When a merger takes place between two companies to form a single firm, the target company to operate as a separate identity. Consider the following scenario: Three Waters Co. is considering an acquisition of Zebra Engineering Corp. (ZEC), and estimates that acquiring ZEC will result in incremental after-tax net cash flows in years 1-3 of $19.00 million, $28.50 million, and $34.20 million, respectively. After the first three years, the incremental cash flows contributed by the ZEC acquisition are expected to grow at a constant rate of 3% per year. Three Waters's current beta is 0.40, but its post-merger beta is expected to be 0.52. The risk-free rate is 3.5%, and the market risk premium is 5.60%. Based on this information, complete the following table by selecting the appropriate values (Note: Do not round intermediate calculations, but round
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- 6. Merger analysis - Free cash flow to equity (FCFE) approach Consider the following acquisition data regarding Washington Company and Purple Turtle Corp.: Washington Company is considering an acquisition of Purple Turtle Corp. Washington Company estimates that acquiring Purple Turtle will result in incremental value for the firm. The analysts involved in the deal have collected the following information from the projected financial statements of the target company. Data Collected (in millions of dollars) Year 1 Year 2 Year 3 EBIT $11.0 $13.2 $16.5 Interest expense 3.0 3.3 3.6 Debt 34.1 40.3 43.4 Total net operating capital 105.1 107.1 109.1 Purple Turtle is a publicly traded company, and its market-determined pre-merger beta is 1.60. You also have the following information about the company and the projected statements. • Purple Turtle currently has a $12.00 million market value of equity and $7.80 million in debt. •The risk-free rate is 5% with a 7.10% market risk premium, and the…Tom Corporation is considering the acquisition of Jerry Corporation. Jerry Corporation has free cash flows to debt and equity holders of $3,750,000. If Tom Corporations acquires Jerry Corporation, Jerry will reduce operating costs by $1,500,000. This will increase free cash flow to $4,900,000. Assume that cash flows occur at year-end and the weighted average cost of capital is 9%. a. What is the value of Jerry Corporation without a merger? o. What is the value of Jerry Corporation with the merger?The financial manager of Company A is evaluating Company B as a possible acquisition. Company B is expected to produce annual after- tax operating cash flows of P500,000. If the merger takes place, Company A will assume P1,250,000 of Company B's long-term liabilities. Company A's weighted average cost of capital is 11% and Company B's weighted average cost of capital is 14.5%. The acquisition will be evaluated as a perpetuity. Based on this information, the estimated value of the target company is nearest P3,448,276. P2,198,276. P4,545,455. d. 9. a. b. C. P3,295,455.
- 4. Merger analysis - Adjusted present value (APV) approach Wizard Inc., which is considering the acquisition of Global Satellite Corp. (GSC), estimates that acquiring GSC will result in an incremental value for the firm. The analysts involved in the deal have collected the following information from the projected financial statements of the target company: Data Collected (in millions of dollars) Year 1 Year 2 Year 3 EBIT $14.0 $16.8 $21.0 Interest expense 3.0 3.3 3.6 Debt 33.0 39.0 42.0 Total net operating capital 113.3 115.5 117.7 Global Satellite Corp. (GSC) is a publicly traded company, and its market-determined pre-merger beta is 1.00. You also have the following information about the company and the projected statements: • GSC currently has a $28.00 million market value of equity and $18.20 million in debt. • The risk-free rate is 5%, there is a 7.10% market risk premium, and the Capital Asset Pricing Model produces a pre-merger required rate of return on equity SL of 12.10%. •…Alpha is considering purchasing a competitor, Beta. Projected cash flows as a result of the merger are: Year 1 $1,450,000 Year 2 $1,750,000 Year 3 $2,000,000 Year 4 $2,500,000. In addition, Beta's year 4 cashflows are expected to grow at a constant rate of 6% after year 4. Beta's post merger beta is estimated to be 1.2 and its post-merger tax rate is 40%. The risk-free rate is 8% and the market risk premium is 4%. REQUIRED: 1. Compute for the maximum bid price that Alpha can offer in the acquisition. 2. How much is the net advantage/disadvantage to Alpha if it acquires Beta's 10,000,000 shares at the current market price of $9.Parentis Ltd. has a value of $150million while the value of Sandis Ltd. is $70million. A merger between the two has just gone through and cost savings with a present value of $ 10million is expected to be achieved. Parentis Ltd. paid cash of $85million for the entire paid up capital of Company B.Requiredi. What is the value of the two firms after the merger? ii. Calculate the cost of the merger to the shareholders of Parentis Ltd.iii. What is the portion of the gain/loss due Parentis Ltd.’s shareholders?iv. From the perspective of the shareholders of Company A, is there an economicjustification for the merger?
