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1. Does Landmark benefit from acquiring Landmark? How can Harris justify a $120 million
bid for Landmark?
Broadway Landmark
In a pessimistic situation, the net present value after the Broadway acquisition seems more attractive:
Landmark has increased the value of Broadway by $133.22- $126.57 = $6.65 million. We have
previously shown that, compared with the bid of $120 million, the net present value of Landmark in
both cases seems to be relatively low ($73.46 million and $106.57 million, respectively). Under
pessimistic circumstances, the NPV of Landmark increased to $73.46 million US dollars after the
acquisition. If we add up the standalone value of Landmark and the added value of $6.65 million by
Broadway as a result of the acquisition, the total amount is approximately $73.46 + $6.65 = $80.11.
As a result, the acquisition did add value to the two companies; but the $120 million bid for
Landmark was overvalued and therefore unreasonable in a pessimistic situation.
On the other hand, when Broadway considers the standard or optimistic plan, it will produce positive
results. In the post-acquisition situation, the value of Broadway will increase by $134.1- $105.5 =
$28.6 million. After Landmark's acquisition, the net present value of the standard scene plus the value
increase of Broadway yields $103.59 + $28.6 = $132.9 million. Therefore, in this case, it is
reasonable to bid for Landmark at $120 million.
2. Which financing option should be chosen and why? Would Broadway be capable of
servicing its debt after the acquisition?
To properly value the entity, we will need a realistic discount rate to bring the cost to the present
value. We will use the weighted average cost of capital (WACC) method. This method uses different
costs for the weight of equity and debt in the overall capital structure. We also use the Capital Asset
Pricing Model (CAPM) to calculate the cost of equity. Using Exhibit 5, the risk-free interest rate of
the 10-year Treasury bond (2.56%), plus the market risk premium (5.90%), multiplies them by the
beta value. Using the information in Exhibit 4, a comparable unlevered beta has been calculated, and
its average value has been taken as 1.1 times the industry average.
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The valuations of the two companies are based on considering the above discount rates from multiple
perspectives. According to the payment structure and debt ratio, Harris should choose debt and equity
financing options. Because Broadway will not be able to repay the debt of its 100% loan obligation, it
will bring its debt-to-equity ratio close to 3, which is risky for the company. Therefore, we will
consider mixed financing, that is, 50% debt and 50% equity to acquire Landmark, which will make
Landmark’s total debt 37%, total equity = 63%, and WACC 8.54%.
Therefore, to fund this $120 million acquisition opportunity, the best financing alternative for the
company is to form 50% debt and 50% equity.
3. Does Harris give up shareholder value by opting for the mix of debt & equity financing
option? What is the real cost of equity financing?
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(Please see the Figure 7-9 for the calculation process)
As shown in the following table, under optimistic conditions, the value of 40% of the company’s
equity after the merger is $61.53 million, and under pessimistic conditions, it is $49.04 million. As a
result, Landmark shareholders received a premium.
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Appendices
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Figure 5: Optimistic scenario Broadway post acquisition
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Figure 8: Valuation of Combined Firm (Pessimistic Case)
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