A212 BWFF3013 CORPORATE FINANCE
1. Consider the following premerger information about Firm X and Firm Y:
Firm X
Firm Y
Total earnings
$95,000
$12,000
Shares outstanding
20,000
9,000
Per-share values:
Market
$63
$15
Book
$6
$2
Assume that Firm X acquires Firm Y by issuing long-term debt to purchase all the shares
outstanding at a merger premium of $5 per share. Assuming that neither firm has any debt
before the merger, construct the post-merger balance sheet for Firm X assuming the use
of the purchase accounting method. Total assets XY = Total equity XY = $300,000
2.
Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no
debt. Penn believes the acquisition will increase its total after-tax annual cash flows by
$1.45 million indefinitely. The current market value of Teller is #31.5 million, and that of
Penn is $53 million. The appropriate discount rate for the incremental cash flows is 10
percent. Penn is trying to decide whether it should offer 40 percent of its stock or $44.5
million in cash to Teller’s shareholders.
a. What is the cost of each alternative? Equity cost = $39,600,000
b. What is the NPV of each alternative? NPV stock = $6,400,000
c. Which alternative should Penn choose?
3. Consider the following pre-merger information about a bidding firm (Firm B) and a target
firm (Firm T). assume that both firms have no debt outstanding.
Shares outstanding
Price per share
Firm B
6,400
$53
Firm T
1,500
$19
Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is
$17,000.
a. If Firm T is willing to be acquired for $23 per share in cash, what is the NPV of the
merger? NPV = $11,000
b. What will the price per share of the merged firm be assuming the conditions in part
(a)?
Share price = $54.72
c. In part (a), what is the merger premium? Merger premium = $6,000
d. Suppose Firm T is agreeable to a merger by an exchange of stock. If B offers one
of its shares for every two of T’s shares, what will the price per share of the merged
firm be? P = $53.80
e. What is the NPV of the merger assuming the conditions in part (d)?
NPV = $5,146.85
4. Fly-By-Night Couriers is analyzing the possible acquisition of Flash-in-the-Pan
Delivery. Neither firm has debt. The forecasts of Fly-By-Night show that the purchase
would increase its annual after-tax cash flow by $345,000 indefinitely. The current
market value of Flash-in-the-Pan is $8.1 million. The current market value of Fly-ByNight is $19 million. The appropriate discount rate for the incremental cash flows is 8
percent. Fly-By-Night is trying to decide whether it should offer 35 percent of its stock
or $11.5 million in cash to Flash-in-the-Pan.
A212 BWFF3013 CORPORATE FINANCE
a. What is the synergy from the merger?
Synergy value = $4,312,500
b. What is the value of Flash-in-the-Pan to Fly-By-Night? Value = $12,412,500
c. What is the cost to Fly-By-Night of each alternative?
Stock acquisition cost = $10,994,375
d. What is the NPV to Fly-By-Night of each alternative?
NPV of stock offer = $1,418,12
e. What alternative should Fly-By-Night use?