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PA3spring2025AP1studentversion.docx

PA3, M&A, Spring 2025 AP1

This practical application is worth 30 points and is due by Sunday at midnight, at the end of Week 6.

For each of these problems, you will find a similar problem worked and explained, in the practice problems for M&A.

For full credit, you need to show the inputs and equations used. Zero credit if no work is shown.

1. What are four possible sources of synergy related to an acquisition or merger? (1 point each, for a max of 4 points)

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2. Liquor Depot is considering acquiring Wines R Us in an all-cash deal. Liquor Depot has 325,000 shares outstanding at $78.90 per share and Wines R Us, a private company, has expected annual cash flows of $1,050,000 per year (forever). Both firms have a(n) 8.4% cost of capital. Liquor Depot anticipates that with their marketing & sales expertise, they could increase Wines R Us annual cash flows by 2.5% annually if the firms combine. Show as total dollar figure, rounded to the nearest dollar.

a) What is the current market value of the target? (3 pts)

b) What is the total incremental value (synergy) of the merger to the acquirer (Hint: this is the PV of the increase in annual cash flows related to the merger) (3 pts)

c) What maximum cash price should the acquirer offer for the target? (3 pts)

3. Handy Mart is being acquired by Spiffy Rental for $3,250,000 worth of Spiffy Rental stock. Handy Mart has 85,000 shares of stock outstanding for $37.80 a share. Spiffy Rental has 435,000 shares outstanding with a market value of $23.65 a share. The incremental value of the acquisition is estimated to be $132,000. Hint, look at practice problem (M&A) #10.

a) How many new shares of the acquirer's stock will be issued to pay for the target? (4 pts)

b) How many shares will the acquirer have after the merger? Rounding to the nearest whole share is fine. (2 pts)

4. Before a potential merger, First Line Books had 14,500 shares outstanding at a market price per share of $38.60. Specialty Thrillers has 6,500 shares outstanding at $32.10 per share. Assume First Line Books has estimated the value of the synergistic benefits from acquiring Specialty Thrillers to be $8,500. Neither firm has outstanding debt. First Line Books has offered $33 per share to the target. Based on this information, answer each of the following: Hint, see practice problem #15

a) What is the value of the target firm to the acquirer (current market value + synergy)? (3 pts, show answer to the nearest dollar)

b) What is the NPV of the proposed acquisition? (to the nearest dollar) (4 pts)

c) If the deal goes through, what is the price per share of the merged firm? (show as $xx.xx per share) (4 pts)

PracticalApplication3.docx

Practical Application 3

Application of M&A Analysis Techniques

Download the attached MS Word file. I suggest you make a copy of the file and use a file name that has your Last Name and PA3 or similar. It is each student's responsibility to verify that all files have been submitted successfully AND that all files are included. There are 5 POINT penalties for incomplete or incorrect submissions. You will have a max of 24 hours after you are notified of the incorrect file to get back to your academic coach and update your submission. Questions on the assignment? Email your academic coach or instructor. Each term a couple of students submit the original file instead of the one with their solutions. They have lost points for late submissions because the correct files aren't submitted on time. Double-check that you are submitting the correct file.