Test bank fundamentals of corporate finance 9th edition chap026

Chapter 26 - Mergers and Acquisitions Chapter 26 Mergers and Acquisitions Multiple Choice Questions Last month, Keyser Design acquired all of the assets and liabilities of Tenor Machine Works The combined firm is known as Keyser Design Tenor Machine Works no longer exists as a separate entity This acquisition is best described as a: A merger B consolidation C tender offer D spinoff E divestiture The Cat Box acquired The Dog House As part of this transaction, both firms ceased to exist in their prior form and combined to create an all-new entity, Animal World Which one of the following terms best describes this transaction? A divestiture B consolidation C tender offer D spinoff E conglomeration The Daily News published an ad today wherein it announced its desire to purchase shares of a competing newspaper, the Oil Town Gossip Which one of the following terms is best described by this announcement? A merger request B consolidation C tender offer D spinoff E divestiture 26-1 Chapter 26 - Mergers and Acquisitions Some Freight Line Express shareholders are very dissatisfied with the performance of the firm's current management team These shareholders want to gain control of the board of directors so they can have the power to oust current management As a means of gaining control, these shareholders have select candidates for all of the open positions on the firm's board of directors Since they have insufficient votes to guarantee the election of these individuals, they are contacting other shareholders and asking them to vote with them on this important matter Of course, the current management team is encouraging shareholders to vote for their candidates for the board Which one of the following terms is best illustrated by this situation? A tender offer B proxy contest C going-private transaction D leveraged buyout E consolidation A group of individual investors is in the process of acquiring all of the publicly-traded shares of OM Outfitters Once the shares are acquired, they will no longer be publicly traded Which of the following terms applies to this process? A tender offer B proxy contest C going-private transaction D leveraged buyout E consolidation The current president and vice-presidents of Mountain Top Consulting have decided to form a private investment group with the sole purpose of purchasing Mountain Top Consulting These individuals have found a lender who will lend them 85 percent of the purchase cost if they pledge their personal assets as collateral for the loan The current officers agree to this arrangement, borrow the funds, and purchase Mountain Top Consulting The purchase of this firm is referred to as a: A conglomeration B proxy contest C merger D leveraged buyout E consolidation 26-2 Chapter 26 - Mergers and Acquisitions Johnson Manufacturers and Peabody Enterprises are both manufacturers of plastic products, such as plastic plates and silverware These two firms have decided to work together to find a more efficient way to recycle rejected products so that any rejected material can be reused Thus, each company is going to assign two of its engineers to this project and have agreed to share any and all costs incurred in this process This project is an example of a: A consolidation B merged alliance C joint venture D takeover project E strategic alliance Diet Soda and High Caffeine are two firms that compete in the soft drink market These two competitors have decided to invest $10 million to form a new company, Fruit Tea, which will manufacture flavored teas This new firm is defined as a: A consolidation B strategic alliance C joint venture D merged alliance E takeover project Alliance Chemicals recently acquired Swenson Industries in a transaction that produced a NPV of $1.3 million This NPV is referred to as: A the agency effect B the consolidating value C diversification D the consolidation effect E synergy 26-3 Chapter 26 - Mergers and Acquisitions 10 Roger is a major shareholder in RB Industrial Supply Currently, Roger is quite unhappy with the direction the firm is headed and is rumored to be considering an attempt to take over the firm by soliciting the votes of other shareholders To head off this potential attempt, the board of RB Industrial Supply has decided to offer Roger $35 a share for all the shares he owns in the firm The current market value per share is $32 This offer to purchase Roger's shares is commonly referred to as: A a golden parachute B standstill