a)
To compute: The value of Publication IR to Company B.
Introduction:
Merger is the complete absorption of one company by another company. The acquiring company acquires all the assets and liabilities of the acquired firm and acquiring firm retains its name and identity. The acquired firm ceases to exist as a separate business entity after a merger.
a)
Answer to Problem 14QP
The value of Publications I to Company B is $9,857,250.
Explanation of Solution
Given information:
“Company B” is analysing the purchase of “Publications I”. Company B expects that earnings and dividends of Publications I to grow at a constant rate of 5% every year. Because of synergy, Company B’s growth rate will increase to 7% each year.
The price earnings ratio of Company B and Publications I are 14.5% and 9.2% respectively. The outstanding shares of Company B and Publications I are $1,400,000 and $195,000 respectively. The earnings of Company B and Publications I are $4,300,000 and $705,000 respectively and the dividends of Company B and Publications I are $1,075,000 and $375,000 respectively.
Formula to calculate the value of Publications I to Company B:
Calculate the value of Publications I to Company B:
Hence, the value of Publications I to Company B is $3.61538 per share.
Formula to calculate the share price of Target Company (I Publications):
Calculate the share price of Target Company (I Publications):
Hence, the share price of the target company is $33.261496.
Formula to calculate the dividend per share:
Calculate the dividend per share:
Hence, the dividend of Publications I is $1.923.
Formula to calculate the required
Calculate the required rate of return for the target company’ shareholders:
Hence, the required return of Publications I is 11.07%.
Formula to calculate the share price of the target company with new growth rate:
Calculate the share price of the target company with new growth rate:
Hence, the share price of the target company is $50.55.
Formula to calculate the value of Publications I to Company B:
Calculate the value of Publications I to Company B:
Hence, the value of Publications I to Company B is $9,857,250.
b)
To compute: The gain of Company B from the acquisition.
Introduction:
Merger is the complete absorption of one company by another company. The acquiring company acquires all the assets and liabilities of the acquired firm and acquiring firm retains its name and identity. The acquired firm ceases to exist as a separate business entity after a merger.
b)
Answer to Problem 14QP
Company B’s gain from acquisition is $3,371,258.28.
Explanation of Solution
Given information:
“Company B” is analysing the purchase of “Publications I”. Company B expects that earnings and dividends of Publications I to grow at a constant rate of 5% every year. Because of synergy, Company B’s growth rate will increase to 7% each year.
The price earnings ratio of Company B and Publications I are 14.5% and 9.2% respectively. The outstanding shares of Company B and Publications I are $1,400,000 and $195,000 respectively. The earnings of Company B and Publications I are $4,300,000 and $705,000 respectively and the dividends of Company B and Publications I are $1,075,000 and $375,000 respectively.
Formula to calculate Company B’s gain from the acquisition:
Calculate Company B’s gain from the acquisition:
Hence, Company B’s gain from acquisition is $3,371,258.28.
c)
To compute: The
Introduction:
Merger is the complete absorption of one company by another company. The acquiring company acquires all the assets and liabilities of the acquired firm and acquiring firm retains its name and identity. The acquired firm ceases to exist as a separate business entity after a merger.
c)
Answer to Problem 14QP
The NPV of the acquisition is $2,447,250.
Explanation of Solution
Given information:
“Company B” is analysing the purchase of “Publications I”. Company B expects that earnings and dividends of Publications I to grow at a constant rate of 5% every year. Because of synergy, Company B’s growth rate will increase to 7% each year.
The price earnings ratio of Company B and Publications I are 14.5% and 9.2% respectively. The outstanding shares of Company B and Publications I are $1,400,000 and $195,000 respectively. The earnings of Company B and Publications I are $4,300,000 and $705,000 respectively and the dividends of Company B and Publications I are $1,075,000 and $375,000 respectively.
Formula to calculate the NPV of the acquisition, if Company B offers $38 in cash for each share of Publications I:
Calculate the NPV of the acquisition, if Company B offers $38 in cash for each share of Publications I.
