45.
|
Which of the following represent potential gains from an acquisition?
I. increased use of debt II. lower costs per unit produced III. strategic beachhead IV. diseconomies of scale
Refer to section 26.4
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.4 Topic: Acquisition gains |
46.
|
The value of a target firm to the acquiring firm is equal to:
Refer to section 26.4
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.4 Topic: Cost of an acquisition |
47.
|
If an acquisition does not create value and the market is smart, then the:
Refer to section 26.5
|
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.5 Topic: Acquisitions and earnings per share |
48.
|
An acquisition completed simply to diversify a firm will:
Refer to section 26.5
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.5 Topic: Diversification |
49.
|
Which one of the following statements is correct?
Refer to section 26.5
|
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.5 Topic: Effects of acquisitions |
50.
|
The primary purpose of a flip-in provision is to:
Refer to section 26.7
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.7 Topic: Defensive tactics |
51.
|
If a firm sells its crown jewels when threatened with a takeover attempt, the firm is employing a strategy commonly referred to as a _____ strategy.
Refer to section 26.7
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.7 Topic: Defensive tactics |
52.
|
Which one of the following defensive tactics is designed to prevent a "two-tier" takeover offer?
Refer to section 26.7
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.7 Topic: Defensive tactics |
53.
|
Which of the following have been suggested as reasons why the stockholders in acquiring firms may not benefit to any significant degree from an acquisition?
I. the price paid for the target firm might equal the target firm's total value II. management may have priorities other than the interest of the stockholders III. the takeover market may not be competitive IV. anticipated merger gains may not be fully achieved
Refer to section 26.8
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.8 Topic: Acquisition effects on stockholders |
54.
|
Which of the following are reasons why a firm may want to divest itself of some of its assets?
I. to raise cash II. to unload unprofitable operations III. to improve the strategic fit of a firm's various divisions IV. to comply with antitrust regulations
Refer to section 26.9
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.9 Topic: Divestitures and restructurings |
55.
|
Which one of the following statements is correct?
Refer to section 26.9
|
AACSB: Analytic
Blooms: Remember Difficulty: 1 Easy Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.9 Topic: Divestitures and restructurings |
56.
|
Nelson's Interiors has $1.52 million in net working capital. The firm has fixed assets with a book value of $23.23 million and a market value of $26.16 million. The firm has no long-term debt. The Home Centre is buying Nelson's Interiors for $29.5 million in cash. The acquisition will be recorded using the purchase accounting method. What is the amount of goodwill that The Home Centre will record on its balance sheet as a result of this acquisition?
Goodwill = $29.5m - $1.52m - $26.16m = $1.82
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 26-02 How accountants construct the combined balance sheet of the new company. Section: 26.3 Topic: Goodwill |
57.
|
Troyer Markets and Deb's Grocery are all-equity firms. Troyer Markets has 2,400 shares outstanding at a market price of $14.80 a share. Deb's Grocery has 3,200 shares outstanding at a price of $28 a share. Deb's Grocery is acquiring Troyer Markets for $37,500 in cash. What is the merger premium per share?
Merger premium per share = ($37,500/2,400) - $14.80 = $0.825
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 26-02 How accountants construct the combined balance sheet of the new company. Section: 26.3 Topic: Merger premium |
58.
|
The Cycle Stop has 1,600 shares outstanding at a market price per share of $8.48. Kate's Wheels has 1,750 shares outstanding at a market price of $13 a share. Neither firm has any debt. Kate's Wheels is acquiring The Cycle Stop for $15,000 in cash. What is the merger premium per share?
Merger premium per share = ($15,000/1,600) - $8.48 = $0.90
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 26-02 How accountants construct the combined balance sheet of the new company. Section: 26.3 Topic: Merger premium |
59.
|
Rosie's has 1,800 shares outstanding at a market price per share of $23.50. Sandy's has 2,500 shares outstanding at a market price of $21 a share. Neither firm has any debt. Sandy's is acquiring Rosie's. The incremental value of the acquisition is $1,200. What is the value of Rosie's to Sandy's?
