Chapter 29

Tutorial 9
1. Calculating Synergy Holmes, Inc., has offered $295 million cash for all of the common stock in
Watson Corporation. Based on recent market information, Watson is worth $278 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?
Value of
synergistic= $295m-$278m : $17

Total
Synergy =
gain
VAB =
VA +
VB + ,
NPV >

Premiums = 17

2. Balance Sheets for Mergers Assume that the following balance sheets are stated at book value.
Suppose that Jurion Co. purchases James, Inc. Then suppose the fair market value of James’s fixed
assets is $23,000 versus the $13,300 book value shown. Jurion pays $30,400 for James and raises
the needed funds through an issue of long- term debt. Construct the postmerger balance sheet under
the purchase method of accounting.

30 , 400 CA : 5 , 200

FA : 23 000,

GW : 2 200
,

Jurion Co ., postmerger -

Current assets 27 000 ,

+ 5 200
,
= 32 200
,
Current liabilities 7. 700

Fixed assets 49 000

,
+ 23
, 000 = 72 , 000
Long-term debt 13 , 800 + 30 , 400 = 44 200 ,

Goodwill 30 400
,
-
5 200
,
-

23 000
,
= 2 200
,
Equity 54 500
,

Total 106 , 400 Total 106 , 400

 3. Cash versus Stock Payment Penn Corp. is analyzing the possible acquisition of Teller Company. Both
firms have no debt. Penn believes the acquisition will increase its total aftertax annual cash flow by
$1.3 million indefinitely. The current market value of Teller is $27 million, and that of Penn is $62
million. The appropriate discount rate for the incremental cash flows is 11 percent. Penn is trying to
decide whether it should offer 35 percent of its stock or $37 million in cash to Teller’s shareholders.
a. What is the cost of each alternative?
b. What is the NPV of each alternative?
c. Which alternative should Penn choose?
* after-tax (F = $1 3 m .
= 11 % MV of Teller = $27m MV of Penn = $62m

Acquisition option = 35 % of Penn's stock $37m in cash

Alternative 1 : 35 % of Penn's stock : A offer term : 1A : 3B >
-

exchange ratio : w = '

Cost = 35 % x $ = $ >
-
newshare A issued to : wxNB > x
- % Cownership of B in ABI

NPV , =
-

$ m + $27m +
$1 3 m .
11m
=
wNB
-

11 % wNB + NA
Alternative 2 : $37m in cash >
-
X % x VAB = Cost

Cost $37 m Premium=

3727=Om
=

$)1 3m should choose alternative

NPV 37m $27 m $1 82m = Penn 1
Synergy 82m
.

= + + = . .
=

11 %
=?
VA = 62m Premiums VAB => NPV = 11 82-10
.
= 1 82m
.

VB = 27m - Vi + Av = Vi (Value of Target after acq ) .

(synergy (DCF 1 3 m)
=_
= - > AV m
=
11 8
,
.

+ -
.

r = 11 % > A lTakeover Target (BI

4. Merger NPV Fly-By-Night Couriers is analyzing the possible acquisition of Flash- in- the-Pan
Restaurants. Neither firm has debt. The forecasts of Fly-By-Night show that the purchase would
increase its annual aftertax cash flow by $425,000 indefinitely. The current market value of Flash-in-
the-Pan is $7.3 million. The current market value of Fly- By-Night is $24 million. The appropriate
discount rate for the incremental cash flows is 8 percent. Fly-By-Night is trying to decide whether it
would offer 30 percent of its stock or $11.4 million in cash to Flash-in-the-Pan.
a. What is the synergy from the merger?
b. What is the premium of each alternative? to target firm (B) >
-

c. What is the NPV to Fly-By-Night of each alternative? to bidder firm (A) >
-

d. What alternative should Fly-By-Night use?

D after-tax
(F = $425 000 , id = 8% MV of Flash-in-the-Pan = $7 .
3m MV of
Fly -By-Night = $24m

Acquisition option : 30% of Fly-By- Night's stock $11 4 m .

$425 000
a
Synergy =
,
=
$5 ,
312 500 ,

8%

I
Alternative 1 : 30% stock Alternative 2 : $11 4 m in .
cash

b. Cost = 30 % x$24m =
$7 2 m.
Premium = $11 4m-$7 3 m
.
. = $4 Im .

c
. NPV , =
-

$7 2 m .
+ $7 3 m .
+ $5 ,
312 , 500 = $5 412 500
, ,
NPV
2
=
-

$11 4m .
+ $7 3m .
+ $5 312 500
, ,
= $1 ,
212 ,
500

6 Fly-By-Night should alternative of its stock

use of
offering 30 %
 Va = 24 m DCF
1 -x =
0 .
425 m

VB = 7 3m
.
AV =
0435m $5 31 M
.

↓
r 8% gain
=
synergy :

b
. To target firm (B)> Cash offer : Premium (B) = 11 4m-7 3m
. . = 4 Im.

~ Share offer : Value of share offer =

30 % x VAB = 10 983 750
. ,

↓
VA +
VB +
AV = 36 6125m
.

=> Premium = 4 533 , 750

,
-
7 3m . = 3 683 750
, ,

1 .
To bidder firm (A) >
Cash offer : NPVA = 5 3125m
.
-

4 /m
. = 1 .
2125m T

Share offer
~ :
NPVA =
DV-Premium =
1 628 750
, ,
=> Choose share offer

Of IVDV) - E offer

bar chia
ex 5 *
Viz 30 % VAB

y
5 .
DV = 36m

VA = 360m Na = 30m

Vi = 144m NB =
18 m

VAB 540m
a .

