1. Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total after tax annual cash flow by $4 million indefinitely. The current market value of Teller is $43 million, and that of Penn is $88 million. The appropriate discount rate for the incremental cash flows is 10 percent. Penn is trying to decide whether it should offer 40 percent of its stock or $69 million in cash to Teller’s shareholders. a. What is the cost of each alternative?
1. Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total after tax annual cash flow by $4 million indefinitely. The current market value of Teller is $43 million, and that of Penn is $88 million. The appropriate discount rate for the incremental cash flows is 10 percent. Penn is trying to decide whether it should offer 40 percent of its stock or $69 million in cash to Teller’s shareholders.
a.
What is the cost of each alternative? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, i.e. 1,234,567.)
Cash cost
$
Equity cost
$
b.
What is the NPV of each alternative? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, i.e. 1,234,567.)
NPV cash
$
NPV stock
$
c.
Which alternative should Penn choose?
Stock
Cash
2. Plant, Inc., is considering making an offer to purchase Palmer Corp. Plant’s vice president of finance has collected the following information:
Plant
Palmer
Price-earnings ratio
15.7
11.3
Shares outstanding
1,620,000
870,000
Earnings
$
4,390,200
$
1,044,000
Dividends
$
1,062,000
$
482,000
Plant also knows that securities analysts expect the earnings and dividends of Palmer to grow at a constant rate of 4 percent each year. Plant management believes that the acquisition of Palmer will provide the firm with some economies of scale that will increase this growth rate to 6 percent per year.
a.
What is the value of Palmer to Plant? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Value of Palmer
$
b.
What would Plant’s gain be from this acquisition? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Gain
$
c.
If Plant were to offer $24 in cash for each share of Palmer, what would the NPV of the acquisition be?(Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
NPV
$
d.
What is the most Plant should be willing to pay in cash per share for the stock of Palmer? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Maximum bid price
$
e.
If Plant were to offer 237,000 of its shares in exchange for the outstanding stock of Palmer, what would the NPV be. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
NPV
$
Plant’s outside financial consultants think that the 6 percent growth rate is too optimistic and a 5 percent rate is more realistic.
f-1.
If Plant still offers $24 per share, what is the NPV with this new growth rate? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
NPV
$
f-2.
If Plant still offers 237,000 shares, what is the NPV with this new growth rate? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
NPV
$
f-3.
Should the acquisition be attempted?
Yes
No
3. Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that both firms have no debt outstanding.
Firm B
Firm T
Shares outstanding
6,000
1,200
Price per share
$
47
$
17
Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $9,500.
a.
If Firm T is willing to be acquired for $19 per share in cash, what is the NPV of the merger? (Do not round intermediate calculations.)
NPV
$
b.
What will the price per share of the merged firm be assuming the conditions in (a)? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Share price
$
c.
If Firm T is willing to be acquired for $19 per share in cash, what is the merger premium? (Do not round intermediate calculations.)
Merger premium
$
d.
Suppose Firm T is agreeable to a merger by an exchange of stock. If B offers one of its share for every two of T ‘s shares, what will the price per share of the merged firm be? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Price per share
$
e.
What is the NPV of the merger assuming the conditions in (d)? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
NPV
$
4. Fair-to-Midland Manufacturing, Inc., (FMM) has applied for a loan at True Credit Bank. Jon Fulkerson, the credit analyst at the bank, has gathered the following information from the company’s financial statements:
Total assets
$77,000
EBIT
7,000
Net working capital
3,500
Book value of equity
20,000
Accumulated retained earnings
16,900
Sales
93,000
The stock price of FMM is $22 per share and there are 5,100 shares outstanding. What is the Z-score for this company? (Do not round intermediate calculations and round your final answer to 3 decimal places. (e.g., 32.161))
Z-score
5. Consider the following premerger information about Firm A and Firm B:
Firm A
Firm B
Total earnings
$
2,100
$
800
Shares outstanding
900
200
Price per share
$
27
$
31
Assume that Firm A acquires Firm B via an exchange of stock at a price of $33 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? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
EPS
$
b.
What will Firm A’s price per share be after the merger if the market incorrectly analyzes this reported earnings growth (that is, the price–earnings ratio does not change)? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Price per share
$
c.
What will the price–earnings ratio of the post-merger firm be if the market correctly analyzes the transaction? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Price-earnings
times
d-1.
If there are no synergy gains, what will the share price of A be after the merger? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Price per share
$
d-2.
What will the price–earnings ratio be? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Price-earnings
times
d-3.
What does your answer for the share price tell you about the amount A bid for B? Was it too high? too low?
Too high
Too Low
Assume that the following balance sheets are stated at book value. The fair market value of James’ fixed assets is equal to the book value. Jurion pays $19,000 for James and raises the needed funds through an issue of long-term debt.
Jurion Co.
Current assets
$
20,100
Current liabilities
$
6,850
Net fixed assets
36,850
Long-term debt
11,260
Equity
38,840
Total
$
56,950
Total
$
56,950
James, Inc.
Current assets
$
4,060
Current liabilities
$
2,800
Net fixed assets
9,880
Long-term debt
1,820
Equity
9,320
Total
$
13,940
Total
$
13,940
Construct a postmerger balance sheet assuming that Jurion Co. purchases James, Inc., and the purchase method of accounting is used. (Do not round intermediate calculations.)
Jurion Co., post-merger
Current assets
$
Current liabilities
$
Fixed assets
Long-term debt
Goodwill
Equity
Total
$
Total
$