Value of Rosie's to Sandy's = (1,800 × $23.50) + $1,200 = $43,500
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.4 Topic: Value of firm B to firm A |
60.
|
The Town Crier and The News Express are all-equity firms. The Town Crier has 11,500 shares outstanding at a market price of $26 a share. The News Express has 15,000 shares outstanding at a price of $31 a share. The News Express is acquiring The Town Crier. The incremental value of the acquisition is $4,500. What is the value of The Town Crier to The News Express?
Value of The Town Crier to The News Express = (11,500 × $26) + $4,500 = $303,500
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.4 Topic: Value of firm B to firm A |
61.
|
The Floral Shoppe and Maggie's Flowers are all-equity firms. The Floral Shoppe has 2,500 shares outstanding at a market price of $16.50 a share. Maggie's Flowers has 5,000 shares outstanding at a price of $17 a share. Maggie's Flowers is acquiring The Floral Shoppe for $42,900 in cash. The incremental value of the acquisition is $1,200. What is the net present value of acquiring The Floral Shoppe to Maggie's Flowers?
NPV = (2,500 × $16.50) + $1,200 - $42,900 = -$450
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.6 Topic: Cash acquisition |
62.
|
Taylor's Hardware is acquiring The Corner Store for $25,000 in cash. Taylor's has 1,500 shares of stock outstanding at a market value of $46 a share. The Corner Store has 2,200 shares of stock outstanding at a market price of $8 a share. Neither firm has any debt. The incremental value of the acquisition is $3,500. What is the value of Taylor's Hardware after the acquisition?
Post-acquisition value of Taylor's = (1,500 × $46) + (2,200 × $8) + $3,500 - $25,000 = $65,100
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.6 Topic: Cash acquisition |
63.
|
Firm A is acquiring Firm B for $75,000 in cash. Firm A has 4,500 shares of stock outstanding at a market value of $27 a share. Firm B has 2,500 shares of stock outstanding at a market price of $29 a share. Neither firm has any debt. The incremental value of the acquisition is $2,200. What is the price per share of Firm A's stock after the acquisition?
Price per share of A = [(4,500 × $27) + (2,500 × $29) + $2,200 - $75,000]/4,500 = $26.93
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.6 Topic: Cash acquisition |
64.
|
The Sweet Shoppe and Candy Land are all-equity firms. The Sweet Shoppe has 500 shares outstanding at a market price of $96 a share. Candy Land has 2,700 shares outstanding at a price of $24 a share. The Sweet Shoppe is acquiring Candy Land for $62,000 in cash. The incremental value of the acquisition is $3,600. What is the net present value of acquiring Candy Land to The Sweet Shoppe?
NPV = (2,700 × $24) + $3,600 - $62,000 = $6,400
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.6 Topic: Cash acquisition |
65.
|
Sleep Tight is acquiring Restful Inns for $52,500 in cash. Sleep Tight has 3,000 shares of stock outstanding at a market price of $38 a share. Restful Inns has 2,100 shares of stock outstanding at a market price of $24 a share. Neither firm has any debt. The incremental value of the acquisition is $1,700. What is the price per share of Sleep Tight after the acquisition?
Price per share = [(3,000 × $38) + (2,100 × $24) + $1,700 - $52,500]/3,000 = $37.87
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.6 Topic: Cash acquisition |
66.
|
Outdoor Living has agreed to be acquired by New Adventures for $48,000 worth of New Adventures stock. New Adventures currently has 8,000 shares of stock outstanding at a price of $32 a share. Outdoor Living has 1,700 shares outstanding at a price of $43 a share. The incremental value of the acquisition is $21,000. What is the value of the merged firm?
Value of merged firm = (8,000 × $32) + (1,700 × $43) + $21,000 = $350,100
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.6 Topic: Stock acquisition |
67.
|
Moore Industries has agreed to be acquired by Scott Enterprises for $22,000 worth of Scott Enterprises stock. Scott Enterprises currently has 7,500 shares of stock outstanding at a price of $28 a share. Moore Industries has 1,800 shares outstanding at a price of $12 a share. The incremental value of the acquisition is $1,100. What is the value per share of Scott Enterprises stock after the acquisition?
