FIN 401 Study Guide - Final Guide: Net Present Value, Issued Shares
30 Apr 2018
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Futures Contract: An agreement trading asset on future date, at price
locked in today
“Buy” = Long Position = “Want to Buy Asset” → Benefit in long position
when Price of X goes above locked in price
“Sell” = Short Position = “Want to Sell Asset” → Benefit when Price of X
goes below locked in price
Buyer’s Profit (Long) = (# of contracts)*(contract size)*(expiration price –
futures priceor locked in price)
Seller’s Profit (Short) = (# of contracts)*(contract size)*(futures priceor
locked in price – expiration priceor market price at expiration)
Mergers and Acquisitions
• ΔCF = CFAB – (CFA + CFB) → Change in Annual CF > 0 = Synergy
• ΔV = VAB – (VA + VB) → Use PV = (660,000/0.12) – (600000/0.12)
• Shares Issued = VTarget / PPSAcquirer
• Exchange Ratio = Issued Shares / Exchanged Shares
If there is no Synergy, no true growth in EPS
• Post Takeover PPS = VAB / Total Shares O/S
• Post Takeover EPS = Combined Earnings / Total Shares O/S
• P/E Ratio = PPS / EPS … P/E Ratio: (falls after takeover, as combined MV doesn’t
change)
Cash Acquisition
• NPV = VB* – cash cost
• Value of Firm B to Firm A (VB*) = VB + ∆V
• VA OR VB = Market PPS x Shares O/S | ΔV = Synergy Value
• Value of Combined Firm: VAB = VA + (VB* – cash cost)
• VAB = VA + (VB + ΔV) – cash cost
• PPS = VAB / Shares O/SAcquirer |or| (VAB + NPV) / Shares O/SAc
• Premium (Cash) = Purchase Price – VB | % = Premium / VB
Stock Swap: NPV = VB* – cost to acquirer
Value of Combined Firm: VAB = VA + VB + V
PT = Pre-Merger Target Share Price
PA = Pre-Merger Acquirer Share Price
Maximum Cash Offer = Synergies Per Share + Current Share Priceof Target
Synergies Per Share = Synergy / Shares O/STarget
Paying with Stock
# of shares offered = Acquisition Cost/PPSAcquirer
Tot. # of Shares O/S Post-Merger = Shares O/SAcquirer + # of shares offered
PPS = VAB / Total # of Shares O/S after Merger
Cost to Acquireror Purchase Price = (# of shares offered) (PPS)
Premium = Purchase Price – VB
How Many Shares for NPV = 0, set NPV = 0, solve for # of shares
Exchange Ratio=
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Document Summary
Futures contract: an agreement trading asset on future date, at price locked in today. Buy = long position = want to buy asset benefit in long position when price of x goes above locked in price. Sell = short position = want to sell asset benefit when price of x goes below locked in price. Buyer"s profit (long) = (# of contracts)*(contract size)*(expiration price futures priceor locked in price) Seller"s profit (short) = (# of contracts)*(contract size)*(futures priceor locked in price expiration priceor market price at expiration) Stock swap: npv = vb* cost to acquirer. Value of combined firm: vab = va + vb + v. Maximum cash offer = synergies per share + current share priceof target. Synergies per share = synergy / shares o/starget. # of shares o/s post-merger = shares o/sacquirer + # of shares offered. Pps = vab / total # of shares o/s after merger.
