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What are the factors that determine whether the company should use cash acquisition or stock acquisition?

What are the factors that determine whether the company should use cash acquisition or stock acquisition?

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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  1. What are the factors that determine whether the company should use cash acquisition or stock acquisition? 
  2. Discuss five different defensive tactics that the target company can use to thwart this takeover attempt. 

3) What are the possible cash flow benefits from this acquisition?   

Statement of Comprehensive Income (in $000) Sales Cost of goods sold Operating expenses EBDIT Depreciation EBIT Interest expense Taxable income Taxes Net income Cash Inventory Accounts receivable 167 Current assets 475 Most Recent Statement of Financial Position ($000) $200 Accounts payable 108 Notes payable Net fixed assets Total assets $2,000 1,300 Current liabilities 160 540 40 500 297 203 81 $ 122 Long-term debt 975 2000 Equity 5,000 7,500 $7,975 Total liabilities & equity $7,975 $ 500 475 Mr. Rich estimates that the synergistic benefits from this acquisition will be $300,000 per year for the foreseeable future. His analysis also indicates that Genie can acquire Aladdin by paying $7.75 million in cash, or by swapping one Genie share for three Aladdin shares. Before Mr. Rich can take his recommendation to Genie's Board of Directors, he needs answers to the following questions:
Transcribed Image Text:Statement of Comprehensive Income (in $000) Sales Cost of goods sold Operating expenses EBDIT Depreciation EBIT Interest expense Taxable income Taxes Net income Cash Inventory Accounts receivable 167 Current assets 475 Most Recent Statement of Financial Position ($000) $200 Accounts payable 108 Notes payable Net fixed assets Total assets $2,000 1,300 Current liabilities 160 540 40 500 297 203 81 $ 122 Long-term debt 975 2000 Equity 5,000 7,500 $7,975 Total liabilities & equity $7,975 $ 500 475 Mr. Rich estimates that the synergistic benefits from this acquisition will be $300,000 per year for the foreseeable future. His analysis also indicates that Genie can acquire Aladdin by paying $7.75 million in cash, or by swapping one Genie share for three Aladdin shares. Before Mr. Rich can take his recommendation to Genie's Board of Directors, he needs answers to the following questions:
Case 3: Mergers & Acquisitions Genie Inc. is a manufacturer of kitchen appliances. After having been in business for 56 years, the firm is currently experiencing stable growth of 2 to 3% per year. Many industry experts consider Genie Inc. as a mature company. Genie's current share price is $20, with 2,500,000 shares outstanding; weighted cost of capital (WACC) is 15%. The company's most recent financial statements are shown below: Statement of Comprehensive Income (in $000) Sales Cost of goods sold Operating expenses EBDIT Depreciation EBIT Interest expense Taxable income Taxes (40%) Net income Statement of Financial Position (in $000) Cash Inventory Accounts receivable Current assets Net fixed assets Total assets $10,000 7,000 1,000 2,000 200 1,800 1,342 458 183 $275 $ 8000 Accounts payable 583 Notes payable 833 9,417 Long-term debt Current liabilities 20,000 Equity $29,417 Total liabilities & equity $ 1,000 3,417 4,417 10,000 15,000 $29,417 Genie has accumulated cash reserves of $8 million, and its CEO, Mr. Lionel Rich, believes that it is a good time to think about boosting Genie's sales growth by acquiring another company that is younger, with better growth opportunities. Mr. Rich has narrowed down the choice to one potential target: Aladdin Corporation. Aladdin is a relatively young company; it has only been in business for five years. Its main products are a line of extremely popular espresso machines. Its shares are selling at $7.50 per share. It has 1,000,000 shares outstanding, and a WACC of 18%. Aladdin's financial statements are shown below:
Transcribed Image Text:Case 3: Mergers & Acquisitions Genie Inc. is a manufacturer of kitchen appliances. After having been in business for 56 years, the firm is currently experiencing stable growth of 2 to 3% per year. Many industry experts consider Genie Inc. as a mature company. Genie's current share price is $20, with 2,500,000 shares outstanding; weighted cost of capital (WACC) is 15%. The company's most recent financial statements are shown below: Statement of Comprehensive Income (in $000) Sales Cost of goods sold Operating expenses EBDIT Depreciation EBIT Interest expense Taxable income Taxes (40%) Net income Statement of Financial Position (in $000) Cash Inventory Accounts receivable Current assets Net fixed assets Total assets $10,000 7,000 1,000 2,000 200 1,800 1,342 458 183 $275 $ 8000 Accounts payable 583 Notes payable 833 9,417 Long-term debt Current liabilities 20,000 Equity $29,417 Total liabilities & equity $ 1,000 3,417 4,417 10,000 15,000 $29,417 Genie has accumulated cash reserves of $8 million, and its CEO, Mr. Lionel Rich, believes that it is a good time to think about boosting Genie's sales growth by acquiring another company that is younger, with better growth opportunities. Mr. Rich has narrowed down the choice to one potential target: Aladdin Corporation. Aladdin is a relatively young company; it has only been in business for five years. Its main products are a line of extremely popular espresso machines. Its shares are selling at $7.50 per share. It has 1,000,000 shares outstanding, and a WACC of 18%. Aladdin's financial statements are shown below:
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