Value per share = [(7,500 × $28) + (1,800 × $12) + $1,100]/[7,500 + ($22,000/28)] = $28.08
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.6 Topic: Stock acquisition |
68.
|
Aardvark Enterprises has agreed to be acquired by Lawson Products in exchange for $30,000 worth of Lawson Products stock. Lawson has 3,000 shares of stock outstanding at a price of $28 a share. Aardvark has 1,100 shares outstanding with a market value of $23 a share. The incremental value of the acquisition is $1,400. What is the value of Lawson Products after the merger?
Value after merger = (3,000 × $28) + (1,100 × $23) + $1,400 = $110,700
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.6 Topic: Stock acquisition |
69.
|
Hanover Tires is being acquired by Better Tires for $89,000 worth of Better Tires stock. Hanover Tires has 2,500 shares of stock outstanding at a price of $36 a share. Better Tires has 6,000 shares outstanding with a market value of $23 a share. The incremental value of the acquisition is $4,200. How many new shares of stock will be issued to complete this acquisition?
Number of shares issued = $89,000/$23 = 3,870 shares
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.6 Topic: Stock acquisition |
70.
|
Glendale Marine is being acquired by Inland Motors for $53,000 worth of Inland Motors stock. Inland Motors has 6,200 shares of stock outstanding at a price of $49 a share. Glendale Marine has 1,700 shares outstanding with a market value of $30 a share. The incremental value of the acquisition is $2,600. What is the total number of shares in the new firm?
Total number of shares = 6,200 + ($53,000/$49) = 7,282 shares
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.6 Topic: Stock acquisition |
71.
|
Firm B is being acquired by Firm A for $162,000 worth of Firm A stock. The incremental value of the acquisition is $4,600. Firm A has 8,500 shares of stock outstanding at a price of $36 a share. Firm B has 5,900 shares of stock outstanding at a price of $27 a share. What is the value per share of Firm A after the acquisition?
Value per share = [(8,500 × $36) + (5,900 × $27) + $4,600]/[8,500 + ($162,000/$36)] = $36.15
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.6 Topic: Stock acquisition |
72.
|
Firm A is being acquired by Firm B for $54,000 worth of Firm B stock. The incremental value of the acquisition is $5,600. Firm A has 2,400 shares of stock outstanding at a price of $19 a share. Firm B has 2,700 shares of stock outstanding at a price of $50 a share. What is the actual cost of the acquisition using company stock?
Number of shares issued = $54,000/$50 = 1,080 shares
Value per share after merger = [(2,400 × $19) + (2,700 × $50) + $5,600]/[2,700 + 1,080] = $49.2593 Actual cost of acquisition = 1,080 × $49.2593 = $53,200 |
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.6 Topic: Stock acquisition |
73.
|
Merchantile Exchange is being acquired by National Sales. The incremental value of the acquisition is $1,800. Merchantile Exchange has 1,500 shares of stock outstanding at a price of $18 a share. National Sales has 3,500 shares of stock outstanding at a price of $54 a share. What is the net present value of the acquisition given that the actual cost of the acquisition using company stock is $28,780?
Net present value = [(1,500 × $18) + $1,800] - $28,780 = $20
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.6 Topic: Stock acquisition |
74.
|
Dressler, Inc., is planning on merging with Weston Foods. Dressler will pay Weston's shareholders the current value of its stock in shares of Dressler stock. Dressler's currently has 6,200 shares of stock outstanding at a market price of $30 a share. Weston's has 2,200 shares outstanding at a price of $25 a share. How many shares of stock will be outstanding in the merged firm?
Number of shares = 6,200 + [(2,200 × $25)/$30] = 8,033 shares
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.5 Topic: Earnings and valuation |
75.
|
Alpha is planning on merging with Beta. Alpha will pay Beta's shareholders the current value of their stock in shares of Alpha. Alpha currently has 4,200 shares of stock outstanding at a market price of $40 a share. Beta has 2,500 shares outstanding at a price of $18 a share. The after-merger earnings will be $8,800. What will the earnings per share be after the merger?
