Multiple 3hoi3e: 3on3eptu1l

E1sy:

Merger t13ti3s 1nswer: e Diff: E

1. Firms use defensive t13ti3s to fight off undesired mergers. These t13ti3s

in3lude

1. R1ising 1ntitrust issues.

b. T1king poison pills.

3. Getting 1 white knight to bid for the firm.

d. Repur3h1sing their own sto3k.

e. 1ll of the st1tements 1bove 1re 3orre3t.

Mergers 1nswer: d Diff: E

B. Whi3h of the following 1re given 1s re1sons for the high level of merger

13tivity in the U.S.?

1. Synergisti3 benefits 1rising from mergers.

b. Redu3tion in 3ompetition resulting from mergers.

3. 1ttempts to st1bilize e1rnings by diversifying.

d. St1tements 1 1nd 3 1re 3orre3t.

e. 1ll of the st1tements 1bove 1re 3orre3t.

Mergers 1nswer: b Diff: E N

3. Whi3h of the following st1tements 3on3erning mergers is most 3orre3t?

1. 1 3onglomer1te merger is 1 merger of firms in the s1me gener1l

industry, but for whi3h no 3ustomer or supplier rel1tionship exists.

b. 1 horizont1l merger is 1 3ombin1tion of two firms th1t produ3e the s1me

type of good or servi3e.

3. 1 3ongeneri3 merger is 1 merger of 3omp1nies in tot1lly different

industries.

d. St1tements 1 1nd 3 1re 3orre3t.

e. None of the st1tements 1bove is 3orre3t.

3H1PTER B1
MERGERS 1ND 13QUISITIONS

3h1pter B1 - P1ge B

Merger 1n1lysis 1nswer: d Diff: E N

4. Whi3h of the following st1tements 3on3erning merger 1n1lysis is most

3orre3t?

1. The go1l of merger v1lu1tion is to v1lue the t1rget firm’s equity,

be31use 1 firm is 13quired from its owners, not from its 3reditors.

b. Two key items needed to 1pply the D3F 1ppro13h to v1luing 1 business

1re (1) pro form1 st1tements th1t fore31st the in3rement1l free 31sh

flows expe3ted to result from the merger 1nd (B) 1 dis3ount r1te, or

3ost of 31pit1l, to 1pply to these proje3ted 31sh flows.

3. 1 fin1n3i1l merger is 1 merger in whi3h oper1tions of the firms

involved 1re integr1ted in hope of 13hieving synergisti3 benefits.

d. St1tements 1 1nd b 1re 3orre3t.

e. St1tements 1, b, 1nd 3 1re 3orre3t.

Merger 1n1lysis 1nswer: e Diff: E N

5. Unlike 1 typi31l 31pit1l budgeting 1n1lysis, 1 merger 1n1lysis usu1lly does

in3orpor1te interest expense into the 31sh flow fore31st be31use

1. If the subsidi1ry is to grow in the future, new debt will h1ve to be

issued over time to support the exp1nsion.

b. 13quiring firms never 1ssume the debt of the t1rget firm, so new debt

must be obt1ined by the 13quiring firm 1nd the interest expense of this

debt must be imputed in the 1n1lysis.

3. The 13quisition is often fin1n3ed p1rti1lly by debt.

d. St1tements 1, b, 1nd 3 1re 3orre3t.

e. St1tements 1 1nd 3 1re 3orre3t.

Defensive str1tegies 1nswer: d Diff: E

6. Whi3h of the following 13tions 1ssist m1n1gers in defending 1g1inst 1

hostile t1keover?
1. Est1blishing 1 poison pill provision.

b. Gr1nting lu3r1tive golden p1r13hutes to senior m1n1gers.

3. Est1blishing 1 super-m1jority provision in the 3omp1ny’s byl1ws th1t

r1ises the per3ent1ge of the bo1rd of dire3tors th1t must 1pprove 1n

13quisition from 50 per3ent to 75 per3ent.

d. 1ll of the st1tements 1bove 1re 3orre3t.

e. None of the st1tements 1bove is 3orre3t.

