Silver Enterprises has acquired All Gold Mining in a merger transaction. The following balance sheets represent the premerger book values for both firms.
Assume the merger is treated as a purchase for accounting purposes. The market value of All Gold Mining's fixed assets is $3,800; the market values for current and other assets are the same as the book values. Assume that Silver Enterprises issues $5,000 in new long-term debt to finance the acquisition. The post-merger balance sheet will reflect goodwill of _____ and total equity of _____.
Goodwill will be created since the acquisition price is greater than the book value. The goodwill amount is equal to the purchase price minus the market value of assets, plus the market value of the acquired company's debt.
Goodwill = $5,000 - ($3,800 market value FA) - ($600 market value of CA) - ($210 market value OA) + ($500 current liabilities) = $890 Total equity = Equity of acquiring firm = $2,700 |
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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 flows by $3.7 million indefinitely. The current market value of Teller is $103 million, and that of Penn is $151.7 million. The appropriate discount rate for the incremental cash flows is 9 percent. Penn is trying to decide whether it should offer 40 percent of its stock of $127 million in cash to Teller's shareholders. The cost of the cash alternative is _____, while the cost of the stock alternative is _____.
Cash cost = Amount of cash offered = $127 million
To calculate the cost of the stock offer, we first need to calculate the value of the target to the acquirer. The value of the target firm to the acquiring firm will be the market value of the target plus the PV of the incremental cash flows generated by the target firm. The cash flows are a perpetuity, so: V* = $103,000,000 + $3,700,000/0.09 = $144,111,111 The cost of the stock offer is the percentage of the acquiring firm given up times the sum of the market value of the acquiring firm and the value of the target firm to the acquiring firm. So, the equity cost will be: Equity cost = 0.4($151,700,000 + $144,111,111) = $118,324,444 |
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The shareholders of Jolie Company have voted in favor of a buyout offer from Pitt Corporation. Information about each firm is given here:
Jolie's shareholders will receive one share of Pitt stock for every three shares they hold in Jolie. Assume the NPV of the acquisition is zero. What will the post-merger PE ratio be for Pitt?
The EPS of the combined company will be the sum of the earnings of both companies divided by the number of shares in the combined company. Since the stock offer is one share of the acquiring firm for three shares of the target firm, net shares in the acquiring firm will increase by one-third of the target firm's current shares. So, the new EPS will be:
EPS = ($210,000 + $630,000)/[124,000 + (1/3)(62,000)] = $5.81 The market price of Pitt will remain unchanged if it is a zero NPV acquisition. Using the PE ratio, we find the current market price of Pitt stock, which is: P = 12($630,000)/124,000 = $60.967742 If the acquisition has a zero NPV, the stock price should remain unchanged. Therefore, the new PE will be: PE = $60.967742/$5.81 = 10.5 |
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