Number of shares = 4,200 + [(2,500 × $18)/$40] = 5,325
Earnings per share = $8,800/5,325 = $1.65 |
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 26-02 How accountants construct the combined balance sheet of the new company. Section: 26.5 Topic: Earnings and valuation |
76.
|
Sue's Bakery is planning on merging with Ted's Deli. Sue's will pay Ted's shareholders the current value of their stock in shares of Sue's Bakery. Sue's currently has 4,500 shares of stock outstanding at a market price of $19 a share. Ted's has 2,300 shares outstanding at a price of $20 a share. What is the value of the merged firm?
Value of merged firm = (4,500 × $19) + (2,300 × $20) = $131,500
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.5 Topic: Earnings and valuation |
77.
|
George's Equipment is planning on merging with Nelson Machinery. George's will pay Nelson's shareholders the current value of their stock in shares of George's Equipment. George's currently has 4,600 shares of stock outstanding at a market price of $31 a share. Nelson's has 1,600 shares outstanding at a price of $38 a share. What is the value per share of the merged firm?
Value per share = [(4,600 × $31) + (1,600 × $38)]/{[4,600 + (1,600 × $38)]/$31} = $31
|
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.5 Topic: Earnings and valuation |
78.
|
Pearl, Inc. has offered $920 million cash for all of the common stock in Jam Corporation. Based on recent market information, Jam is worth $710 million as an independent operation. For the merger to make economic sense for Pearl, what would the minimum estimated value of the synergistic benefits from the merger have to be?
Minimum economic value = $920 million - $710 million = $210 million
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy EOC: 26-1 Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.4 Topic: Calculating synergy |
79.
|
Consider the following premerger information about Firm X and Firm Y:
Assume that Firm X acquires Firm Y by paying cash for all the shares outstanding at a merger premium of $3 per share. Also assume that neither firm has any debt before or after the merger. What is the value of the total equity of the combined firm, XY, if the purchase method of accounting is used?
Assets from X = 26,000($26) = $676,000 (book value)
Assets from Y = 26,000($23) = $598,000 (market value) Goodwill = 26,000($23 + $3) - $598,000 = $78,000 Total Assets XY = Total equity XY = $676,000 + $598,000 + $78,000 = $1,352,000 |
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy EOC: 26-2 Learning Objective: 26-02 How accountants construct the combined balance sheet of the new company. Section: 26.2 Topic: Balance sheet for mergers |
80.
|
Assume the following balance sheets are stated at book value.
What will be the value of the equity account on the postmerger balance sheet assuming that Meat Co. purchases Loaf, Inc. and the pooling of interests method of accounting is used.
Postmerger equity = $28,900 + $9,400 = $38,300
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy EOC: 26-3 Learning Objective: 26-02 How accountants construct the combined balance sheet of the new company. Section: 26.3 Topic: Balance sheet for mergers |
81.
|
Assume the following balance sheets are stated at book value.
Suppose the fair market value of Loaf's fixed assets is $7,200 versus the $3,300 book value shown. Meat pays $10,200 for Loaf and raises the needed funds through an issue of long-term debt. Assume the purchase method of accounting is used. The post-merger balance sheet of Meat Co. will have total debt of ______ and total equity of ______.
Total post-merger debt = $1,800 + $1,100 + $900 + $500 + $10,200 = $14,500
Total post-merger equity = Pre-merger equity of acquiring firm = $11,500 |
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy EOC: 26-4 Learning Objective: 26-02 How accountants construct the combined balance sheet of the new company. Section: 26.3 Topic: Balance sheet for mergers |
82.
|
Silver Enterprises has acquired All Gold Mining in a merger transaction. The following balance sheets represent the premerger book values for both firms.
Assume the merger is treated as a pooling of interests for accounting purposes. The total assets are _____ and the total equity is _____ on the post-merger balance sheet.
Post-merger total assets = $17,400 + $10,100 = $27,500
Post-merger total equity = $11,300 + $8,100 = $19,400 |
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy EOC: 26-5 Learning Objective: 26-02 How accountants construct the combined balance sheet of the new company. Section: 26.3 Topic: Balance sheet for mergers |
83.
|
Silver Enterprises has acquired All Gold Mining in a merger transaction. The following balance sheets represent the premerger book values for both firms.