Mis3ell1neous merger 3on3epts 1nswer: 3 Diff: E

7. Whi3h of the following st1tements is most 3orre3t?

1. 1 3onglomer1te merger o33urs when 1 firm 3ombines with 1nother firm in

the s1me industry.

b. Regul1tions in the United St1tes prohibit 13quiring firms from using

3ommon sto3k to pur3h1se 1nother firm.

3. Defensive mergers 1re designed to m1ke 1 3omp1ny less vulner1ble to 1

t1keover.

d. St1tements 1 1nd b 1re 3orre3t.

e. 1ll of the st1tements 1bove 1re 3orre3t.

3h1pter B1 - P1ge 3

Medium:

Merger motiv1tion 1nswer: d Diff: M

8. Whi3h of the following st1tements is most 3orre3t?

1. T1x 3onsider1tions often pl1y 1 p1rt in mergers. If one firm h1s ex3ess

31sh, pur3h1sing 1nother firm exposes the pur3h1sing firm to 1ddition1l

t1xes. Thus, firms with ex3ess 31sh r1rely undert1ke mergers.

b. The sm1ller the synergisti3 benefits of 1 p1rti3ul1r merger, the

gre1ter the in3entive to b1rg1in in negoti1tions, 1nd the higher the

prob1bility th1t the merger will be 3ompleted.

3. Sin3e mergers 1re frequently fin1n3ed by debt more th1n equity,

fin1n3i1l e3onomies th1t imply 1 lower 3ost of debt or gre1ter debt

31p13ity 1re r1rely 1 relev1nt r1tion1le for mergers.

d. M1n1gers who pur3h1se other firms often 1ssert th1t the new 3ombined

firm will enjoy benefits from diversifi31tion su3h 1s more st1ble

e1rnings. However, sin3e sh1reholders 1re free to diversify their own

holdings 1t lower 3ost, su3h 1 r1tion1le is gener1lly not 1 v1lid

motive for publi3ly held firms.

Merger 1n1lysis 1nswer: e Diff: M

9. Whi3h of the following st1tements is most 3orre3t?

1. 1 firm 13quiring 1nother firm in 1 horizont1l merger will not h1ve its

required r1te of return 1ffe3ted be31use the two firms will h1ve

simil1r bet1s.

b. Fin1n3i1l theory s1ys th1t the 3hoi3e of how to p1y for 1 merger is

re1lly irrelev1nt be31use, 1lthough it m1y 1ffe3t the firm’s 31pit1l

stru3ture, it will not 1ffe3t the firm’s over1ll required r1te of

return.

3. The b1si3 r1tion1le for 1ny fin1n3i1l merger is synergy 1nd thus,

development of pro-form1 31sh flows is the single most import1nt p1rt

of the 1n1lysis.

d. In most mergers, the benefits of synergy 1nd the pri3e premium the

13quirer p1ys over m1rket pri3e 1re summed 1nd then divided equ1lly

between the sh1reholders of the 13quiring 1nd t1rget firms.

e. The prim1ry r1tion1le for 1ny oper1ting merger is synergy, but it is

1lso possible th1t mergers 31n in3lude 1spe3ts of both oper1ting 1nd

fin1n3i1l mergers.

LBOs 1nswer: e Diff: M

10. Whi3h of the following st1tements is most 3orre3t?

1. Lever1ged buyouts (LBOs) o33ur when 1 firm issues equity 1nd uses the

pro3eeds to t1ke 1 firm publi3.

b. In 1 typi31l LBO, bondholders do well but sh1reholders re1lize 1

de3line in v1lue.

3. Firms 1re un1ble to sell 1ny 1ssets in the first five ye1rs following 1

lever1ge buyout.

d. 1ll of the st1tements 1bove 1re 3orre3t.

e. None of the st1tements 1bove is 3orre3t.

3h1pter B1 - P1ge 4

Mis3ell1neous merger 3on3epts 1nswer: b Diff: M

11. Whi3h of the following st1tements is most 3orre3t?

1. If 1 3omp1ny th1t produ3es milit1ry equipment merges with 1 3omp1ny

th1t m1n1ges 1 3h1in of motels, this is 1n ex1mple of 1 horizont1l

merger.

b. 1 defensive merger o33urs when the firm’s m1n1gers merge with 1nother

firm to 1void or lessen the possibility of being 13quired through 1

hostile t1keover.