- Koala Technologies is considering the acquisition of Laser Industries in a stock-for-stock exchange. Selected financial data for the two companies is shown below. An immediate synergistic earnings benefit of $2.5 million is expected in this merger. Sales (millions) Net income (millions) Koala $90 $9.4 O a. $2.23 O b. $2.75 O c. $2.25 O d. $2.21 Laser $10 $1.2 Common shares outstanding (millions) 4.0 0.8 Earnings per share $2.35 $1.50 Common stock (price per share) $35.00 $27.00 Calculate the post-merger EPS if the Laser shareholders accept an offer of $33.25 a share in a stock-for-stock exchangeThe financial manager of Company X is evaluating Company Y as a possible acquisition. Company Y is expected to produce annual earnings before interest and taxes P485,000. Depreciation write-offs on Company Y's assets are Pl20,000 annually. Both companies have a 34% marginal tax rate. If the merger takes place, Company X will assume P1,425,000 of Company Y's long-term liabilities. Company X's weighted average cost of capital is 9.25% and Company Y's weighted average cost of capital is 14.75%. The acquisition will be evaluated as a perpetuity. If Company X acquires Company Y for PI,125,000 in cash, then the estimated change in the combined wealth of Company X's shareholders will be nearest P433,729 increase. b. 10. a. P1,558,729 increase. P379,830 decrease. d. с. P2,207,838 increase. The following information refers to Questions No. 11 and 12: Ebony Corporation has negotiated the acquisition of Ivory Company in an exchange of shares. Under the terms of the merger, the exchange ratio will…Ch. 29. Calculating Synergy. The Left Foot Company has offered $426 million cash for the common stock in the Right Foot Company. Based on recent market information, the Right Foot Company is worth $389 million as an independent operation. If the merger makes economic sense for Holmes, what is the minimum estimated value of the synergistic benefits from the merger? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) Round to the nearest dollar and format as "XX,XXX,XXX"
- Penn Corp. is analyzing the possible acquisition of Teller Company. Both believes the acquisition will increase its total aftertax annual cash flow by $1,176,015.93 indefinitely. The current market value of Teller is $23,453,722 and that of Penn is $63,348,212. The appropriate discount rate for the incremental cash flow is 13.63%. Penn is trying to decide whether it should offer 36% of its stock or $35,478,193 in cash to Teller's shareholders. What is the equity cost of the acquisition? HINT: Compute the value of the combined firm by adding the current value of the target with the present value of the differential cash flow of the combined firm. To determine the equity cost of the acquisition, add the current value of the acquirer and then multiply by the proposed percentage of the stock that has been offered for the firm.RTE Telecom Inc., which is considering the acquisition of Lucky Coro, estimates that acquiring Lucky will result in an incremental value for the firm. The analysts involved in the deal have collected the following information from the projected financial statements of the target company: Data Collected (in millions of dollars) Year 1 Year 2 Year 3 EBIT $120 $14.4 $18.0 Interest expense 505560 Debt 29.7 35.1 37.8 Total net operating capital 109.2 111.3 1134) Lucky Corp is a pubicly traded company, and its market- determined pre-merger beta is 1.20 You also have the following information about the company and the projected statements: Lucky currently has a $12.00 million market value of equity and S 7:80 million in debt. The risk-free rate is 3.5%, there is a 5.60% market risk premium, and the Capital Asset Pricing Model produces a pre merger required rate of return on equity rs of 10.22% Lucky's cost of debt is 5.50% al a laxtale of 35% The projections assume that the company will have…Penn Corp. is analyzing the possible acquisition of Teller Company. Both believes the acquisition will increase its total aftertax annual cash flow by $1,272,653.1 indefinitely. The current market value of Teller is $23,042,111 and that of Penn is $62,440,594. The appropriate discount rate for the incremental cash flow is 14.22%. Penn is trying to decide whether it should offer 33% of its stock or $36,097,009 in cash to Teller's shareholders. What is the NPV of the stock offer? HINT: Subtract the equity cost (as computed in the previous problem) from the value of the combined firm.