EProblem 31-9 Merger gains and costs Velcro Saddles is contemplating the acquisition of Skiers' Airbags Inc. The values of the two companies as separate entities are $42 million and $19 million, respectively. Velcro Saddles estimates that by combining the two companies, it will reduce marketing and administrative costs by $435,000 per year in perpetuity. Velcro Saddles can either pay $23 million cash for Skiers' or offer Skiers' a 44% holding in Velcro Saddles. The opportunity cost of capital is 10%. ERequired: a. What is the gain from merger? (Enter your answer in millions rounded to 2 decimal places.) b. What is the cost of the cash offer? (Enter your answer in millions.) E c. What is the cost of the stock alternative? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) d. What is the NPV of the acquisition under the cash offer? (Enter your answer in millions rounded to 2 decimal places.) e. What is its NPV under the stock offer? (Do not round intermediate calculations. A negative answer should be indicated by a minus sign. Enter your answer in millions rounded to 2 decimal places.) a. Merger gain million b. Cost of cash offer million c. Cost of stock offer million d. NPV of cash offer million e. NPV of stock offer million Problem 31-8 Merger motives World Enterprises is determined to report earnings per share of $2.77. It therefore acquires the Wheelrim and Axle Company. You are given the following facts: World Wheelrim Enterprises $4 2$ Merged Firm $2.77 and Axle Earnings per share Price per share Price-earnings ratio Number of shares 2.25 2$ 2.25 45.00 22.50 20 10 150,000 $ 337,500 $6,750,000 150,000 $ 337,500 $3,375,000 Total earnings Total market value There are no gains from merging. In exchange for Wheelrim and Axle shares, World Enterprises issues just enough of its own shares to ensure its $2.77 earnings per share objective. Required: a. Complete the below table for the merged firm. b. How many shares of World Enterprises are exchanged for each share of Wheelrim and Axle? c. What is the cost of the merger to World Enterprises? d. What is the change in the total market value of the World Enterprises shares that were outstanding before the merger?
EProblem 31-9 Merger gains and costs Velcro Saddles is contemplating the acquisition of Skiers' Airbags Inc. The values of the two companies as separate entities are $42 million and $19 million, respectively. Velcro Saddles estimates that by combining the two companies, it will reduce marketing and administrative costs by $435,000 per year in perpetuity. Velcro Saddles can either pay $23 million cash for Skiers' or offer Skiers' a 44% holding in Velcro Saddles. The opportunity cost of capital is 10%. ERequired: a. What is the gain from merger? (Enter your answer in millions rounded to 2 decimal places.) b. What is the cost of the cash offer? (Enter your answer in millions.) E c. What is the cost of the stock alternative? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) d. What is the NPV of the acquisition under the cash offer? (Enter your answer in millions rounded to 2 decimal places.) e. What is its NPV under the stock offer? (Do not round intermediate calculations. A negative answer should be indicated by a minus sign. Enter your answer in millions rounded to 2 decimal places.) a. Merger gain million b. Cost of cash offer million c. Cost of stock offer million d. NPV of cash offer million e. NPV of stock offer million Problem 31-8 Merger motives World Enterprises is determined to report earnings per share of $2.77. It therefore acquires the Wheelrim and Axle Company. You are given the following facts: World Wheelrim Enterprises $4 2$ Merged Firm $2.77 and Axle Earnings per share Price per share Price-earnings ratio Number of shares 2.25 2$ 2.25 45.00 22.50 20 10 150,000 $ 337,500 $6,750,000 150,000 $ 337,500 $3,375,000 Total earnings Total market value There are no gains from merging. In exchange for Wheelrim and Axle shares, World Enterprises issues just enough of its own shares to ensure its $2.77 earnings per share objective. Required: a. Complete the below table for the merged firm. b. How many shares of World Enterprises are exchanged for each share of Wheelrim and Axle? c. What is the cost of the merger to World Enterprises? d. What is the change in the total market value of the World Enterprises shares that were outstanding before the merger?
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
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:EProblem 31-9 Merger gains and costs
Velcro Saddles is contemplating the acquisition of Skiers' Airbags Inc. The values of the two companies as separate entities
are $42 million and $19 million, respectively. Velcro Saddles estimates that by combining the two companies, it will reduce
marketing and administrative costs by $435,000 per year in perpetuity. Velcro Saddles can either pay $23 million cash for
Skiers' or offer Skiers' a 44% holding in Velcro Saddles. The opportunity cost of capital is 10%.
ERequired:
a. What is the gain from merger? (Enter your answer in millions rounded to 2 decimal places.)
b. What is the cost of the cash offer? (Enter your answer in millions.)
E c. What is the cost of the stock alternative? (Do not round intermediate calculations. Enter your answer in millions rounded
to 2 decimal places.)
d. What is the NPV of the acquisition under the cash offer? (Enter your answer in millions rounded to 2 decimal places.)
e. What is its NPV under the stock offer? (Do not round intermediate calculations. A negative answer should be indicated by
a minus sign. Enter your answer in millions rounded to 2 decimal places.)
a. Merger gain
million
b. Cost of cash offer
million
c. Cost of stock offer
million
d. NPV of cash offer
million
e. NPV of stock offer
million
Transcribed Image Text:Problem 31-8 Merger motives
World Enterprises is determined to report earnings per share of $2.77. It therefore acquires the Wheelrim and Axle Company.
You are given the following facts:
World
Wheelrim
Enterprises
$4
2$
Merged Firm
$2.77
and Axle
Earnings per share
Price per share
Price-earnings ratio
Number of shares
2.25
2$
2.25
45.00
22.50
20
10
150,000
$ 337,500
$6,750,000
150,000
$ 337,500
$3,375,000
Total earnings
Total market value
There are no gains from merging. In exchange for Wheelrim and Axle shares, World Enterprises issues just enough of its own
shares to ensure its $2.77 earnings per share objective.
Required:
a. Complete the below table for the merged firm.
b. How many shares of World Enterprises are exchanged for each share of Wheelrim and Axle?
c. What is the cost of the merger to World Enterprises?
d. What is the change in the total market value of the World Enterprises shares that were outstanding before the merger?
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