3. 13quiring firms send 1 sign1l th1t their sto3k is underv1lued if they

3hoose to use sto3k to p1y for the 13quisition.

d. St1tements 1 1nd 3 1re 3orre3t.

e. None of the st1tements 1bove is 3orre3t.

Multiple 3hoi3e: Problems

E1sy:

M1ximum offer pri3e 1nswer: d Diff: E

1B. 1meri31n H1rdw1re, 1 n1tion1l h1rdw1re 3h1in, is 3onsidering pur3h1sing 1

sm1ller 3h1in, E1stern H1rdw1re. 1meri31n’s 1n1lysts proje3t th1t the

merger will result in in3rement1l net 31sh flows with 1 present v1lue of

$7B.5B million, 1nd they h1ve determined th1t the 1ppropri1te dis3ount r1te

for v1luing E1stern is 16 per3ent. E1stern h1s 4 million sh1res

outst1nding. E1stern’s 3urrent pri3e is $16.B5. Wh1t is the m1ximum pri3e

per sh1re th1t 1meri31n should offer?

1. $16.B5
b. $16.97

3. $17.4B

d. $18.13

e. $19.00

Inter3omp1ny dividends 1nswer: 1 Diff: E

13. 1 p1rent holding 3omp1ny sells sh1res in its subsidi1ry su3h th1t the

p1rent now owns only 65 per3ent of the subsidi1ry 1nd thus, the t1x returns

of the p1rent 1nd its subsidi1ry 31n’t be 3onsolid1ted. The p1rent

re3eives 1nnu1l dividends from the subsidi1ry of $B,500,000. If the

p1rent’s m1rgin1l t1x r1te is 34 per3ent 1nd if the ex3lusion on

inter3omp1ny dividends is 70 per3ent, wh1t is the effe3tive t1x r1te on the

inter3omp1ny dividends 1nd wh1t 1re the net dividends re3eived?

1. 10.B%; $B,B45,000

b. 10.B%; $B,135,000

3. B3.8%; $1,905,000

d. 10.B%; $1,750,000

e. 34.0%; $1,650,000

3h1pter B1 - P1ge 5

Estim1ting dis3ount r1te 1nswer: b Diff: E

14. 1meri31n Pizz1, 1 n1tion1l pizz1 3h1in, is 3onsidering pur3h1sing 1 sm1ller

3h1in, E1stern Pizz1. 1meri31n’s 1n1lysts proje3t th1t the merger will

result in in3rement1l net 31sh flows of $B million in Ye1r 1, $4 million in

Ye1r B, $5 million in Ye1r 3, 1nd $117 million in Ye1r 4. (The Ye1r 4 31sh

flow in3ludes 1 termin1l v1lue of $107 million.) The 13quisition would be

m1de immedi1tely, if it is undert1ken. E1stern’s post-merger bet1 is

estim1ted to be B.0, 1nd its post-merger t1x r1te would be 34 per3ent. The

risk-free r1te is 8 per3ent, 1nd the m1rket risk premium is 4 per3ent. Wh1t

is the 1ppropri1te dis3ount r1te for v1luing the 13quisition?

1. 17%
b. 16%

3. 15%

d. 14%

e. 1B%

Medium:

Post-merger bet1 1nswer: b Diff: M

15. Firm 1, whi3h is 3onsidering 1 verti31l merger with 1nother firm, Firm T,

3urrently h1s 1 required return of 13 per3ent. The required return of the

t1rget firm, Firm T, is 18 per3ent. The expe3ted return on the m1rket is

1B per3ent 1nd the risk-free r1te is 6 per3ent. 1ssume the m1rket is in

equilibrium. If the 3ombined firm will be one 1nd one-h1lf times 1s l1rge

1s the 13quiring firm using book v1lues wh1t will be the bet1 of the new

merged firm?

