Problem 28-9 on Acquisition Analysis based on Chapter 28 Mergers and Acquisitions<\/b><\/p>\n
(Excel file included)<\/p>\n
Your company has earnings per share of $4. It has 1 million shares outstanding, each of which has a price of $40. You are thinking of buying TargetCo, which has earnings per share of $2, 1 million shares outstanding, and a price per share of $25. You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction. <\/p>\n
a. If you pay no premium to buy TargetCo, what will your earnings per share be after the merger? <\/p>\n
b. Suppose you offer an exchange ratio such that, at current preannouncement share prices for both firms, the offer represents a 20% premium to buy TargetCo. What will your earnings per share be after the merger? <\/p>\n
c. What explains the change in earnings per share in part (a)? Are your shareholders any better or worse off? <\/p>\n
d. What will your price-earnings ratio be after the merger (if you pay no premium)? How does this compare to your P\/E ratio before the merger? How does this compare to TargetCo\u2019s premerger P\/E ratio?<\/p>\n
Problem 16-8 on Managerial Decision based on Chapter 16 Financial Distress, Managerial Incentives, and Information <\/b> <\/p>\n
(Excel file included)<\/p>\n
As in Problem 1, Gladstone Corporation is about to launch a new product. Depending on the success of the new product, Gladstone may have one of four values next year: $150 million, $135 million, $95 million, or $80 million. These outcomes are all equally likely, and this risk is diversifiable. Suppose the risk-free interest rate is 5% and that, in the event of default, 25% of the value of Gladstone\u2019s assets will be lost to bankruptcy costs. (Ignore all other market imperfections, such as taxes.) <\/p>\n
a. What is the initial value of Gladstone\u2019s equity without leverage? <\/p>\n
Now suppose Gladstone has zero-coupon debt with a $100 million face value due next year. <\/p>\n
b. What is the initial value of Gladstone\u2019s debt? <\/p>\n
c. What is the yield-to-maturity of the debt? What is its expected return? <\/p>\n
d. What is the initial value of Gladstone\u2019s equity? What is Gladstone\u2019s total value with leverage? <\/p>\n
Suppose Gladstone has 10 million shares outstanding and no debt at the start of the year. <\/p>\n
e. If Gladstone does not issue debt, what is its share price? <\/p>\n
f. If Gladstone issues debt of $100 million due next year and uses the proceeds to repurchase shares, what will its share price be? Why does your answer differ from that in part (e)?<\/p>\n
Problem 16-9 on Financial Distress based on Chapter 16 Financial Distress, Managerial Incentives, and Information <\/b> <\/p>\n
Kohwe Corporation plans to issue equity to raise $50 million to finance a new investment. After making the investment, Kohwe expects to earn free cash flows of $10 million each year. Kohwe currently has 5 million shares outstanding, and it has no other assets or opportunities. <\/p>\n
Suppose the appropriate discount rate for Kohwe\u2019s future free cash flows is 8%, and the only capital market imperfections are corporate taxes and financial distress costs. <\/p>\n
a. What is the NPV of Kohwe\u2019s investment? <\/p>\n
b. What is Kohwe\u2019s share price today? <\/p>\n
Suppose Kohwe borrows the $50 million instead. The firm will pay interest only on this loan each year, and it will maintain an outstanding balance of $50 million on the loan. Suppose that Kohwe\u2019s corporate tax rate is 40%, and expected free cash flows are still $10 million each year. <\/p>\n
c. What is Kohwe\u2019s share price today if the investment is financed with debt? <\/p>\n
Now suppose that with leverage, Kohwe\u2019s expected free cash flows will decline to $9 million per year due to reduced sales and other financial distress costs. Assume that the appropriate discount rate for Kohwe\u2019s future free cash flows is still 8%. <\/p>\n
d. What is Kohwe\u2019s share price today given the financial distress costs of leverage?<\/p>\n","protected":false},"excerpt":{"rendered":"
Problem 28-9 on Acquisition Analysis based on Chapter 28 Mergers and Acquisitions (Excel file included) Your company has earnings per share of $4. It has 1 million shares outstanding, each of which has a price of $40. You are thinking Read More …<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-119407","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/119407","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/comments?post=119407"}],"version-history":[{"count":0,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/119407\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/media?parent=119407"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/categories?post=119407"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/tags?post=119407"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}