Hence, the NPV of the acquisition at $38 offer price is $2,447,250.
d)
To compute: The maximum bidding price that Company B will be willing to pay for Publications I.
Introduction:
Merger is the complete absorption of one company by another company. The acquiring company acquires all the assets and liabilities of the acquired firm and acquiring firm retains its name and identity. The acquired firm ceases to exist as a separate business entity after a merger.
d)
Answer to Problem 14QP
The maximum bid price is $50.55.
Explanation of Solution
Given information:
“Company B” is analysing the purchase of “Publications I”. Company B expects that earnings and dividends of Publications I to grow at a constant rate of 5% every year. Because of synergy, Company B’s growth rate will increase to 7% each year.
The price earnings ratio of Company B and Publications I are 14.5% and 9.2% respectively. The outstanding shares of Company B and Publications I are $1,400,000 and $195,000 respectively. The earnings of Company B and Publications I are $4,300,000 and $705,000 respectively and the dividends of Company B and Publications I are $1,075,000 and $375,000 respectively.
Formula to calculate the maximum bid price:
Hence, Company B’s maximum bid price is $50.55.
e)
To compute: The NPV of the acquisition, if Company B was offered $205,000 of its shares for the stock outstanding of Publications I.
Introduction:
Merger is the complete absorption of one company by another company. The acquiring company acquires all the assets and liabilities of the acquired firm and acquiring firm retains its name and identity. The acquired firm ceases to exist as a separate business entity after a merger.
e)
Answer to Problem 14QP
The NPV is $634,300.
Explanation of Solution
Given information:
“Company B” is analysing the purchase of “Publications I”. Company B expects that earnings and dividends of Publications I to grow at a constant rate of 5% every year. Because of synergy, Company B’s growth rate will increase to 7% each year.
The price earnings ratio of Company B and Publications I are 14.5% and 9.2% respectively. The outstanding shares of Company B and Publications I are $1,400,000 and $195,000 respectively. The earnings of Company B and Publications I are $4,300,000 and $705,000 respectively and the dividends of Company B and Publications I are $1,075,000 and $375,000 respectively.
Formula to compute the EPS of Company B:
Calculate the EPS of Company B:.
Hence, the EPS of Company B is $3.07143.
Formula to calculate the share price of Company B:
Calculate the share price of Company B:
Hence, the share price of Company B is $44.5357.
Formula to calculate the market value of Company B:
Calculate the market value of Company B:
Hence, the market value of Company B is $62,349,980.
Formula to calculate the price of the stock in the merged firm:
Calculate the price of the stock in the merged firm:
Hence, the price of the merged firm stock is $44.99.
Formula to calculate the NPV:
Calculate the NPV:
Hence, NPV is $634,300, if Company B offers 205,000 shares in exchange for outstanding stock of Publications I.
f)
To discuss: Whether the acquisition must be attempted and the acquisition that must be tried.
Introduction:
Merger is the complete absorption of one company by another company. The acquiring company acquires all the assets and liabilities of the acquired firm and acquiring firm retains its name and identity. The acquired firm ceases to exist as a separate business entity after a merger.
f)
Explanation of Solution
Given information:
“Company B” is analysing the purchase of “Publications I”. Company B expects that earnings and dividends of Publications I to grow at a constant rate of 5% every year. Because of synergy, Company B’s growth rate will increase to 7% each year.
The price earnings ratio of Company B and Publications I are 14.5% and 9.2% respectively. The outstanding shares of Company B and Publications I are $1,400,000 and $195,000 respectively. The earnings of Company B and Publications I are $4,300,000 and $705,000 respectively and the dividends of Company B and Publications I are $1,075,000 and $375,000 respectively.
Yes, the acquisition should go further, and Company B should offer cash of $38 for each share of Publications I.
g)
To compute: The NPV, if the outside financial consultants of Company B feel that the growth rate is very optimistic at 7% and it is realistic at 6%.
Introduction:
Merger is the complete absorption of one company by another company. The acquiring company acquires all the assets and liabilities of the acquired firm and acquiring firm retains its name and identity. The acquired firm ceases to exist as a separate business entity after a merger.
g)
Answer to Problem 14QP
The reduction in growth rate, results in positive NPV for cash offer and negative NPV for stock offer.