Assume the merger is treated as a purchase for accounting purposes. The market value of All Gold Mining's fixed assets is $3,800; the market values for current and other assets are the same as the book values. Assume that Silver Enterprises issues $5,000 in new long-term debt to finance the acquisition. The post-merger balance sheet will reflect goodwill of _____ and total equity of _____.
Goodwill will be created since the acquisition price is greater than the book value. The goodwill amount is equal to the purchase price minus the market value of assets, plus the market value of the acquired company's debt.
Goodwill = $5,000 - ($3,800 market value FA) - ($600 market value of CA) - ($210 market value OA) + ($500 current liabilities) = $890 Total equity = Equity of acquiring firm = $2,700 |
AACSB: Analytic
Blooms: Analyze Difficulty: 1 Easy EOC: 26-6 Learning Objective: 26-02 How accountants construct the combined balance sheet of the new company. Section: 26.3 Topic: Incorporating goodwill |
84.
|
Penn 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 $3.7 million indefinitely. The current market value of Teller is $103 million, and that of Penn is $151.7 million. The appropriate discount rate for the incremental cash flows is 9 percent. Penn is trying to decide whether it should offer 40 percent of its stock of $127 million in cash to Teller's shareholders. The cost of the cash alternative is _____, while the cost of the stock alternative is _____.
Cash cost = Amount of cash offered = $127 million
To calculate the cost of the stock offer, we first need to calculate the value of the target to the acquirer. The value of the target firm to the acquiring firm will be the market value of the target plus the PV of the incremental cash flows generated by the target firm. The cash flows are a perpetuity, so: V* = $103,000,000 + $3,700,000/0.09 = $144,111,111 The cost of the stock offer is the percentage of the acquiring firm given up times the sum of the market value of the acquiring firm and the value of the target firm to the acquiring firm. So, the equity cost will be: Equity cost = 0.4($151,700,000 + $144,111,111) = $118,324,444 |
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium EOC: 26-7 Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.6 Topic: Cash versus stock payment |
85.
|
The shareholders of Jolie Company have voted in favor of a buyout offer from Pitt Corporation. Information about each firm is given here:
Jolie's shareholders will receive one share of Pitt stock for every three shares they hold in Jolie. Assume the NPV of the acquisition is zero. What will the post-merger PE ratio be for Pitt?
The EPS of the combined company will be the sum of the earnings of both companies divided by the number of shares in the combined company. Since the stock offer is one share of the acquiring firm for three shares of the target firm, net shares in the acquiring firm will increase by one-third of the target firm's current shares. So, the new EPS will be:
EPS = ($210,000 + $630,000)/[124,000 + (1/3)(62,000)] = $5.81 The market price of Pitt will remain unchanged if it is a zero NPV acquisition. Using the PE ratio, we find the current market price of Pitt stock, which is: P = 12($630,000)/124,000 = $60.967742 If the acquisition has a zero NPV, the stock price should remain unchanged. Therefore, the new PE will be: PE = $60.967742/$5.81 = 10.5 |
AACSB: Analytic
Blooms: Analyze Difficulty: 1 Easy EOC: 26-8 Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.5 Topic: Merger PE |
86.
|
Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that neither firm has any debt outstanding.
Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $2,500. What is the NPV of the merger assuming that Firm T is willing to be acquired for $28 per share in cash?
The NPV of the merger is the market value of the target firm, plus the value of the synergy, minus the acquisition costs, so:
NPV = 1,200 ($26) + $2,500 - 1,200($28) = $100 |
AACSB: Analytic
Blooms: Analyze Difficulty: 1 Easy EOC: 26-9 Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.6 Topic: Merger NPV |
87.
|
Consider the following premerger information about Firm A and Firm B:
Assume that Firm A acquires Firm B via an exchange of stock at a price of $25 for each share of B's stock. Both A and B have no debt outstanding. What will the earnings per share of Firm A be after the merger?
Cost of acquisition = 210 ($25) = $5,250
Since the stock price of the acquiring firm is $40, the firm will have to give up: Shares offered = $5,250/$40 = 131.25 shares The EPS of the merged firm will be the combined earnings of the existing firms divided by the new shares outstanding, so: EPS = ($930 + $650)/(620 + 131.25) = $2.10 |
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium EOC: 26-11 Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction. Section: 26.5 Topic: Post-merger EPS |
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