payments C greenmail D a poison pill E a white knight 11 Which one of the following generally has a flip-in provision that significantly increases the cost to a shareholder who is attempting to gain control over a firm? A golden parachute B standstill agreement C greenmail D poison pill E white knight 12 Melvin was attempting to gain control of Western Wood Products until he realized that the existing shareholders in the firm had the right to purchase additional shares at a below-market price given his hostile takeover attempt Thus, Melvin decided to forego investing in this firm What term applies to the tactic used by Western Wood Products to stave off this takeover attempt? A pac-man defense B shark repellent plan C golden parachute provision D greenmail provision E share rights plan 26-4 Chapter 26 - Mergers and Acquisitions 13 Nieger Mills engages in farming, trucking of farm products, and the milling and retailing of farm grains The firm has decided to sell its farming operations to Jasper Farms This sale is referred to as a(n): A liquidation B divestiture C merger D allocation E restructuring 14 Princeton Enterprises is a diversified company In addition to its primary business operations, the firm is also the sole shareholder of a wholly owned subsidiary As part of its restructuring plan, Princeton has decided to implement an IPO offering for shares in the subsidiary This offering is equivalent to a 25 percent ownership stake in the subsidiary What is the distribution of these shares called? A split-up B equity carve-out C countertender offer D white knight transaction E lockup transaction 15 Family Travel Plans is the sole shareholder in its subsidiary, Traveler's Insurance Co Family Travel Plans has decided to divest itself of its insurance operations and does so by distributing the shares in the subsidiary to the shareholders of Family Travel Plans This distribution of shares is called a(n): A lockup transaction B bear hug C equity carve-out D spin-off E split-up 26-5 Chapter 26 - Mergers and Acquisitions 16 Blasco Distributors has become a large conglomerate Its board of directors recently concluded that the firm has become so large that it has lost its efficiency The board further concluded that the firm could be both more efficient and more profitable if it were divided into three distinct and separate firms The board presented this suggested to the firm's shareholders and those shareholders voted and agreed to divide the firm Dividing this firm into separate entities is referred to as a(n): A lockup transaction B divestiture C equity carve-out D spin-off E split-up 17 Which one of the following statements correctly applies to a legally defined merger? A The acquiring firm retains its identity and absorbs only the assets of the acquired firm B The acquired firm is completely absorbed and ceases to exist as a separate legal entity C A new firm is created which includes all the assets and liabilities of the acquiring firm plus the assets only of the acquired firm D A new firm is created from the assets and liabilities of both the acquiring and acquired firms E A merger reclassifies the acquired firm into a new entity which becomes a subsidiary of the acquiring firm 18 Which of the following statements correctly apply to a merger? I The titles to individual assets of the acquired firm must be transferred into the acquiring firm's name II The merged firm will retain the use of the acquiring company's name III The acquiring firm does not have to seek approval for the merger from its shareholders IV The shareholders of the acquired company must approve the merger A I and III only B II and IV only C I, II, and III only D I, II, and IV only E I, II, III, and IV 26-6 Chapter 26 - Mergers and Acquisitions 19 In a merger the: A legal status of both the acquiring firm and the target firm is terminated B acquiring firm retains its pre-merger legal status C acquiring firm acquires the assets, but not the liabilities, of the target firm D shareholders of the target firm have little, if any, say as to whether or not the merger occurs E target firm continues to exist but will be a wholly owned subsidiary of the acquiring firm 20 Which of the following increase the costs associated with a merger? A changing the title to all the combined firm's assets B disbanding the operations of the target firm C hiring an underwriter to distribute the IPO shares D issue costs associated with warrants that must be offered to the shareholders of the acquiring firm E seeking