Explanation of Solution
Given information:
“Company B” is analysing the purchase of “Publications I”. Company B expects that earnings and dividends of Publications I to grow at a constant rate of 5% every year. Because of synergy, Company B’s growth rate will increase to 7% each year.
The price earnings ratio of Company B and Publications I are 14.5% and 9.2% respectively. The outstanding shares of Company B and Publications I are $1,400,000 and $195,000 respectively. The earnings of Company B and Publications I are $4,300,000 and $705,000 respectively and the dividends of Company B and Publications I are $1,075,000 and $375,000 respectively.
Formula to calculate the share price of the target company with changed growth rate:
Calculate the share price of the target company with changed growth rate.
Hence, the share price of the target company with changed rate of growth is $40.20.
Formula to calculate the value of Publications I to Company B:
Calculate the value of Publications I to Company B:
Hence, the value of Publications I to Company B is $7,839,000.
Formula to calculate Company B’s gain from acquisition:
Calculate Company B’s gain from acquisition:
Hence, the gain is $6,485,991.72.
Formula to calculate the NPV of the acquisition, if Company B offers $38 in cash for each share of Publications I.
Calculate the NPV of the acquisition, if Company B offers $38 in cash for each share of Publications I.
Hence, the NPV for cash is 429,000.
Formula to calculate the price of the stock in the merged firm:
Calculate the price of the stock in the merged firm:
Hence, the price of the merged stock firm is $43.73.
Formula to calculate the NPV for stock offer:
Calculate the NPV for stock offer:
Note:
- EPS represents Earnings Per Share
- NPV represents Net Present Value
- P represents Share price
- DPS represents Dividend Per Share
- V represents Market Value
Hence, the NPV for stock is -$1,125,650.
Want to see more full solutions like this?
Chapter 26 Solutions
Fundamentals of Corporate Finance
- A5 3b QRS N-Queries Company has an exciting new project that will cost $10,000,000. The company proposes to finance this project by issuing new shares with a rights offering. Currently, the company has 2,000,000 shares outstanding, each valued in the financial market at $30. With the rights offering, shareholders will be able to purchase one new share for a subscription price of $10. b. How many new shares will be issued?arrow_forwardA5 3c QRS N-Queries Company has an exciting new project that will cost $10,000,000. The company proposes to finance this project by issuing new shares with a rights offering. Currently, the company has 2,000,000 shares outstanding, each valued in the financial market at $30. With the rights offering, shareholders will be able to purchase one new share for a subscription price of $10. c. How many rights will be required to buy one new share, N?arrow_forwardMf6. Goldman Sachs is underwriting instacart's IPO, They have estimated the market is willing to purchase 322 million shares of instacart at a price of 68 per share Goldman offers Instacart the choice of either a firm commitment with a price of $43 and a spread of $1.10, or a best efforts with a commission of $4.77 per share. How many shares does Instacart need to sell to prefer the best efforts offering? Note Answer in millions, report two decimal places.arrow_forward
- A3)  Time remaining: 00:09:42 Finance Smartworks is considering a potential buyout of Redwords. The manager of Smartworks believes that the value of Redwords will rise by 50% if Smartworks purchases Redwords and changes its management. Redwords is a listed company with 10 million shares outstanding, and its share price is only $15 per share now. Smartworks is going to use a leveraged buyout with an offer of $20 per share to control Redwords. If Smartworks obtains 100% control of Redwords, the share price of Redwords after the leveraged buyout will be closest to: a. $1.00. b. $15.00. c. $20.00. d. $3.00.arrow_forwardMf2. 1. Consider the data in the following table for a hypothetical two-stock version of the Dow Jones Industrial Average. a) Calculate the percentage change in the index value. b) Suppose firm XYZ from part (a) were to split two for one during the period (price drops to $35 immediately after the split and the new final price is $30). Calculate the percentage change in the index value. c) If this was for S&P500-type index, what is the percentage change in the index value? Is it affected by the stock split of firm XYZ?arrow_forward1.10 Norwell Inc. has equity with a market value of $900 million and a current debt to capital ratio of 10%. If Norwell has an optimal debt ratio of 40% and would like to borrow money and buy back stock right now, how much additional debt will the firm have to issue? a. $260 million b. $300 million c. $400 million d. $600 million e. None of the abovearrow_forward