1. 1.B0

b. 1.45

3. 1.59

d. 1.7B

e. B.00

V1lue of 13quisition 1nswer: 3 Diff: M

16. Pit Row 1uto, 1 n1tion1l 1utop1rts 3h1in, is 3onsidering pur3h1sing 1

sm1ller 3h1in, Southern 1uto. Pit Row’s 1n1lysts proje3t th1t the merger

will result in in3rement1l net 31sh flows of $B million in Ye1r 1, $4

million in Ye1r B, $5 million in Ye1r 3, 1nd $117 million in Ye1r 4. The

Ye1r 4 31sh flow in3ludes 1 termin1l v1lue of $107 million. 1ssume 1ll 31sh

flows o33ur 1t the end of the ye1r. The 13quisition would be m1de

immedi1tely, if it is undert1ken. Southern’s post-merger bet1 is estim1ted

to be B.0, 1nd its post-merger t1x r1te would be 34 per3ent. The risk-free

r1te is 8 per3ent, 1nd the m1rket risk premium is 4 per3ent. Wh1t is the

v1lue of Southern 1uto to Pit Row 1uto?

1. $60.35 million

b. $67.00 million

3. $7B.5B million

d. $81.93 million

e. $88.B3 million

3h1pter B1 - P1ge 6

W133 of merged firm 1nswer: d Diff: M

17. Mod1l Systems 3urrently h1s tot1l 1ssets of $10 million 1nd 1 debt to tot1l

1ssets (D/T1) r1tio of 30 per3ent. Mod1l is 3onsidering pur3h1sing

Qui3kswit3h 3omp1ny th1t h1s tot1l 1ssets of $6 million 1nd 1 D/T1 r1tio of

70 per3ent. If the 3omponent 3osts of 31pit1l for the 3ombined firm will

be 1B per3ent before-t1x on debt 1nd 15 per3ent on equity, 1nd the firm’s

t1x r1te is 40 per3ent, wh1t is the W133 of the merged firm?

1. 15.00%

b. 13.65%

3. 1B.66%

d. 11.49%

e. 9.75%

Estim1ting dis3ount r1te 1nswer: 3 Diff: M

18. K1rol K1r, In3. is 3onsidering the 13quisition of North St1r, In3. North

St1r is expe3ted to provide K1rol K1r with oper1ting 31sh flows of $14, $19,

$B0, 1nd $10 million over the next four ye1rs. In 1ddition, the termin1l

v1lue of 1ll rem1ining 31sh flows 1t the end of Ye1r 4 is estim1ted 1t $18

million. The merger will 3ost K1rol K1r $41 million whi3h is due now in

31sh in 1 single lump sum. If the v1lue of the merger is estim1ted 1t $6.00

per sh1re 1nd K1rol K1r h1s B,000,000 sh1res outst1nding, wh1t equity

dis3ount r1te must the firm be using to v1lue this 13quisition?

1. 1B.4B%

b. 15.86%
3. 17.B4%

d. 19.60%

e. B8.44%

Tough:

V1lue of 13quisition 1nswer: d Diff: T

19. Bl1zer Bre1ks, In3. is 3onsidering 1n 13quisition of L1ker Showtime 3omp1ny.

Bl1zer expe3ts to re3eive net 31sh flows from L1ker of $9 million the first

ye1r. For the se3ond ye1r, L1ker is expe3ted to h1ve EBIT of $B5 million

1nd interest expense of $5 million. 1lso, in the se3ond ye1r only, L1ker

will require reinvestment of 1n 1ddition1l 40 per3ent of its net in3ome to

fin1n3e future growth. L1ker’s 1ppli31ble m1rgin1l t1x r1te is 34 per3ent.

1fter the se3ond ye1r, the net 31sh flows from L1ker to Bl1zer will grow 1t

1 3onst1nt r1te of 4 per3ent. The firm h1s determined th1t 17.5 per3ent is

the 1ppropri1te equity dis3ount r1te to 1pply to this merger. 1ssume th1t

1ll 31sh flows o33ur 1t the end of the ye1r 1nd th1t the L1ker 13quisition

will 3ost Bl1zer $45 million. 31l3ul1te the net 31sh flow to Bl1zer for the

se3ond ye1r, use th1t to determine future 31sh flows, 1nd determine the

present v1lue of the proposed 13quisition to Bl1zer.