approval of the shareholders of both the acquiring and the acquired firm 21 Down River Markets has decided to acquire a controlling interest in Blue Jays by purchasing shares of stock in the public markets Which of the following statements correctly apply to this acquisition? I The purchase of publicly-traded shares may be more expensive than an outright merger with Blue Jays would have been II Down River Markets can avoid dealing with the board of directors of Blue Jays by purchasing shares in this manner III If Down River Markets is successful in acquiring at least 80 percent of the outstanding shares of Blue Jays, the remaining shareholders in Blue Jays will be forced to also sell their shares to Down River Markets IV Whether or not Down River Markets gains control of Blue Jays depends upon the willingness of Blue Jays shareholders to sell their shares A I and III only B II and IV only C I, II, and IV only D I, II, and III only E I, II, III, and IV 26-7 Chapter 26 - Mergers and Acquisitions 22 Biltwell Hotels is acquiring all of the assets of Green Roof Inns As a result, Green Roof Inns: A will become a fully owned subsidiary of Biltwell Hotels B will remain as a shell corporation unless the shareholders opt to dissolve it C will be fully merged into Biltwell Hotels and will no longer exist as a separate entity D and Biltwell Hotels will both cease to exist and a new firm will be formed E will automatically be dissolved 23 An auto maker recently acquired a windshield manufacturer Which type of an acquisition was this? A horizontal B longitudinal C conglomerate D vertical E indirect 24 If General Electric, a highly diversified company, were to acquire Ocean Freight Limited, the acquisition would be classified as a _ acquisition A horizontal B longitudinal C conglomerate D vertical E integrated 25 If Paul's Hardware were to acquire Suburban Hardware, the acquisition would be classified as a _ acquisition A horizontal B longitudinal C conglomerate D vertical E integrated 26-8 Chapter 26 - Mergers and Acquisitions 26 Which of the following is a form of a takeover? I tender offer II merger III proxy contest IV going private transaction A I and II only B III and IV only C II, III, and IV only D I, II, and III only E I, II, III, and IV 27 Firms A and B formally agree to each put up $25 million to create firm C Firm C will perform environmental testing on the products produced by both Firm A and Firm B Which one of the following terms describes Firm C? A joint venture B going-private transaction C conglomerate D subsidiary E leveraged buyout 28 Dixie and ten of her wealthy friends formed a group and borrowed the funds necessary to acquire 100 percent of the outstanding shares of Southern Fried Chicken This transaction is known as a: A proxy contest B management buyout C vertical acquisition D leveraged buyout E unfriendly takeover 29 In a tax-free acquisition, the shareholders of the target firm: A receive income which is considered to be tax-exempt B gift their shares to a tax-exempt organization and therefore have no taxable gain C are viewed as having exchanged shares on a dollar-for-dollar basis D sell their shares to a qualifying entity thereby avoiding both income and capital gains taxes E sell their shares at cost thereby avoiding the capital gains tax 26-9 Chapter 26 - Mergers and Acquisitions 30 Which of the following are required for an acquisition to be considered tax-free? I continuity of equity interest II a business purpose, other than avoiding taxes, for the acquisition III payment in the form of equity shares for the acquired firm IV cash payment for the equity of the acquired firm A I and II only B II and III only C II and IV only D I, II, and III only E I, II, and IV only 31 Which one of the following statements is correct? A The shareholders of an acquired firm are generally given a choice of accepting either cash or shares of stock when the acquisition is tax-free B To be a tax-free acquisition, the shareholders of an acquired firm must receive shares in the acquiring firm that are equal to 95 percent or less of the value of the shares held in the acquired firm C The assets of an acquired firm are recorded on the books of the acquiring firm at their current book value regardless of the tax status of the acquisition D Target firm shareholders demand a higher selling price when an acquisition is a nontaxable event E If the assets of a firm are written up as part of the acquisition process, the increase in value is considered to be a taxable gain 32 The purchase accounting method requires that: A the excess of the purchase price over the fair market value of the target firm be recorded as a one-time expense on the income statement of the acquiring firm B goodwill be amortized on a yearly basis for financial statement purposes C the equity of the acquiring firm be reduced by the excess of the purchase price over the fair market value of the target firm D the assets of the target firm be recorded at their fair market value on the balance sheet of the acquiring firm E the excess amount paid for the target firm be recorded as a tangible asset on the books of the acquiring firm 26-10 Chapter 26 - Mergers and Acquisitions 71 Firm B is being acquired by Firm A for $162,000 worth of Firm A stock The incremental value of the acquisition is $4,600 Firm A has 8,500 shares of stock outstanding at a price of $36 a share Firm B has 5,900 shares of stock outstanding at a price of $27 a share What is the value per share of Firm A after the acquisition? A $35.28 B $35.71 C $36.00 D $36.15 E $37.04 Value per share = [(8,500 × $36) + (5,900 × $27) + $4,600]/[8,500 + ($162,000/$36)] = $36.15 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 26-3 Section: 26.6 Topic: Stock acquisition 72 Firm A is being acquired by Firm B for $54,000 worth of Firm B stock The incremental value of the acquisition is $5,600 Firm A has 2,400 shares of stock outstanding at a price of $21 a share Firm B has 2,700 shares of stock outstanding at a price of $50 a share What is the actual cost of the acquisition using company stock? A $50,509 B $52,276 C $54,571 D $56,780 E $60,600 Number of shares issued = $54,000/$50 = 1,080 shares Value per share after merger = [(2,400 × $21) + (2,700 × $50) + $5,600]/[2,700 + 1,080] = $50.5291 Actual cost of acquisition = 1,080 × $50.5291 = $54,571 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 26-3 Section: 26.6 Topic: Stock acquisition 26-69 Chapter 26 - Mergers and Acquisitions 73 Merchantile Exchange is being acquired by National Sales The incremental value of the acquisition is $1,800 Merchantile Exchange has 1,500 shares of stock outstanding at a price of $18 a share National Sales has 3,500 shares of stock outstanding at a price of $54 a share What is the net present value of the acquisition given that the actual cost of the acquisition using company stock is $28,780? A $8 B $11 C $20 D $37 E $46 Net present value = [(1, 500 × $18) + $1,800] - $28,780 = $20 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 26-3 Section: 26.6 Topic: Stock acquisition 74 Dressler, Inc., is planning on merging with Weston Foods Dressler will pay Weston's shareholders the current value of its stock in shares of Dressler stock Dressler's currently has 6,200 shares of stock outstanding at a market price of $30 a share Weston's has 2,200 shares outstanding at a price of $28 a share How many shares of stock will be outstanding in the merged firm? A 6,840 shares B 7,061 shares C 7,200 shares D 8,253 shares E 8,609 shares Number of shares = 6,200 + [(2,200 × $28)/$30] = 8,253 shares AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 26-3 Section: 26.5 Topic: Earnings and valuation 26-70 Chapter 26 - Mergers and Acquisitions 75 Alpha is planning on merging with Beta Alpha will pay Beta's shareholders the current value of their stock in shares of Alpha Alpha currently has 4,200 shares of stock outstanding at a market price of $40 a share Beta has 2,500 shares outstanding at a price of $18 a share The after-merger earnings will be $8,800 What will the earnings per share be after the merger? A $1.61 B $1.65 C $1.75 D $1.81 E $1.86 Number of shares = 4,200 + [(2,500 × $18)/$40] = 5,325 Earnings per share = $8,800/5,325 = $1.65 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 26-2 Section: 26.5 Topic: Earnings and valuation 76 Sue's Bakery is planning on merging with Ted's Deli Sue's will pay Ted's shareholders the current value of their stock in shares of Sue's Bakery Sue's currently has 4,500 shares of stock outstanding at a market price of $19 a share Ted's has 2,100 shares outstanding at a price of $20 a share What is the value of the merged firm? A $106,500 B $107,800 C $125,400 D $127,500 E $131,600 Value of merged firm = (4,500 × $19) + (2,100 × $20) = $127,500 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 26-3 Section: 26.5 Topic: Earnings and valuation 26-71 Chapter 26 - Mergers and Acquisitions 77 George's Equipment is planning on merging with Nelson Machinery George's will pay Nelson's shareholders the current value of their stock in shares of George's Equipment George's currently has 4,600 shares of stock outstanding at a market price of $31 a share Nelson's has 1,600 shares outstanding at a price of $38 a share What is the value per share of the merged firm? A $30.77 B $31.00 C $31.29 D $31.74 E $32.06 Value per share = [(4,600 × $31) + (1,600 × $38)]/{[4,600 + (1,600 × $38)]/$31} = $31 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 26-3 Section: 26.5 Topic: Earnings and valuation Essay Questions 78 Empirical evidence indicates that the returns to shareholders of the target firm vary significantly from the returns to the shareholders of the acquiring firm Identify the shareholders that tend to realize the smaller return and provide some possible explanation for these low returns The empirical evidence strongly indicates that the shareholders of the target firm realize large wealth gains as a result of a takeover bid but the shareholders in the acquiring firm gain little, if anything While a definitive answer is elusive, the following have been offered as possible explanations for these low returns to acquiring shareholders: size differentials, competition in the takeover market, lack of achieving merger gains, management goals other than the best interests of the shareholders, and early announcements of corporate acquisition intent Feedback: Refer to section 26.8 AACSB: Reflective thinking Bloom's: Comprehension Difficulty: Basic Learning Objective: 26-3 Section: 26.8 Topic: Merger gains 26-72 Chapter 26 - Mergers and Acquisitions 79 Identify the three basic legal procedures that one firm can use to acquire another and briefly discuss the advantages and disadvantages of each The three forms are merger, acquisition of stock, and acquisition of assets A merger has the advantage that it is legally simple and therefore low cost but it has the disadvantage that it must be approved by the shareholders of both firms Acquisition by stock requires no shareholder meetings and management of the target firm can be bypassed However, it can be a costly form of acquisition and minority shareholders may hold out, thereby raising the cost of the purchase An acquisition of assets requires the vote of the target firm's shareholders However, it can become quite costly to transfer title to all of the assets Feedback: Refer to section 26.1 AACSB: Reflective thinking Bloom's: Analysis Difficulty: Intermediate Learning Objective: 26-1 Section: 26.1 Topic: Forms of acquisitions 80 Defensive merger tactics are designed to thwart unwanted takeovers and mergers Do such activities work to the advantage of shareholders all of the time? Are these types of activities ethical? Who you think benefits the most from these activities? Good students will recognize that defensive tactics "insulate" existing management from the vagaries of the marketplace and may allow ineffective management to remain in charge Obviously, defensive maneuvers not always act in the best interest of shareholders Some students will argue that management benefits most from these activities The ethics debate about these issues is always an interesting one Feedback: Refer to section 26.7 AACSB: Reflective thinking Bloom's: Analysis Difficulty: Intermediate Learning Objective: 26-1 Section: 26.7 Topic: Poison pills 26-73 Chapter 26 - Mergers and Acquisitions 81 Firms can frequently create synergy by merging and sharing complementary resources with another firm Give two examples of situations where this would most likely occur Student examples will vary but should display an understanding of how complementary resources can be shared in a manner that will reduce costs A common example would be two seasonal firms such as a golf course and a ski resort where assets such as the administrative functions, the hospitality staff, the dining areas, and the resort areas would all be considered complementary resources Feedback: Refer to section 26.4 AACSB: Reflective thinking Bloom's: Analysis Difficulty: Intermediate Learning Objective: 26-3 Section: 26.4 Topic: Complementary resources Multiple Choice Questions 82 Pearl, Inc has offered $860 million cash for all of the common stock in Jam Corporation Based on recent market information, Jam is worth $710 million as an independent operation For the merger to make economic sense for Pearl, what would the minimum estimated value of the synergistic benefits from the merger have to be? A $0 B $75 million C $150 million D $710 million E $860 million Minimum economic value = $860 million - $710 million = $150 million AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 26-1 Learning Objective: 26-3 Section: 26.4 Topic: Calculating synergy 26-74 Chapter 26 - Mergers and Acquisitions 83 Consider the following premerger information about Firm X and Firm Y: Assume that Firm X acquires Firm Y by paying cash for all the shares outstanding at a merger premium of $3 per share Also assume that neither firm has any debt before or after the merger What is the value of the total equity of the combined firm, XY, if the purchase method of accounting is used? A $1,274,000 B $1,316,000 C $1,352,000 D $1,422,000 E $1,427,000 Assets from X = 26,000($26) = $676,000 (book value) Assets from Y = 26,000($23) = $598,000 (market value) Goodwill = 26,000($23 + $3) - $598,000 = $78,000 Total Assets XY =Total equity XY = $676,000 + $598,000 + $78,000 = $1,352,000 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 26-2 Learning Objective: 26-2 Section: 26.2 Topic: Balance sheet for mergers 26-75 Chapter 26 - Mergers and Acquisitions 84 Assume the following balance sheets are stated at book value What will be the value of the equity account on the postmerger balance sheet assuming that Meat Co purchases Loaf, Inc and the pooling of interests method of accounting is used A $26,700 B $33,600 C $35,800 D $38,200 E $46,100 Postmerger equity = $26,700 + $9,100 = $35,800 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 26-3 Learning Objective: 26-2 Section: 26.3 Topic: Balance sheet for mergers 26-76 Chapter 26 - Mergers and Acquisitions 85 Assume the following balance sheets are stated at book value Suppose the fair market value of Loaf's fixed assets is $7,200 versus the $3,300 book value shown Meat pays $10,200 for Loaf and raises the needed funds through an issue of long-term debt Assume the purchase method of accounting is used The post-merger balance sheet of Meat Co will have total debt of and total equity of A $1,600; $11,500 B $1,600; $15,400 C $10,200; $15,400 D $14,500; $11,500 E $14,500; $15,400 Total post-merger debt = $1,800 + $1,100 + $900 + $500 + $10,200 = $14,500 Total post-merger equity = Pre-merger equity of acquiring firm = $11,500 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 26-4 Learning Objective: 26-2 Section: 26.3 Topic: Balance sheet for mergers 26-77 Chapter 26 - Mergers and Acquisitions 86 Silver Enterprises has acquired All Gold Mining in a merger transaction The following balance sheets represent the premerger book values for both firms Assume the merger is treated as a pooling of interests for accounting purposes The total assets are _ and the total equity is _ on the post-merger balance sheet A $24,500; $10,500 B $24,500; $18,200 C $26,300; $10,500 D $26,300; $16,600 E $26,300; $18,200 Post-merger total assets = $16,600 + $9,700 = $26,300 Post-merger total equity = $10,500 + $7,700 = $18,200 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 26-5 Learning Objective: 26-2 Section: 26.3 Topic: Balance sheet for mergers 26-78 Chapter 26 - Mergers and Acquisitions 87 Silver Enterprises has acquired All Gold Mining in a merger transaction The following balance sheets represent the premerger book values for both firms Assume the merger is treated as a purchase for accounting purposes The market value of All Gold Mining's fixed assets is $3,800; the market values for current and other assets are the same as the book values Assume that Silver Enterprises issues $5,000 in new long-term debt to finance the acquisition The post-merger balance sheet will reflect goodwill of _ and total equity of _ A $640; $2,700 B $640; $4,610 C $890; $2,700 D $890; $4,610 E $890; $5,500 Goodwill will be created since the acquisition price is greater than the book value The goodwill amount is equal to the purchase price minus the market value of assets, plus the market value of the acquired company's debt Goodwill = $5,000 - ($3,800 market value FA) - ($600 market value of CA) - ($210 market value OA) + ($500 current liabilities) = $890 Total equity = Equity of acquiring firm = $2,700 AACSB: Analytic Bloom's: Analysis Difficulty: Basic EOC #: 26-6 Learning Objective: 26-2 Section: 26.3 Topic: Incorporating goodwill 26-79 Chapter 26 - Mergers and Acquisitions 88 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 flows by $3.7 million indefinitely The current market value of Teller is $103 million, and that of Penn is $151.7 million The appropriate discount rate for the incremental cash flows is percent Penn is trying