- A5 3f QRS N-Queries Company has an exciting new project that will cost $10,000,000. The company proposes to finance this project by issuing new shares with a rights offering. Currently, the company has 2,000,000 shares outstanding, each valued in the financial market at $30. With the rights offering, shareholders will be able to purchase one new share for a subscription price of $10. f. What is the value of a right after the ex-rights date, Re?arrow_forwardMf3. Question 3. a) Which security has more total risk? b) Which security has more systematic risk? c) Which security should have the higher expected return? Why? QUESTION 4. The company XYZ has 2.5 million share of common stock outstanding and 60,000 bonds (par value of the bond is $1,000) with semi-annual coupon payments of $40 per bond. The bonds have 8 years to maturity and sell for $900, The common stock has a beta of 1.34 and sells for $42 a share. The US. Treasury bill is yielding 2.8 percent and the return on the market is 11.2 percent The corporate tax rate is 21 percent. What is the Company's weighted average cost of capital?arrow_forwardQ#2:Debt to Assets Ratio Debt to Equity Before-tax cost of debt0.0 0 6%0.1 0.11 7%0.2 0.25 9%0.3 0.43 12.5%0.4 0.66 15.5%Krf= 3%, Market Risk Premuim = 5%, T=30%, BUL = 0.9.Required: Determine, its capital structure. Q#3: A firm has 20 million shares outstanding, with a $30 per share market price. The firm has $10million in extra cash that it plans to use in a stock repurchase;…arrow_forward
- H3. An unlevered firm with 300,000 shares outstanding has net income of $625,000. The firm’s stock sells for $9.50 per share and the book value per share is $12.00. The firm is considering an investment that is expected to cost $1 million and increase net income by $125,000. The cost of the investment will be financed with the issue of new shares. Assume the firm’s price-earnings ratio will remain constant. Does accounting dilution and/or market value dilution take place? Why? Show proper step by step calculationarrow_forward1. Frostfell Airlines is expected to pay an upcoming dividend of P3.29. The company's dividend is expected to grow at a steady, constant rate of 5% well into the future. Frostfell currently has 1,600,000 shares of common stock outstanding. If the required rate of return for Frostfell is 12%, what is the best estimate for the current price of Frostfell's common stock? P65.80 P62.51 P27.41 P47.00 2. Assume that you are the financial staff of Vanderheiden Inc., and you have collected the following data: the yield on the company’s outstanding bonds is 7.75%, its tax rate is 40%, the next expected dividend is P0.65 a share, the dividend is expected to grow at a constant rate of 6.00% a year, the price of the stock is P15.00 per share, the flotation cost for selling new shares is F = 10%, and the target capital structure is 45% debt and 55% common equity. What is the firm's WACC, assuming it must issue new stock to finance its capital budget? 6.89% 7.64% 7.26% 8.04% 3.…arrow_forwardQuestion#01 The Rogers Company is currently in this situation: Sales = 14 million; Variable Cost = 7 million Fixed Cost = 3 million tax rate, T = 35%; value of debt, D = $2 million; k d = 10%; ks = 15%; and Shares of stock outstanding, n = 600,000. The firm’s market is stable, and it expects no growth, so all earnings are paid out as dividends. The debt consists of perpetual bonds. What is the total market value of the firm’s stock, S, its price per share, P0, and the firm’s total market value, V? What is the firm’s weighted average cost of capital? The firm can increase its debt by $8 million, to a total of $10 million, using the new debt to buy back and retire some of its shares. Its interest rate on all debt will be 12 percent (it will have to call and refund the old debt), and its cost of equity will rise from 15 to 17 percent. EBIT will remain constant. Should the firm change its capital structure? Calculate the Break-even point of the company.arrow_forward