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Lecture 3

MGFB10H3 Lecture 3: MGFC10_Review Prolems with Solutions on Mergers & Acquisitions

by OneClass312922 , Fall 2016
5 Pages
74 Views
Fall 2016

Department
Finance
Course Code
MGFB10H3
Professor
Syed Ahmed
Lecture
3

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MGFC10H3 (Intermediate Finance)
Review Problems with solutions on Mergers & Acquisitions
Prof. Syed W. Ahmed
QUESTION 1:
Andrea Chubb & Neil Garcia Limited (ACNGL) is considering acquiring Updeshz Chahl & Anthony Lam
Industries (UCALI). The following information is available about the two companies:
ACNGL UCALI
Price $90 $53
Number of Shares 500,000 100,000
Earnings $3,000,000 $500,000
The most recent dividend paid by UCALI was $4 per share and it is expected that dividends and earnings at
UCALI will grow at 6% per year. However after the acquisition due to several economies of scale growth rate
at UCALI will increase to 8% per year.
a. What is the value of UCALI to ACNGL?
b. If ACNGL offers $60 in cash for each share of UCALI then what would the NPV of the acquisition be?
c. If ACNGL offers 67,000 of its shares in exchange for UCALI outstanding shares, then what would the NPV
of the acquisition be?
d. Should the acquisition be attempted, and, if so, should it be a cash or stock offer?
e. To make the value of stock offer equivalent to the cash offer, how many of its share ACNGL offer in
exchange of 100,000 shares of UCALI.
QUESTION 2:
Alex Szeto & Kuraish Zoeb Pools (AKP) and Alan Luc & Virginia Chan Pools (AVP) have agreed to merge
and form Marina Mironenko & Debbie Ma Pools Limited (MDL). The companies are exactly alike except for
location. AKP is located in Toronto, and AVP is in Edmonton. The end of period value of each firm is
determined by the weather, as shown.
Weather Probability Value
Hot 0.2 $5,000,000
Warm 0.5 $4,000,000
Rainy 0.3 $1,000,000
Each company has an outstanding debt claim of $2,000,000. Assume that no premiums are paid in the merger.
a. What is the probability distribution of the value of the combined firm after the merger?
b. What is the probability distribution of the end of period debt values and stock values after the merger?
c. Show that the value of the combined firm is the sum of the individual values.
d. Show that the bondholders are better off and the shareholders are worse off in the combined firm than they
would have been if the firms remain separate.
-2-
QUESTION 3:
Chun Kit Lam & Nadeem Hemani Technologies (CNT) is considering the acquisition of Xiaolin Liu & Danish
Zahid Industries (XDI). CNT has estimated the following incremental benefits and investments:
Incremental Incremental
Cash Flow Incremental Incremental Net Working
Year Before Taxes CCA Investment Capital
0 $0 $0 $60,000 $20,000
1 220,000 40,000 70,000 40,000
2 220,000 80,000 70,000 20,000
3 200,000 50,000 ---- 20,000
4 100,000 30,000 ---- ----
5 to ∞ decline by 2% per ---- ---- ----
year after year 4
Additional Information CNT XDI
P/E ratio 15 14
EPS $2 $3
# of shares outstanding 100,000 50,000
The marginal tax rate is 40%, and the discount rate is 12%.
a. What is the NPV if CNT acquire XDI by using cash and paying a premium of 15%?
b. What is the NPV if CNT employ stock to acquire XDI and use an exchange ratio of 1.6?
c. How many shares should be issued to XDI’s shareholders if CNT would like to maintain cost of acquisition
through stock same as the cost when cash is used. What will be the share price after the acquisition?
d. How many shares should be issued to XDI’s shareholders if CNT would like to hold 60% of the shares of
the combined firm. What would be the price per share? What would be the NPV?

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Description
MGFC10H3 (Intermediate Finance) Review Problems with solutions on Mergers & Acquisitions Prof. Syed W. Ahmed QUESTION 1: Andrea Chubb & Neil Garcia Limited (ACNGL) is considering acquiring Updeshz Chahl & Anthony Lam Industries (UCALI). The following information is available about the two companies: ACNGL UCALI Price $90 $53 Number of Shares 500,000 100,000 Earnings $3,000,000 $500,000 The most recent dividend paid by UCALI was $4 per share and it is expected that dividends and earnings at UCALI will grow at 6% per year. However after the acquisition due to several economies of scale growth rate at UCALI will increase to 8% per year. a. What is the value of UCALI to ACNGL? b. If ACNGL offers $60 in cash for each share of UCALI then what would the NPV of the acquisition be? c. If ACNGL offers 67,000 of its shares in exchange for UCALI outstanding shares, then what would the NPV of the acquisition be? d. Should the acquisition be attempted, and, if so, should it be a cash or stock offer? e. To make the value of stock offer equivalent to the cash offer, how many of its share ACNGL offer in exchange of 100,000 shares of UCALI. QUESTION 2: Alex Szeto & Kuraish Zoeb Pools (AKP) and Alan Luc & Virginia Chan Pools (AVP) have agreed to merge and form Marina Mironenko & Debbie Ma Pools Limited (MDL). The companies are exactly alike except for location. AKP is located in Toronto, and AVP is in Edmonton. The end of period value of each firm is determined by the weather, as shown. Weather Probability Value Hot 0.2 $5,000,000 Warm 0.5 $4,000,000 Rainy 0.3 $1,000,000 Each company has an outstanding debt claim of $2,000,000. Assume that no premiums are paid in the merger. a. What is the probability distribution of the value of the combined firm after the merger? b. What is the probability distribution of the end of period debt values and stock values after the merger? c. Show that the value of the combined firm is the sum of the individual values. d. Show that the bondholders are better off and the shareholders are worse off in the combined firm than they would have been if the firms remain separate. -2- QUESTION 3: Chun Kit Lam & Nadeem Hemani Technologies (CNT) is considering the acquisition of Xiaolin Liu & Danish Zahid Industries (XDI). CNT has estimated the following incremental benefits and investments: Incremental Incremental Cash Flow Incremental Incremental Net Working Year Before Taxes CCA Investment Capital 0 $0 $0 $60,000 $20,000 1 220,000 40,000 70,000 40,000 2 220,000 80,000 70,000 20,000 3 200,000 50,000 ---- 20,000 4 100,000 30,000 ---- ---- 5 to ∞ decline by 2% per ---- ---- ---- year after year 4 Additional Information CNT XDI P/E ratio 15 14 EPS $2 $3 # of shares outstanding 100,000 50,000 The marginal tax rate is 40%, and the discount rate is 12%. a. What is the NPV if CNT acquire XDI by using cash andpaying a premium of 15%? b. What is the NPV if CNT employ stock to acquire XDI and use an exchange ratio of 1.6? c. How many shares should be issued to XDI’s shareholders if CNT would like to maintain cost of acquisition through stock same as the cost when cash is used. What will be the share price after the acquisition? d. How many shares should be issued to XDI’s shareholders if CNT would like to hold 60% of the shares of the combined firm. What would be the price per share? What would be the NPV? -3- Answer 1: ($4×100,000)(1.06) 424,000 a. $5,300,000 = = ∴r = 0.14 r −0.06 r −0.06 Value of UCALI to ACNGL is (4 ×00 ,000 )(08 ) V = = $7,200 000 014− 0.08 b. NPV = $7,200,000-$60(100,000) = $1,200,000 c. Cost = fraction of the combined firm owned by UCALI x Value of the combined firm. V combined$90(500,000) + 7,200,000 = $52,200,000 Fraction owned by UCALI = 67,000/(500,000+67,000) = 0.118166 C
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