-alone companies.arrow_forwardFor Question 1, 2, and 3, use the following information: 1.) Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that both firms have no debt outstanding. Firm B Firm T Shares outstanding 6,500 1,500 Price per share $ 45 $ 15 Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $10,600. If Firm T is willing to be acquired for $20 per share in cash, what is the NPV of the merger? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Please round to the nearest dollar and format as "X,XXX" 2.) Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that both firms have no debt outstanding. Firm B Firm T Shares outstanding 6,500 1,500 Price per share $ 45 $…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT