Question

A Corporation has been in merger talks with B Company. After the merger, B will become a division of A. Jack, the financial officer at A, has been instrumental in the negotiations. Both companies believe a merger will result in significant synergies due to economies of scale in manufacturing and marketing, as well as savings in general and administrative expenses. Stocks in A currently sell for $94 per share, and the company has 11 million shares of stock outstanding. The management of A feels that the capital structure at B is not optimal. If the merger takes place, B will immediately increase its leverage and make its debt-equity ratio to be 1. Taking synergy value into account, Jack estimates that the total firm value (debt and equity) of B right after merger would be $811.2 million, and B has 5.2 million shares of stock outstanding.

a. Suppose the shareholders of B agree to a cash offer of $58 per share. What is A’s market value of equity after merger?

b. Suppose A chooses to pay stocks for the merger. A Corporation issues and offers one of its shares for every two of B’s shares. What is the NPV of this stock merger?

Answer #1

Firm A is considering a merger/acquisition with Firm B. Based on
the following data, what is the stock exchange ratio if Firm A
negotiates a merger with Firm B and if all the synergy gain goes to
Firm A's shareholders?
Firm A:
Market value of debt: $4 million
Market value of equity: $6 million
Number of shares: 0.5 million
Estimated total firm value based on value-based management model
if the merger takes place: 12 million
Firm B:
Market value of...

Merger Bid Hastings Corporation is interested in acquiring
Vandell Corporation. Vandell has 1 million shares outstanding and a
target capital structure consisting of 30% debt; its beta is 1.30
(given its target capital structure). Vandell has $10.64 million in
debt that trades at par and pays an 7% interest rate. Vandell’s
free cash flow (FCF0) is $2 million per year and is expected to
grow at a constant rate of 6% a year. Both Vandell and Hastings pay
a 30%...

Problem 22-03
Merger Bid
Hastings Corporation is interested in acquiring Vandell
Corporation. Vandell has 1 million shares outstanding and a target
capital structure consisting of 30% debt; its beta is 1.10 (given
its target capital structure). Vandell has $9.86 million in debt
that trades at par and pays an 8% interest rate. Vandell’s free
cash flow (FCF0) is $2 million per year and is expected
to grow at a constant rate of 5% a year. Both Vandell and Hastings
pay...

MV Corporation has debt with market value of $ 100 million,
common equity with a book value of $ 104 million, and preferred
stock worth $ 22 million outstanding. Its common equity trades at $
53 per share, and the firm has 5.9 million shares outstanding.
What weights should MV Corporation use in its WACC? The debt
weight for the WACC calculation is nothing%. (Round to two
decimal places.

MV Corporation has debt with market value of $ 100 million,
common equity with a book value of $ 98 million, and preferred
stock worth $ 20 million outstanding. Its common equity trades at $
45 per share, and the firm has 5.9 million shares outstanding.
What weights should MV Corporation use in its WACC? The debt
weight for the WACC calculation is nothing%. (Round to two
decimal places.)

Consider the following pre-merger 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 8,700
3,600 Price per Share $47 $19 Firm B has estimated that the value
of the synergistic benefits from acquiring Firm T is $16,700.
Suppose Firm B agrees to a merger by an exchange of stock. If B
offers one of its shares for every 2 of T's shares....

Your company has earnings per share of
$5.
It has
1
million shares outstanding, each of which has a price of
$39.
You are thinking of buying TargetCo, which has earnings of
$2
per share,
1
million shares outstanding, and a price per share of
$21.
You will pay for TargetCo by issuing new shares. There are no
expected synergies from the transaction. Suppose you offered an
exchange ratio such that, at current pre-announcement share
prices for both firms, the...

MV Corporation has debt with market value of $ 103 ?million,
common equity with a book value of $ 105 ?million, and preferred
stock worth $ 18 million outstanding. Its common equity trades at $
46 per? share, and the firm has 5.5 million shares outstanding.
What weights should MV Corporation use in its? WACC?
The debt weight for the WACC calculation is ?%. ?(Round to two
decimal? places.)
The preferred stock weight for the WACC calculation is %. (Round...

Bidding firm (Firm B) has 5679 shares outstanding that are
currently selling at $47 per share. Target firm (Firm T) has 1691
shares outstanding that are currently selling at $16 per share.
Assume that both firms have no debt outstanding. Firm B has
estimated that the value of the synergistic benefits from acquiring
Firm T is $8327. Suppose Firm T is agreeable to a merger by an
exchange of stock. If B offers three of its shares for every five...

Problem 22-01
Valuation of Merger Target
Hastings Corporation is interested in acquiring Vandell
Corporation. Vandell has 1 million shares outstanding and a target
capital structure consisting of 30% debt; its beta is 1.45 (given
its target capital structure). Vandell has $10.04 million in debt
that trades at par and pays an 7.7% interest rate. Vandell’s free
cash flow (FCF0) is $1 million per year and is expected to grow at
a constant rate of 6% a year. Vandell pays a...

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