FIN 305
Fall 2021
Solutions to Assignment 2
Due date/time: Fri, Nov 19, 8:00pm
Late submission will incur a penalty
0(zero) point will be given on the submission made after the solutions are posted
Chapter 26 Mergers and Acquisitions
1. Last month, The Blue Bottle Coffee acquired all of the assets and liabilities of the Intelligentsia Coffee. The
combined firm is known as Blue Bottle Coffee. Intelligentsia Coffee no longer exists as a separate entity.
Which one of the following terms best describes this transaction?
A. Merger
B. Consolidation
C. Takeover
D. Stock acquisition
Answer: A (Complete absorption of one firm by another, A+B=A)
2. What are advantages and disadvantages of a merger over other forms of acquiring a firm (e.g. stock
acquisition)?
Answer:
• Advantages:
§ Legally simple
§ Less expensive
– Avoids costly legal process of transferring title to assets from target to bidder
— Disadvantages
§ Shareholders of both companies must approve:
– Typically, approval requires 2/3 or more of votes; difficult to obtain
3. What are the four sources of gains from acquisitions?
Answer:
— Revenue enhancement
— Cost reductions
— Lower taxes
— Reductions in capital needs
4. The Town Crier and The News Express are all-equity firms. The Town Crier has 11,500 shares outstanding at
a market price of $26 a share. The News Express has 15,000 shares outstanding at a price of $31 a share. The
News Express is acquiring The Town Crier. The synergy value of the acquisition is $4,500. What is the value
of The Town Crier to The News Express?
Answer:
Value of The Town Crier to The News Express = (11,500 × $26) + $4,500 = $303,500
5. Walnut Co. and Almond Co. are all-equity firms. Walnut Co. has 2,000 shares outstanding at a market price
of $8 a share. Almond Co. has 3,000 shares outstanding at a price of $24 a share. Almond Co. is acquiring
Walnut Co. for $20,000 in cash. What is the merger premium?
Answer:
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FIN 305
Fall 2021
Merger premium = acquisition cost - target firm’s stand-alone value = 20,000 – $8*2000 =20000-16000 = $4000
6. The Sweet Shoppe and Candy Land are all-equity firms. The Sweet Shoppe has 500 shares outstanding at a
market price of $96 a share. Candy Land has 2,700 shares outstanding at a price of $24 a share. The Sweet
Shoppe is acquiring Candy Land for $62,000 in cash. The incremental value of the acquisition is $3,600.
What is the net present value (NPV) of acquiring Candy Land to The Sweet Shoppe?
Answer:
NPV = (2,700 × $24) + $3,600 - $62,000 = $6,400
7. Scott Enterprises is acquiring Moore Industries for $22,000 worth of Scott Enterprises stock. Scott Enterprises
currently has 7,500 shares of stock outstanding at a price of $28 a share. Moore Industries has 1,800 shares
outstanding at a price of $12 a share. The synergy value of the acquisition is $1,100. What is the stock price
per share of Scott after the acquisition using stock payment?
Answer:
Post-merger stock price per share = combined company value/ total number of shares outstanding
= (Scott value + Moore value + synergy) / (number of Scott’s shares outstanding before acquisition +
newly issued shares to Moore)
= [(7,500 × $28) + (1,800 × $12) + $1,100]/[7,500 + ($22,000/28)] = $232700/ 8285.7= $28.08
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