Chap 26 #1
Chapter 26 - Dropbox 6.4
Problem 1: Balance Sheets for Mergers
Silver Enterprises has acquired All Gold Mining in a merger transaction. The following Balance Sheets represent the pre-merger book values for both firms:
Silver Enterprises
Cu
ent assets $ 5,300 Cu
ent liabilities $ 3,100
Other assets $ 1,500 Long-term debt $ 7,800
Net fixed assets $ 17,900 Equity $ 13,800
Total $ 24,700 $ 24,700
All Gold Mining
Cu
ent assets $ 1,400 Cu
ent liabilities $ 1,460
Other assets $ 570 Long-term debt $ - 0
Net fixed assets $ 7,400 Equity $ 7,910
Total $ 9,370 $ 9,370
The market value of All Gold Mining's fixed assets is $9,100; the market value for cu
ent and other assets are the same as the book values. Assume that Silver Enterprises issues $15,000 in new long-term debt to finance the acquisition.
Construct the balance sheet for the new corporation if the merger is treated as a purchase of interests for accounting purposes.
Use the Template Provided Below to Create Your Solution - Pay close attention to the formulas and formatting of the inputs.
Input Area:
XXXXXXXXXXSilver Enterprises
Cu
ent assets $ 5,300 Cu
ent liabilities $ 3,100
Other assets $ 1,500 Long-term debt $ 15,000
Net fixed assets $ 17,900 Equity $ 13,800
Total $ 24,700 $ 31,900
XXXXXXXXXXAll Gold Mining
Cu
ent assets Cu
ent liabilities
Other assets Long-term debt
Net fixed assets 9,100 Equity
Total $ 9,100 $ - 0
Market value of fixed assets
New long-term debt
Output Area:
.
Silver Enterprises - Post Merge
Cu
ent assets $ 5,300 Cu
ent liabilities $ 3,100
Other assets 1,500 Long-term debt 15,000
Net fixed assets 17,900 Equity 13,800
Goodwill 7,200
Total $ 31,900 $ 31,900
This is the Student Template, provided in the course materials by D. Kendall April 2020
Chap 26 #2
Chapter 26 - Dropbox 6.4
Problem 2: Cash versus Stock Payment
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 flow by $1.9 million indefinitely. The cu
ent market value of Teller is $41 million, and that of Penn is $79 million. The appropriate discount rate for the incremental cash flows is 10 percent. Penn is trying to decide whether it should offer 40 percent on its stock of $57 million in cash to Teller's stockholders.
a) What is the cost of each alternative? XXXXXXXXXXb) What is the NPV of each alternative? XXXXXXXXXXc) Which alternative should Penn choose?
Use the Template Provided Below to Create Your Solution - Pay close attention to the formulas and formatting of the inputs.
Input Area:
After-tax annual cash flow
Teller market value
Penn market value
Discount rate
Stock offe
Cash offe
Output Area:
.
a. V*k ERROR:#DIV/0!
Cash cost $ - 0
Equity cost ERROR:#DIV/0!
b. NPV cash ERROR:#DIV/0!
NPV stock ERROR:#DIV/0!
c. ERROR:#DIV/0!
This is the Student Template, provided in the course materials by D. Kendall April 2020
Chap 26 #3
Chapter 26 - Dropbox 6.4
Problem 3: Calculating Synergy
Three Guys Burgers, Inc., has offered $19 million for all of the common stock in Two Guys Fries, Corp. The cu
ent market capitalization of Two Guys as an independent company is $15 million. Assume the required return of the acquisition is 9 percent and the synergy from the acquisition is a perpetuity.
What is the minimum annual synergy that Three Guys apparently feels it will gain from the acquisition?
Create your Original Solution Below - Be sure to show all calculations and clearly indicate answers.
This is the Student Template, provided in the course materials by D. Kendall April 2020
Chap 26 #4
Chapter 26 - Dropbox 6.4
Problem 4: Effects of a Stock Exchange
Consider the following pre-merger information about Firm A and Firm B:
Firm A Firm B
Total earnings $ 3,150 $ 1,000
Shares outstanding $ 1,500 $ 300
Price per share $ 43 $ 47
Assume that Firm A acquires Firm B via an exchange of stock at a price of $49 for each share of B's stock. Both A and B have no debt outstanding.
a) What will the earnings per share (EPS) of Firm A be after the merger? XXXXXXXXXXb) What will Firm A's price per share be after the merger if the market inco
ectly analyzes this reported earnings growth (that is, the price-earnings ratio does not change)? XXXXXXXXXXc) What will be the price-earnings ratio of the postmerger firm if the market co
ectly analyzes the transaction (the market price adjusts to reflect the new price-earnings ratio)? XXXXXXXXXXd) If there are no synergy gains, what will the share price of A be after the merger? What will the price-earnings ratio be? XXXXXXXXXXe) What does this tell you about the amount A bid for B? Was it too high or too low? Explain.
Use the Template Provided Below to Create Your Solution - Pay close attention to the formulas and formatting of the inputs.
Input Area:
Firm A Firm B
Total earnings
Shares outstanding
Price per share
Acquisition price
Output Area:
.
Cost $ - 0
Shares given up by A ERROR:#DIV/0!
a. EPS ERROR:#DIV/0!
b. Old P/E ERROR:#DIV/0!
New price ERROR:#DIV/0!
c. P/E ERROR:#DIV/0!
d. Price ERROR:#DIV/0!
P/E ERROR:#DIV/0!
e. At the cu
ent acquisition price, this is a
ERROR:#DIV/0! acquisition.
With no real synergy, this was a bad deal.
This is the Student Template, provided in the course materials by D. Kendall April 2020