Fundamentals of Corporate Finance
Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
Question
Book Icon
Chapter 26, Problem 8QP

a)

Summary Introduction

To compute: The NPV (Net Present Value) of the merger

Introduction:

A merger is the total absorption of one company by another, where the firm that is acquiring retains its uniqueness and it terminates the other to exist as an individual entity.

a)

Expert Solution
Check Mark

Answer to Problem 8QP

The NPV of the merger is $5,200.

Explanation of Solution

Given information: Pre-merger details about Firm B, the bidding firm and Firm T, the targeted firm provides the following information:

  • The outstanding shares of Firm B and Firm T are $5,400 and $1,400 respectively.
  • The prices for one share of Firm B and Firm T are $47 and $18 respectively.

The synergistic value benefits of Firm T from acquiring Firm B is $9,400.

Formula to calculate the NPV:

NPV cash=Value of the target firm+Synergy valueCost of acquistion

Calculate the NPV if the price per share for acquisition is $21:

NPV=(Value of the target firm(Price per share)+Synergy valueCost of acquistion(Acquisition price per share))=$1,400($18)+$9,400$1,400($21)=$5,200

Hence, the NPV is $5,200.

b)

Summary Introduction

To calculate: The price per share

Introduction:

A merger is the total absorption of one company by another, where the firm that is acquiring retains its uniqueness and it terminates the other to exist as an individual entity.

b)

Expert Solution
Check Mark

Answer to Problem 8QP

The price per share is $47.96.

Explanation of Solution

Given information: Pre-merger details about Firm B, the bidding firm and Firm T, the targeted firm provides the following information:

  • The outstanding shares of Firm B and Firm T are $5,400 and $1,400 respectively.
  • The prices for one share of Firm B and Firm T are $47 and $18 respectively.

The synergistic value benefits of Firm T from acquiring Firm B is $9,400.

Formula to calculate the share price:

Share price=[Market value of the merger company(Price per share for Firm B)+NPV of the acquisition]Number of oustanding shares

Calculate the share price:

Share price=[Market value of the merger company(Price per share for Firm B)+NPV of the acquisition]Number of oustanding shares=[$5,400($47)+$5,200]$5,400=$47.96

Hence, the share price $47.96.

c)

Summary Introduction

To calculate: The merger premium.

Introduction:

A merger is the total absorption of one company by another, where the firm that is acquiring retains its uniqueness and it terminates the other to exist as an individual entity.

c)

Expert Solution
Check Mark

Answer to Problem 8QP

The merger premium is $4,200.

Explanation of Solution

Given information: Pre-merger details about Firm B, the bidding firm and Firm T, the targeted firm provides the following information:

  • The outstanding shares of Firm B and Firm T are $5,400 and $1,400 respectively.
  • The prices for one share of Firm B and Firm T are $47 and $18 respectively.

The synergistic value benefits of Firm T from acquiring Firm B is $9,400.

Formula to calculate the merger premium:

Merger premium=[Outstanding shares of Target firm(Cost per share for the target firmPrice per share for the target firm)]

Calculate the merger premium:

Merger premium=[Outstanding shares of Target firm(Cost per share for the target firmPrice per share for the target firm)]=$1,400($21$18)=$4,200

Hence, the merger premium is $4,200

d)

Summary Introduction

To calculate: The price per share if the merger takes place through the exchange of stock and if the bidding firm offers one share for each of the two target firm’s shares.

Introduction:

A merger is the total absorption of one company by another, where the firm that is acquiring retains its uniqueness and it terminates the other to exist as an individual entity.

d)

Expert Solution
Check Mark

Answer to Problem 8QP

The price for one share in the merged firm is $47.28.

Explanation of Solution

Given information: Pre-merger details about Firm B, the bidding firm and Firm T, the targeted firm provides the following information:

  • The outstanding shares of Firm B and Firm T are $5,400 and $1,400 respectively.
  • The prices for one share of Firm B and Firm T are $47 and $18 respectively.

The synergistic value benefits of Firm T from acquiring Firm B is $9,400.

Formula to calculate the new shares:

New shares created=(Number of shares of the target firm×Exchange ratio)

Calculate the new shares:

New shares created=(Number of shares of the target firm×Exchange ratio)=$1,400×12=$700

Hence, the created new shares is $700.

Formula to calculate the value of the merged firm:

Value of the merged firm=[Outstanding shares of the bidding firm(Price per share of bidding firm)+Outstanding shares of the target firm(Price per share of target firm)+Synergistic benefits]

Calculate the value of the merged firm:

Value of the merged firm=[Outstanding shares of the bidding firm(Price per share of bidding firm)+Outstanding shares of the target firm(Price per share of target firm)+Synergistic benefits]=$5,400($47)+$1,400($18)+$9,400=$2,88,400

Hence, the value of the merged firm is $288,400.

