6.4 Assignment: Problems for Chapter 26

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Home>Business & Finance homework help>Operations Management homework help>6.4 Assignment: Problems for Chapter 26

Chap 26 #1

Chapter 26 - Dropbox 6.4
Problem 1: Balance Sheets for Mergers
Silver Enterprises has acquired All Gold Mining in a merger transaction. The following Balance Sheets represent the pre-merger book values for both firms:
Silver Enterprises
Current assets $ 5,300 Current liabilities $ 3,100
Other assets $ 1,500 Long-term debt $ 7,800
Net fixed assets $ 17,900 Equity $ 13,800
Total $ 24,700 $ 24,700
All Gold Mining
Current assets $ 1,400 Current liabilities $ 1,460
Other assets $ 570 Long-term debt $ - 0
Net fixed assets $ 7,400 Equity $ 7,910
Total $ 9,370 $ 9,370
The market value of All Gold Mining's fixed assets is $9,100; the market value for current and other assets are the same as the book values. Assume that Silver Enterprises issues $15,000 in new long-term debt to finance the acquisition.
Construct the balance sheet for the new corporation if the merger is treated as a purchase of interests for accounting purposes.
Use the Template Provided Below to Create Your Solution - Pay close attention to the formulas and formatting of the inputs.
Input Area:
Silver Enterprises
Current assets Current liabilities
Other assets Long-term debt
Net fixed assets Equity
Total $ - 0 $ - 0
All Gold Mining
Current assets Current liabilities
Other assets Long-term debt
Net fixed assets Equity
Total $ - 0 $ - 0
Market value of fixed assets
New long-term debt
Output Area:
.
Silver Enterprises - Post Merger
Current assets $ - 0 Current liabilities $ - 0
Other assets - Long-term debt -
Net fixed assets - Equity -
Goodwill -
Total $ - 0 $ - 0
This is the Student Template, provided in the course materials by D. Kendall April 2020

Chap 26 #2

Chapter 26 - Dropbox 6.4
Problem 2: Cash versus Stock Payment
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 flow by $1.9 million indefinitely. The current market value of Teller is $41 million, and that of Penn is $79 million. The appropriate discount rate for the incremental cash flows is 10 percent. Penn is trying to decide whether it should offer 40 percent on its stock of $57 million in cash to Teller's stockholders.
a) What is the cost of each alternative? b) What is the NPV of each alternative? c) Which alternative should Penn choose?
Use the Template Provided Below to Create Your Solution - Pay close attention to the formulas and formatting of the inputs.
Input Area:
After-tax annual cash flow
Teller market value
Penn market value
Discount rate
Stock offer
Cash offer
Output Area:
.
a. V*k ERROR:#DIV/0!
Cash cost $ - 0
Equity cost ERROR:#DIV/0!
b. NPV cash ERROR:#DIV/0!
NPV stock ERROR:#DIV/0!
c. ERROR:#DIV/0!
This is the Student Template, provided in the course materials by D. Kendall April 2020

Chap 26 #3

Chapter 26 - Dropbox 6.4
Problem 3: Calculating Synergy
Three Guys Burgers, Inc., has offered $19 million for all of the common stock in Two Guys Fries, Corp. The current market capitalization of Two Guys as an independent company is $15 million. Assume the required return of the acquisition is 9 percent and the synergy from the acquisition is a perpetuity.
What is the minimum annual synergy that Three Guys apparently feels it will gain from the acquisition?
Create your Original Solution Below - Be sure to show all calculations and clearly indicate answers.
This is the Student Template, provided in the course materials by D. Kendall April 2020

Chap 26 #4

Chapter 26 - Dropbox 6.4
Problem 4: Effects of a Stock Exchange
Consider the following pre-merger information about Firm A and Firm B:
Firm A Firm B
Total earnings $ 3,150 $ 1,000
Shares outstanding $ 1,500 $ 300
Price per share $ 43 $ 47
Assume that Firm A acquires Firm B via an exchange of stock at a price of $49 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 be the price-earnings ratio of the postmerger firm if the market correctly analyzes the transaction (the market price adjusts to reflect the new price-earnings ratio)? 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? e) What does this tell you about the amount A bid for B? Was it too high or too low? Explain.
Use the Template Provided Below to Create Your Solution - Pay close attention to the formulas and formatting of the inputs.
Input Area:
Firm A Firm B
Total earnings
Shares outstanding
Price per share
Acquisition price
Output Area:
.
Cost $ - 0
Shares given up by A ERROR:#DIV/0!
a. EPS ERROR:#DIV/0!
b. Old P/E ERROR:#DIV/0!
New price ERROR:#DIV/0!
c. P/E ERROR:#DIV/0!
d. Price ERROR:#DIV/0!
P/E ERROR:#DIV/0!
e. At the current acquisition price, this is a
ERROR:#DIV/0! acquisition.
With no real synergy, this was a bad deal.
This is the Student Template, provided in the course materials by D. Kendall April 2020