PAB = = = 13 17
.

30m + 11m
NaB
offer term exchange ratio (w)
b .
1
.
A = 3 .
B => =
↳ wXNB = 11m = w =

H
18m

wW Na (Proportional ownership
(%) of B)
m
'x =
NAB

wX18m

:59
M1 %) VAB Cost offer 159m => . 44 %
29 w 0 6954
M
=
x = = => = .

wX 18 m + 30m

VAB = Va + VB + DV
*
VB = VB + DV (value of target firm to bidder)

NPVA : AV - Premium
OR
*
Vi -
Cost (offer)

Premiums =
Cost (offer) -

VB

L
 &
5. Merger NPV Harrods PLC has a market value of £360 million and 30 million shares outstanding.
Selfridge Department Store has a market value of £144 million and 18 million shares outstanding.
Harrods is contemplating acquiring Selfridge. Harrods’s CFO concludes that the combined firm with
synergy will be worth £540 million, and Selfridge can be acquired at a premium of £15 million.
a. If Harrods offers G
11 million shares of its stock in exchange for the 18 million shares of Selfridge,
what will the stock price of Harrods be after the acquisition?
b. What exchange ratio between the two stocks would make the value of the stock offer equivalent to
a cash offer of £159 million?

Harrods outstanding
: MV = 7360m 30m shares Synergy = 54

Selfridge
~
: MV = 1144m 18m shares
outstanding Premium = 115m
exchange>
a .
Harrods : 11m shares 18m share of Selfrigale
1360m
B4 acquisition : Stock price of Harrods t1/share > Value of stock offer 712 x 11m -132m
1540m30m
=
=

= = =

After acquisition : Stock price of Harrods 1 14 59/ share

-
130m -

11m + 18m)
= .

. Value of stock
b offer = Cash offer
=> exchange ratio x112 x 11m = 205m => Exchange ratio = 1 553
.

6. Calculating NPV Plant, Inc., is considering making an offer to purchase Palmer Corp. Plant’s vice
president of finance has collected the following information: A B - ~

PlE

NI

Div

Plant also knows that securities analysts expect the earnings and dividends of Palmer to grow at a
constant rate of 4 percent each year. Plant management believes that the acquisition of Palmer will
provide the firm with some economies of scale that will increase this growth rate to 6 percent per
year. earnings/Div/Ps
>

a. What is the synergy from the Merger. Post-merger g 6 % 3- synergy PST (B)
G Pre-merger g 4 % : =

= :
:

b. If Plant were to offer $20 in cash for each share of Palmer, what would the NPV of the acquisition
be?
c. What is the most Plant should be willing to pay in cash per share for the stock of Palmer?
d. If Plant were to offer 225,000 of its shares in exchange for the outstanding stock of Palmer, what
would the NPV be? = NB No of share issued for B
>
-

e. Should the acquisition be attempted? If so, should it be as in (c) or as in (e)?

f. Plant’s outside financial consultants think that the 6 percent growth rate is too optimistic and a 5
percent rate is more realistic. How does this change your previous answers?
a DP = PB -

PB -

spost-mengers ,
pre-mergers
.

*
Nis

AV

·PBx
EPS =
10x9600 . 12 8 .

750 , 000

DPS (Do) =
LOO
PB = 12 8 .

, g
= 4 %, Do = 0 .
63 => DDM (const growth rate
Ps
Doll + g) Do(l + g) 0 63(1 + 4 %)
4 %
rg
.

= +
= = +
g =

rs-g Ps 12 8 %
.

= 9 12 %
.

0 63 x 1 06
PB 6% Ps 21 4
.

g =
·
.

= =
post-merger 1 = .

0 0912-0 06
.
.

-
=>
APB = 21 4 .
-

12 8.
= 8 6 .

=> DV = APB x NB = 8 6 .
x 0 75 m
. =
6 45m .

Synergy
OR *
I VB

= PB post-merger *
NB : 21 4 . x 0 75
. m = 16 05. m

"
.
b Offer price = 20 => NPVA =? VB -
Cost

& V- Premium - 120-12 8) .

x 0 75
.
m

JE
*
Vi = 16 05 .
m NPVA = 1 05
.
m or = (21 4-20) . x 0 75
.
m

Cost = 20 x 0 75m
.
= 15m

c .
Maximum price = 21 4
.
>
-

NPV = 0

225, 000
↓ wNB = 225, 000 => M1 % ) = =
13 04 % .

225, 000 + 1 , 500 , 000

=>
Cost offer = M1 % ) x VAB = 13 04 %
.
x (60 9m .
+ 16 05 m)
.
=

PaXNA EPSX PEX NA 4 2m 14 5 1 5m 60 9 m

Va =
= =
.

x .
x .
= .

1 5
. m

60 9m 16 05m

VAB
OR A +
PAB . .

43 97
=
: =
= .

0 25m
.
1 5m
. + 0 25 m
.

PAB X 225 000 ,

= Lost = 43 97 .
x 225, 000 = 9 , 893 250
,

*
NPVA = V
-
Cost = 16 05m
.
-

9 , 893 250 ,
= 6 156 , 750
,

OR Premump =
Cost -
VB
NPV = DV-Premium