Formula to calculate the price for one share for a merged firm:

Price per share=Value of the merged firmTotal shares of new firm

Calculate the price for one share for a merged firm:

Price per share=Value of the merged firmTotal shares of new firm=$288,400$5,400+$700=$47.28

Hence, the price for one share is $47.28.

e)

Summary Introduction

To calculate: The NPV of the merger if the merger takes place through the exchange of stocks and if the bidding firm offers one share for each of the two target firms’ shares

Introduction:

A merger is the total absorption of one company by another, where the firm that is acquiring retains its uniqueness and it terminates the other to exist as an individual entity.

e)

Expert Solution
Check Mark

Answer to Problem 8QP

The NPV of the merger is $1,504.92.

Explanation of Solution

Given information:

Pre-merger details about Firm B, the bidding firm and Firm T, the targeted firm provides the following information:

  • The outstanding shares of Firm B and Firm T are $5,400 and $1,400 respectively.
  • The prices for one share of Firm B and Firm T are $47 and $18 respectively.

The synergistic value benefits of Firm T from acquiring Firm B is $9,400.

Formula to calculate the NPV:

NPV=[Outstanding shares of the target firm(Price per share of target firm)+Synergistic benefitsCost of acquisition (Price per share for the merged firm)]

Calculate the NPV:

NPV=[Outstanding shares of the target firm(Price per share of target firm)+Synergistic benefitsCost of acquisition (Price per share for the merged firm)]=$1,400($18)+$9,400$700($47.2786885245901)=$1,504.92

Hence, the NPV is $1,504.92.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
Define the following:   Callable bond Puttable bond Zero-coupon bond Premium bond Discount bond Crossover bonds   Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of EUR 1,000, 15 years to maturity, a coupon rate of 7.2%. If the yield to maturity is 6.3%, what is the current price of the bond?   Rhiannon Corporation has bonds on the market with 13 years to maturity, a YTM of 7.6%, a par value of $1,000, a current market price of $1,075. The bonds make semiannual payments.   What must the coupon rate be on these bonds? What would be coupon rate if the current market price is $962.68? What would be the coupon rate if the bonds make quarterly payments?   Suppose that a bond has a face value of $1,000 and a YTM of 8% per annum. If the bond pays monthly coupons with an annual coupon rate of 9.6%, what will be the current price of…
Wildcat, Incorporated, has estimated sales (in millions) for the next four quarters as follows: Q1 Q2 Q3 Sales $ 195 $ 215 $ 235 Q4 $ 265 Sales for the first quarter of the following year are projected at $210 million. Accounts receivable at the beginning of the year were $83 million. Wildcat has a 45-day collection period. Wildcat's purchases from suppliers in a quarter are equal to 50 percent of the next quarter's forecast sales, and suppliers are normally paid in 36 days. Wages, taxes, and other expenses run about 20 percent of sales. Interest and dividends are $18 million per quarter. Wildcat plans a major capital outlay in the second quarter of $98 million. Finally, the company started the year with a $84 million cash balance and wishes to maintain a $40 million minimum balance. a-1. Assume that Wildcat can borrow any needed funds on a short-term basis at a rate of 3 percent per quarter and can invest any excess funds in short-term marketable securities at a rate of 2 percent per…
Consider the following two bonds:     Bond A Bond B Face value $1,000 $1,000 Coupon rate (annual) 8% 8% YTM 9% 7% Maturity 10 years 10 years Price (PV) ? ?   Calculate the price for each bond. What is the primary factor affecting the prices of the bonds? Indicate which bond is premium and which one is discount. Is there any relationship between the YTM and the coupon rate in case of premium/discount bonds? Now, consider the following two bonds:     Bond X Bond Y Face value $1,000 $1,000 Coupon rate (annual) 8% 8% YTM 11% 11% Maturity 5 years 10 years Price (PV) ? ?   Calculate the price for each bond. What is the relationship between bond price and maturity, all else equal?   A bond with a par value of $1,000 and a maturity of 8 years is selling for $925. If the annual coupon rate is 7%, what’s the yield on the bond? What would be the yield if the bond had semiannual payments?…
Knowledge Booster
Background pattern image
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
Entrepreneurial Finance
Finance
ISBN:9781337635653
Author:Leach
Publisher:Cengage
Text book image
Fundamentals Of Financial Management, Concise Edi...
Finance
ISBN:9781337902571
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Text book image
Financial Management: Theory & Practice
Finance
ISBN:9781337909730
Author:Brigham
Publisher:Cengage