The fair market value of James’ fixed assets is equal to the book value

Accounting : Chapter 29

Question 3). 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 $15,000 for James and raises the needed funds through an issue of long-term debt. Construct a post-merger balance sheet assuming that Jurion Co. purchases James, Inc., and the purchase method of accounting is used.

Jurion Co.

Current assets                   $18,000                                 Current liabilities              $  5,100

Net fixed assets                               33,000                                                   Long-term debt                                9,300

                                                                                                                  Equity                                 36,600

 Total                                     $51,000                                 Total                                     $51,000

James, Inc.

Current assets                   $3,500                                                   Current liabilities              $2,100

Net fixed assets                               8,900                                                     Long-term debt                                1,400

                                                                                                                 Equity                                  8,900

 Total                                 $12,400                                                     Total                                      $12,400

Question 5).

Silver Enterprises has acquired All Gold Mining in a merger transaction. Construct the balance sheet for the new corporation if the merger is treated as a purchase for accounting purposes. The market value of All Gold Mining’s fixed assets is $5,800; the market values for current and other assets are the same as the book values. Assume that Silver Enterprises issues $13,800 in new long-term debt to finance the acquisition. The following balance sheets represent the premerger book values for both firms:

Silver Enterprises

Current assets                   $  8,600                                                 Current liabilities              $  5,200

Other assets                      1,800                                                     Long-term debt                                3,700

Net fixed assets                               15,800                                                   Equity                                   17,300

 Total                                     $26,200                                 Total                                     $26,200

All Gold Mining

Current assets                   $2,500                                                   Current liabilities              $ 2,300

Other assets                      850                                                         Long-term debt                                     0

Net fixed assets                              5,800                                                     Equity                                   6,850

 Total                                     $9,150                                                   Total                                     $ 9,150

 Question 7).

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 $1.1 million indefinitely. The current market value of Teller is $45 million, and that of Penn is $62 million. The appropriate discount rate for the incremental cash flows is 12 percent. Penn is trying to decide whether it should offer 40 percent of its stock or $48 million in cash to Teller’s shareholders.

  a.  What is the cost of each alternative?

  b.  What is the NPV of each alternative?

  c.  Which alternative should Penn choose?

Question 10).

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                                                         4,800                                                     1,200

Price per share                                                                  $36                                                         $24

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 $30 per share in cash, what is the NPV of

the merger?

 b.  What will the price per share of the merged firm be assuming the conditions in (a)?

 c.  In part (a), what is the merger premium?

 d.  Suppose Firm  T is agreeable to a merger by an exchange of stock.   If  B offers

four of its shares for every five of  T ’s shares, what will the price per share of the

merged firm be?

 e.  What is the NPV of the merger assuming the conditions in (d)?

Question 12).

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 $18 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?

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)? 

 c.  What will the price–earnings ratio of the post-merger firm be if the market correctly analyzes the transaction?

 d.  If there are no synergy gains, what will the share price of  A be after the merger?

What will the price–earnings ratio be? What does your answer for the share price

tell you about the amount  A bid for  B ? Was it too high? Too low? Explain.

Please attach all the answers in the excel file that I am providing along with the question.