EBK PRINCIPLES OF CORPORATE FINANCE
EBK PRINCIPLES OF CORPORATE FINANCE
12th Edition
ISBN: 9781259358487
Author: BREALEY
Publisher: MCGRAW HILL BOOK COMPANY
Question
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Chapter 31, Problem 10PS

a)

Summary Introduction

To determine: The gain from merger

a)

Expert Solution
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Explanation of Solution

The pre-merger values of Company C and Company D:

PVC=1million×$90=$90million

PVD=600,000×$20=$12million

Compute r to determine  PVCD,

$0.80(r0.06)=$20r=0.10,or 10%

Compute pre-merger values:

PVCD=PVC pre-merger+PVD post-merger=$90million+600,000×($0.80(0.100.08))=$114 million

Compute acquisition gain:

Acquisition gain=PVCD(PVC+PVD)=$114million($90million+$12million)=$12 million

Hence, the acquisition gain is $12 million.

b)

Summary Introduction

To determine: Cost of acquisition.

b)

Expert Solution
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Explanation of Solution

Compute cost of acquisition:

Cash acquisition cost=Cash paidPVC=($25×600,000)$12million=$3 million

Hence, Cost of acquisition is $3 million.

c)

Summary Introduction

To determine: Cost of acquisition if Company D offers 1 share of Company D for 3 shares of Company D.

c)

Expert Solution
Check Mark

Explanation of Solution

Compute cost of acquisition:

SharesCD=Old sharesC+New shares=1million+(600,0003)=$1.2 million

Share priceCD=PVCDSharesCD=$114million1.2million=$95

 Stock acquisition cost=(New shares×PriceCD)PVD=[(600,0003)×$95]$12million=$7 million

Hence, cost of acquisition is $7 million.

d)

Summary Introduction

To determine: Cost of acquisition.

d)

Expert Solution
Check Mark

Explanation of Solution

Compute cost of acquisition:

Cash acquisition cost=cash paidPVD=($25×600,000)$12million=$3 million

Hence, Cost of acquisition is $3 million.

e)

Summary Introduction

To determine: Stock acquisition cost

e)

Expert Solution
Check Mark

Explanation of Solution

The stock acquisition cost is dependent on the rate of growth.

PVCD=PVC pre-merger+PVD post-merger=$90million+600,000×($0.80(0.100.06))=$102 million

Share priceDC=PVDCSharesDC=$102million1.2million=$85million

 Stock acquisition cost=(New shares×PriceCD)PVD=[(600,0003)×$85million]$12million=$5 million

Hence, the stock acquisition is $5 million.

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