a)
To determine: The gain from merger
a)
Explanation of Solution
The pre-merger values of Company C and Company D:
Compute r to determine
Compute pre-merger values:
Compute acquisition gain:
Hence, the acquisition gain is $12 million.
b)
To determine: Cost of acquisition.
b)
Explanation of Solution
Compute cost of acquisition:
Hence, Cost of acquisition is $3 million.
c)
To determine: Cost of acquisition if Company D offers 1 share of Company D for 3 shares of Company D.
c)
Explanation of Solution
Compute cost of acquisition:
Hence, cost of acquisition is $7 million.
d)
To determine: Cost of acquisition.
d)
Explanation of Solution
Compute cost of acquisition:
Hence, Cost of acquisition is $3 million.
e)
To determine: Stock acquisition cost
e)
Explanation of Solution
The stock acquisition cost is dependent on the rate of growth.
Hence, the stock acquisition is $5 million.
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Chapter 31 Solutions
EBK PRINCIPLES OF CORPORATE FINANCE
- Topic: Illiquidity, Synergy, Control, Book Value, Sound Value, Liquidation Value, Income Approach, and Forex Translation A Corp. and B Company will be merging. Independently, A has forecasted annual earnings of P400,000 and overall return of 16%. On the other hand, B had dividends of P480,000 last year, an overall return of 15% and a payout ratio of 80%. Once combined, they will have a total equity value of P7,300,000. How much is the value of synergy between the two entities?arrow_forwardYou've collected the following information about Groot, Inc.: Profit margin Total asset turnover Total debt ratio Payout ratio = 4.44% = 3.50 = .25 = 29% a. What is the sustainable growth rate for the company? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the ROA? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Sustainable growth rate b. ROA % 15.54 %arrow_forwardWhen an acquirer assesses a potential target, the price the acquirer is willing to pay should be based on the value of: The target firm’s total corporate value (debt and equity) The target firm’s equity The target firm’s debt Consider the following scenario: Ziffy Corp. is considering an acquisition of Keedsler Motors Co., and estimates that acquiring Keedsler will result in incremental after-tax net cash flows in years 1–3 of $14.00 million, $21.00 million, and $25.20 million, respectively. After the first three years, the incremental cash flows contributed by the Keedsler acquisition are expected to grow at a constant rate of 6% per year. Ziffy’s current beta is 1.60, but its post-merger beta is expected to be 2.08. The risk-free rate is 5%, and the market risk premium is 7.10%. Based on this information, complete the following table by selecting the appropriate values (Note: Do not round intermediate calculations, but round your answers to two decimal places): Value…arrow_forward
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