to decide whether it should offer 44 percent of its stock of $133 million in cash to Teller's shareholders The cost of the cash alternative is _, while the cost of the stock alternative is _ A $103,000,000; $130,156,889 B $103,000,000; $133,000,000 C $133,000,000; $103,000,000 D $133,000,000; $130,156,889 E $236,000,000; $103,000,000 Cash cost = Amount of cash offered = $133 million To calculate the cost of the stock offer, we first need to calculate the value of the target to the acquirer The value of the target firm to the acquiring firm will be the market value of the target plus the PV of the incremental cash flows generated by the target firm The cash flows are a perpetuity, so: V* = $103,000,000 + $3,700,000/0.09 = $144,111,111 The cost of the stock offer is the percentage of the acquiring firm given up times the sum of the market value of the acquiring firm and the value of the target firm to the acquiring firm So, the equity cost will be: Equity cost = 0.44($151,700,000 + $144,111,111) = $130,156,899 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate EOC #: 26-7 Learning Objective: 26-3 Section: 26.6 Topic: Cash versus stock payment 26-80 Chapter 26 - Mergers and Acquisitions 89 The shareholders of Jolie Company have voted in favor of a buyout offer from Pitt Corporation Information about each firm is given here: Jolie's shareholders will receive one share of Pitt stock for every three shares they hold in Jolie Assume the NPV of the acquisition is zero What will the post-merger PE ratio be for Pitt? A 8.4 B 9.2 C 9.8 D 10.5 E 11.2 The EPS of the combined company will be the sum of the earnings of both companies divided by the number of shares in the combined company Since the stock offer is one share of the acquiring firm for three shares of the target firm, net shares in the acquiring firm will increase by one-third of the target firm's current shares So, the new EPS will be: EPS = ($210,000 + $630,000)/[124,000 + (1/3)(62,000)] = $5.81 The market price of Pitt will remain unchanged if it is a zero NPV acquisition Using the PE ratio, we find the current market price of Pitt stock, which is: P = 12($630,000)/124,000 = $60.967742 If the acquisition has a zero NPV, the stock price should remain unchanged Therefore, the new PE will be: PE = $60.967742/$5.81 = 10.5 AACSB: Analytic Bloom's: Analysis Difficulty: Basic EOC #: 26-8 Learning Objective: 26-3 Section: 26.5 Topic: Merger PE 26-81 Chapter 26 - Mergers and Acquisitions 90 Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T) Assume that neither firm has any debt outstanding Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $2,600 What is the NPV of the merger assuming that Firm T is willing to be acquired for $28 per share in cash? A $400 B $600 C $1,800 D $2,200 E $2,600 The NPV of the merger is the market value of the target firm, plus the value of the synergy, minus the acquisition costs, so: NPV = 1,100 ($26) + $2,600 - 1,100($28) = $400 AACSB: Analytic Bloom's: Analysis Difficulty: Basic EOC #: 26-9 Learning Objective: 26-3 Section: 26.6 Topic: Merger NPV 26-82 Chapter 26 - Mergers and Acquisitions 91 Consider the following premerger information about Firm A and Firm B: Assume that Firm A acquires Firm B via an exchange of stock at a price of $25 for each share of B's stock Both A and B have no debt outstanding What will the earnings per share of Firm A be after the merger? A $1.60 B $1.86 C $1.95 D $2.02 E $2.10 Cost of acquisition = 210 ($25) = $5,250 Since the stock price of the acquiring firm is $40, the firm will have to give up: Shares offered = $5,250/$40 = 131.25 shares The EPS of the merged firm will be the combined earnings of the existing firms divided by the new shares outstanding, so: EPS = ($930 + $650)/(620 + 131.25) = $2.10 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate EOC #: 26-11 Learning Objective: 26-3 Section: 26.5 Topic: Post-merger EPS 26-83 ... Which one of the following terms is best illustrated by this situation? A tender offer B proxy contest C going-private transaction D leveraged buyout E consolidation A group of individual investors... publicly traded Which of the following terms applies to this process? A tender offer B proxy contest C going-private transaction D leveraged buyout E consolidation The current president and vice-presidents... Mountain Top Consulting The purchase of this firm is referred to as a: A conglomeration B proxy contest C merger D leveraged buyout E consolidation 26-2 Chapter 26 - Mergers and Acquisitions Johnson