PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Question
Chapter 31, Problem 13PS
Summary Introduction
To discuss: The PE ratio of merged firm.
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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.
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).
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