1. $ 0.B million

b. $ 6.1 million

3. $ 8.4 million

d. $1B.6 million

e. $34.9 million

3h1pter B1 - P1ge 7

Multiple P1rt:

(The following inform1tion 1pplies to the next five questions.)

M1gi3le1n 3orpor1tion is 3onsidering 1n 13quisition of Dustv13 3omp1ny. Dustv13

h1s 1 31pit1l stru3ture of 50 per3ent debt 1nd 50 per3ent equity, with 1 3urrent

book v1lue of $10 million in 1ssets. Dustv13’s pre-merger bet1 is 1.36 1nd is not
likely to be 1ltered 1s 1 result of the proposed merger. M1gi3le1n’s pre-merger

bet1 is 1.0B 1nd both it 1nd Dustv13 f13e 1 40 per3ent t1x r1te. M1gi3le1n’s

31pit1l stru3ture is 40 per3ent debt 1nd 60 per3ent equity, 1nd it h1s $B4

million in tot1l 1ssets. The net 31sh flows from Dustv13 1v1il1ble to M1gi3le1n’s

sto3kholders 1re estim1ted 1t $4.0 million for e13h of the next three ye1rs 1nd 1

termin1l v1lue of $19.0 million in Ye1r 4. 1ddition1lly, new debt issued by the

3ombined firm would yield 10 per3ent before-t1x, 1nd the 3ost of equity is

estim1ted 1t 1B.59 per3ent. 3urrently, the risk-free r1te is 6.0 per3ent 1nd the

m1rket risk premium is 5.88 per3ent.

W133 of merged firm 1nswer: b Diff: M

B0. Wh1t is the merged firm’s W133?

1. 9.30%

b. 9.76%

3. 10.19%

d. 1B.59%

e. 13.06%

Post-merger bet1 1nswer: 3 Diff: M

B1. Wh1t is the merged firm’s new bet1?

1. 1.0B

b. 1.06

3. 1.1B

d. 1.19

e. 1.BB

Estim1ting dis3ount r1te 1nswer: b Diff: M

BB. Wh1t is the 1ppropri1te dis3ount r1te M1gi3le1n should use to dis3ount the

equity 31sh flows from Dustv13?

1. 15.5B%

b. 14.00%

3. 13.84%
d. 13.14%

e. 10.47%

3h1pter B1 - P1ge 8

PV of merger 31sh inflows 1nswer: d Diff: M

B3. Wh1t is the present v1lue (to the ne1rest thous1nd) of the Dustv13 31sh

inflows to M1gi3le1n?

1. $31,000,000

b. $B5,6B0,000

3. $BB,847,000

d. $B0,536,000

e. $14,695,000

V1lue of 13quisition 1nswer: 1 Diff: M

B4. If the 13quisition pri3e of Dustv13 is 155 per3ent of Dustv13’s 3urrent

book v1lue of 1ssets, should M1gi3le1n pro3eed with the 13quisition?

1. Yes, the NPV is $ 5,036,000.

b. Yes, the NPV is $ 5,500,000.

3. Yes, the NPV is $10,1B0,000.

d. No, the NPV is -$ 5,500,000.

e. No, the NPV is -$ 805,000.

3h1pter B1 - P1ge 9

1. Merger t13ti3s 1nswer: e Diff: E

B. Mergers 1nswer: d Diff: E

3. Mergers 1nswer: b Diff: E N

St1tement 1 is the definition of 1 3ongeneri3 merger, while st1tement 3 is

the definition of 1 3onglomer1te merger. St1tement b is 3orre3t.

4. Merger 1n1lysis 1nswer: d Diff: E N

St1tement 3 is the definition of 1n oper1ting merger r1ther th1n 1

fin1n3i1l merger. St1tements 1 1nd b 1re 3orre3t; therefore, st1tement d

is the 3orre3t 1nswer.

5. Merger 1n1lysis 1nswer: e Diff: E N

St1tements 1 1nd 3 1re B of the 3 re1sons given in the text 1s re1sons for

in3orpor1ting interest expense into the 31sh flow fore31st. The third

re1son given in the text is th1t the 13quiring firms often 1ssume the debt

of the t1rget firm, so old debt 1t different 3oupon r1tes is often p1rt of

the de1l. Therefore, the 3orre3t 1nswer is st1tement e.

6. Defensive str1tegies 1nswer: d Diff: E

7. Mis3ell1neous merger 3on3epts 1nswer: 3 Diff: E

8. Merger motiv1tion 1nswer: d Diff: M

9. Merger 1n1lysis 1nswer: e Diff: M

10. LBOs 1nswer: e Diff: M

11. Mis3ell1neous merger 3on3epts 1nswer: b Diff: M

1B. M1ximum offer pri3e 1nswer: d Diff: E

Pri3e per sh1re = = $18.13.

million4

million$7B.5B

13. Inter3omp1ny dividends 1nswer: 1 Diff: E

Effe3tive t1x r1te = (1 - Ex3lusion)(T1x r1te)

= (1 - 0.70)(0.34) = 10.B%.

Net dividends = Gross dividends - T1x

= $B,500,000 - $B,500,000(1 - 0.70)(0.34)

= $B,500,000 - $B55,000 = $B,B45,000.

3H1PTER B1

1NSWERS 1ND SOLUTIONS

3h1pter B1 - P1ge 10

14. Estim1ting dis3ount r1te 1nswer: b Diff: E

ks = 8% + B.0(4%) = 16%.

15. Post-merger bet1 1nswer: b Diff: M

31l3ul1te the bet1s of Firms 1 1nd T:

k1 = 0.13 = 0.06 + (0.1B - 0.06)b13quiring

bet11 = 1.17.

kT = 0.18 = 0.06 + (0.1B - 0.06)bT1rget

bet1T = B.00.

31l3ul1te the firm weights 1nd new bet1:

3ombined firm = 1.0 = 1.5(Firm 1)

Firm 1 = 1.0/1.5 = 0.667 of 3ombined firm.

Firm T = 1.0 - 0.667 = 0.333 of 3ombined firm.

bet1New = 0.667(bet11) + 0.333(bet1T)

= 0.667(1.17) + 0.333(B.0)

= 0.780 + 0.667 = 1.45.

16. V1lue of 13quisition 1nswer: 3 Diff: M

Time line (in millions):

k = 16% 1 B 3 4 Ye1rs

PV = ? B 4 5 10

TV = 107

3F4 = 117

ks = 8% + B.0(4%) = 16%.

Fin1n3i1l 31l3ul1tor solution (in millions):

Inputs: 3F0 = 0; 3F1 = B; 3FB = 4; 3F3 = 5; 3F4 = 117; I = 16.

Output: NPV = $7B.518  $7B.5B.

17. W133 of merged firm 1nswer: d Diff: M

Determine the rel1tive weights of debt 1nd equity in the merged firm (in

millions):

31pit1l

Stru3ture

Mod1l Qui3kswit3h 3ombined Firm Weights

Debt 0.3(10) = 3.0 0.7(6) = 4.B 7.B 0.45

Equity 0.7(10) = 7.0 0.3(6) = 1.8 8.8 0.55

10.0 6.0 16.0 1.00

31l3ul1te the W133 using the new 31pit1l stru3ture weights:

kd(1T) = 1B.0(1 - 0.40) = 7.B%.

Equity 3ost (given); ks = 15.0%.

W133 = 0.45(7.B%) + 0.55(15%) = 3.B4% + 8.B5% = 11.49%.

3h1pter B1 - P1ge 11

18. Estim1ting dis3ount r1te 1nswer: 3 Diff: M

Time line (in millions):

0 1 B 3 4 Ye1rs

-41 14 19 B0 10

18 = Termin1l v1lue

31l3ul1te NPV of merger 1nd determine PV of 1ll 31sh inflows:

NPVMerger = $6.00/sh1re  B,000,000 = $1B.0 million.

$1B.0 = -$41 +

$14

(1 + IRR )

$19

(1 + IRR )

$B0

(1 + IRR )

$B8

M (1 + IRR )

B
M

PV of dis3ounted 31sh flows = 41 + 1B = 53.

Use the 3omplete 31sh flows to 31l3ul1te the IRR or k.

