PARK&SHOP and WELLCOME are operating supermarkets in Hong Kong. They arecompeting with each other in terms of price and products.PARK&SHOP is considering the possible acquisition of WELLCOME. Both companies haveno debt. PARK&SHOP estimates that the acquisition will create synergy by increasing itstotal after-tax annual cash flows by $2.4 million forever.The current market value of WELLCOME is $58 million, and that of PARK&SHOP is $107million. The discount rate for the incremental cash flows is 10%. PARK&SHOP tries todetermine whether it should offer 40% of its stock or $73 million in cash to WELLCOME'sshareholders.Required:(a) What is the cost of each alternative?(b) Calculate the net present value of each alternative. Suggest whichalternative PARK&SHOP should choose.(c) Justify three rationales for a company to consider acquisition. It is an ongoing issue in exchange rate manipulation. The United States has been protestingfor many years that renminbi or yuan (CNY), the currency in China, is being undervalued.You would like to apply the concept of Purchasing Power Parity (PPP) to find out if suchaccusation is correct. Following are data you have collected from July 2016 Big Mac Index.LocationUnited StatesChinaHong KongBig Mac prices in local currency July 2016 USD exchange rateUSD4.5567CNY 16.00HKD17.006.13417.7567(a) Analyse whether the accusation by the United States regardingundervaluation of the renminbi at that time was valid. Find out thepercentage of undervalue/overvalue of the renminbi against the US dollarto support your view.(b) Some countries encourage manipulation in their exchange rate relative tothose of some other countries as a means of relieving foreign tradeimbalances. Evaluate each of the following scenarios regarding its impactthat would have on the Hong Kong importers and Hong Kong exportersdoing business with the foreign country:i The officials of Hong Kong Monetary Authority (HKMA) announcethat they are comfortable with the rising euro relative to the HongKong dollar.ii The Japanese government announces that it will print billions of newyen and inject them into the economy in an effort to boost the localeconomic activities.

Large companies with large cash amounts tend to acquire small and profitable companies to increase…

PARK&SHOP and WELLCOME are operating supermarkets in Hong Kong. They competing with each other in terms of price and products. PARK&SHOP is considering the possible acquisition of WELLCOME. Both companies h no debt. PARK&SHOP estimates that the acquisition will create synergy by increasing total after-tax annual cash flows by $2.4 million forever. The current market value of WELLCOME is $58 million, and that of PARK&SHOP is S nillion. The discount rate for the incremental cash flows is 10%. PARK&SHOP tries determine whether it should offer 40% of its stock or $73 million in cash to WELLCOM hareholders.

PARK&SHOP and WELLCOME are operating supermarkets in Hong Kong. They competing with each other in terms of price and products. PARK&SHOP is considering the possible acquisition of WELLCOME. Both companies h no debt. PARK&SHOP estimates that the acquisition will create synergy by increasing total after-tax annual cash flows by $2.4 million forever. The current market value of WELLCOME is $58 million, and that of PARK&SHOP is S nillion. The discount rate for the incremental cash flows is 10%. PARK&SHOP tries determine whether it should offer 40% of its stock or $73 million in cash to WELLCOM hareholders.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Happy Times, Incorporated, wants to expand its party stores into the Southeast. In order to establish an immediate presence in the area, the company is considering the purchase of the privately held Joe’s Party Supply. Happy Times currently has debt outstanding with a market value of $200 million and a YTM of 5.8 percent. The company’s market capitalization is $440 million and the required return on equity is 11 percent. Joe’s currently has debt outstanding with a market value of $33.5 million. The EBIT for Joe’s next year is projected to be $13 million. EBIT is expected to grow at 8 percent per year for the next five years before slowing to 3 percent in perpetuity. Net working capital, capital spending, and depreciation as a percentage of EBIT are expected to be 7 percent, 13 percent, and 6 percent, respectively. Joe’s has 2.15 million shares outstanding and the tax rate for both companies is 21 percent. a.What is the maximum share price that Happy Times should be willing to pay for…
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