Company A is considering the acquisition of Company B, and intends to finance this potential acquisition using only retained cash. Consider the information in Table 2 about Companies A and B, expected synergies from the acquisition and price asked by Company B's shareholders to sell their company. Table 2 A B Current market value (€) Number of shares Expected synergies from 700 420 100 40 acquisition (€) 80 Value asked by Company B's shareholders (€ ) 560 To answer the following questions make plausible assumptions if necessary. a. What is the expected combined value after acquisition? Explain your answer. b. Should A acquire B by €560? Explain your answer. c. Consider the scenario where Company A decides to finance the acquisition with equity instead of cash. What would be the optimal exchange ratio of Company A v ersus Company B shares? Explain your answer.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Company A is considering the acquisition of Company B, and intends to finance this
potential acquisition using only retained cash.
Consider the information in Table 2 about Companies A and B, expected synergies from
the acquisition and price asked by Company B's shareholders to sell their company.
Table 2
A
Current market value (€)
700
420
Number of shares
100
40
Expected synergies from
acquisition (€)
80
Value asked by Company
B's shareholders (€ )
560
To answer the following questions make plausible assumptions if necessary.
a. What is the expected combined value after acquisition? Explain your answer.
b. Should A acquire B by €560? Explain your answer.
c. Consider the scenario where Company A decides to finance the acquisition with
equity instead of cash. What would be the optimal exchange ratio of Company Av
ersus Company B shares? Explain your answer.
Transcribed Image Text:Company A is considering the acquisition of Company B, and intends to finance this potential acquisition using only retained cash. Consider the information in Table 2 about Companies A and B, expected synergies from the acquisition and price asked by Company B's shareholders to sell their company. Table 2 A Current market value (€) 700 420 Number of shares 100 40 Expected synergies from acquisition (€) 80 Value asked by Company B's shareholders (€ ) 560 To answer the following questions make plausible assumptions if necessary. a. What is the expected combined value after acquisition? Explain your answer. b. Should A acquire B by €560? Explain your answer. c. Consider the scenario where Company A decides to finance the acquisition with equity instead of cash. What would be the optimal exchange ratio of Company Av ersus Company B shares? Explain your answer.
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