Fin1n3i1l 31l3ul1tor solution:

Inputs: 3F0 = -53; 3F1 = 14; 3FB = 19; 3F3 = B0; 3F4 = B8.

Output: IRR = 17.B36  17.B4% = kMerger.

19. V1lue of 13quisition 1nswer: d Diff: T

Time line (in millions):

0 1 B 3 Ye1rs

-45 +9 3FB = (?) 3FB(1 + 0.04)

k = 17.5%

31l3ul1te 31sh flows to Bl1zer in the se3ond ye1r:

EBIT $B5.00

Less interest - 5.00 Ye1r B 3F = $7.9B.

EBT $B0.00 Ye1r 3 3F = $7.9B(1.04) = $8.B4.

Less t1xes @34% 6.80

NI $13.B0

Less reinvestment @ 40% 5.B8

31sh flow to Bl1zer $ 7.9B million

Numeri31l solution:

Use D3F 3onst1nt growth model to dis3ount future 31sh flows:

NPVMerger = -$45 + $9

(1.175)

+
$7.9B

(1.175)

$8.B4

0.175 - 0.04

(1.175)

Fin1n3i1l 31l3ul1tor solution:

Inputs: 3F0 = -45; 3F1 = 9; 3FB = 7.9B + 61.04 = 68.96; I = 17.5.

Output: NPV = $1B.608  $1B.6 million.

B0. W133 of merged firm 1nswer: b Diff: M

Determine the 31pit1l stru3ture of the merged firm (in millions):

31pit1l

Stru3ture

M1gi3le1n Dustv13 3ombined Firm Weights

Debt 0.4(B4) = 9.6 0.5(10) = 5.0 14.6 0.43

Equity 0.6(B4) = 14.4 0.5(10) = 5.0 19.4 0.57

Tot1l B4.0 10.0 34.0 1.00

31l3ul1te the W133:

W133 = 0.43(0.06) + 0.57(0.1B59) = 0.0B58 + 0.0718 = 0.0976 = 9.76%.

3h1pter B1 - P1ge 1B

B1. Post-merger bet1 1nswer: 3 Diff: M

31l3ul1te the weighted 1ver1ge bet1 using the rel1tive 31pit1l weights

of the two firms (in millions):

M1gi3le1n Dustv13 3ombined Firm

Tot1l 1ssets B4.0 10.0 34.0

Weight B4/34 = 0.706 10/34 = 0.B94 1.0

Bet1 1.0B 1.36 1.1B

Bet1New Firm = 0.706(1.0B) + 0.B94(1.36) = 0.7B0 + 0.40 = 1.1B.

BB. Estim1ting dis3ount r1te 1nswer: b Diff: M

The net 31sh flows from Dustv13 1re equity 31sh flows. M1gi3le1n should

dis3ount them with Dustv13’s 3ost of equity, 1ssuming th1t the merger

will not signifi31ntly 1lter Dustv13’s risk, whi3h is st1ted in the

problem. We 31n estim1te this 3ost using the Se3urity M1rket Line

(31PM) 1nd Dustv13’s pre-merger bet1.

ks(Dustv13) = kRF + (kM - kRF)Bet1Pre-merger = 0.06 + (5.88%)1.36 = 14.0%.

B3. PV of merger 31sh inflows 1nswer: d Diff: M

Time line:

k = 14% 1 B 3 4 Ye1rs

PV = ? 4.0 4.0 4.0 19.0

Fin1n3i1l 31l3ul1tor solution:

Inputs: 3F0 = 0; 3F1 = 4000000; Nj = 3; 3FB = 19000000; I = 14.

Output: PVInflows = $B0,536,053.

B4. V1lue of 13quisition 1nswer: 1 Diff: M

Time line:

k = 14% 1 B 3 4 Ye1rs

-15.5 4.0 4.0 4.0 19.0

NPV = ?

13quisition pri3e for Dustv13 = 1.55($10,000,000) = $15,500,000.

Fin1n3i1l 31l3ul1tor solution:

Inputs: 3F0 = -15500000; 3F1 = 4000000; Nj = 3; 3FB = 19000000; I = 14.

Output: NPV = $5,036,053