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    LBS Tutorial 8 Finance

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    giovanni
    This document contains practice questions related to mergers and acquisitions. It evaluates different rationales for M&A deals and calculates acquisition premiums and synergies in hypothetical scenarios. Specifically, it assesses whether diversification through unrelated acquisitions would lower a company's cost of debt. It also calculates the total merger gain and acquisition premium for a potential merger between two companies based on their share prices and earnings. Finally, it analyzes how issuing new shares to acquire another company affects earnings per share and shareholder value.

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    LBS Tutorial 8 Finance

    Uploaded by

    giovanni
    291 views3 pages
    This document contains practice questions related to mergers and acquisitions. It evaluates different rationales for M&A deals and calculates acquisition premiums and synergies in hypothetical scenarios. Specifically, it assesses whether diversification through unrelated acquisitions would lower a company's cost of debt. It also calculates the total merger gain and acquisition premium for a potential merger between two companies based on their share prices and earnings. Finally, it analyzes how issuing new shares to acquire another company affects earnings per share and shareholder value.

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    This document contains practice questions related to mergers and acquisitions. It evaluates different rationales for M&A deals and calculates acquisition premiums and synergies in hypothetical scenarios. Specifically, it assesses whether diversification through unrelated acquisitions would lower a company's cost of debt. It also calculates the total merger gain and acquisition premium for a potential merger between two companies based on their share prices and earnings. Finally, it analyzes how issuing new shares to acquire another company affects earnings per share and shareholder value.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    291 views3 pages

    LBS Tutorial 8 Finance

    Uploaded by

    giovanni
    This document contains practice questions related to mergers and acquisitions. It evaluates different rationales for M&A deals and calculates acquisition premiums and synergies in hypothetical scenarios. Specifically, it assesses whether diversification through unrelated acquisitions would lower a company's cost of debt. It also calculates the total merger gain and acquisition premium for a potential merger between two companies based on their share prices and earnings. Finally, it analyzes how issuing new shares to acquire another company affects earnings per share and shareholder value.

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    © All Rights Reserved
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    Finance Tutorial 8 M&A

    Question 1:

    Evaluate the following comments.

    a. “Our cost of debt is high because we’re a pure-play healthcare company and vulnerable to
    changes in healthcare regulation. We should buy a water company to diversify and reduce our cost
    of debt.”

    False. Buying another company will not decrease the cost of debt.

    b. “Merge with Fledgling Electronics? No way! Their P/E’s too high. That deal would knock 20% off
    our earnings per share”.

    False. A deal can be accruting or diluting depending on the acquirer P/E ratio.

    c. “Our business is offering cable TV, broadband, and telephone services to households. We should
    buy a company that makes TV programmes, so that we can offer better products to our customers.”

    False. Vertical integration depends on various things such as capability to produce the tv
    programme, cultural clashes, synergies between companies.

    Question 2:

    Steinberg is investigating a possible merger with Dietrich, which is currently unanticipated by the
    market. Here is basic information about the two companies for the last financial year. Both
    companies are all-equity financed.

    Both Steinberg and Dietrich are mature


    firms, with forecasted growth of 2.5% per year. Steinberg’s treasurer believes that post-merger cost
    savings could generate a one-time permanent 15% increase in the two firms’ combined earnings.
    Dividend payout would increase proportionally, although long-term growth would remain at 2.5%
    per year.

    a. What is the total merger gain? Hint: use the current stock prices to calculate the current costs of
    equity.

    Merger gain = synergies

    Total EPS = 14.80

    Earning after M&A = 14.80 * 15.5 shares * 1.15 = 263.81

    Re = Div / Pshare = 6.21%

    Vat = Earnings/re = 263.81 / 0.0621 = 4230.56 = Va + Vt + synergies


    Va = 60*10 = 600
    Vt =85*5.5 = 467.5
    Synergies = 4230.56 – 600 – 467.5 = 3163

    b. What is the acquisition premium if Steinberg borrows €600 million and pays this amount in cash
    for Dietrich?

    Premium = 600 - Vt = 600 – 467.5 = 132.5

    c. Suppose that Steinberg offers 1.65 Steinberg shares for each Dietrich share. What is the
    acquisition premium in this case?

    # of shares outstanding = 10 + 1.65*5.5 = 19.075

    After deal is completed


    Acquired share = 10/19.075 * Vat = 2218
    Target Share = (1.65*5.5/19.075)* Vat = 2012.7

    3. Nedwin is determined to report earnings per share of $2.67. It therefore acquires the Feldmania
    Company. You are given the following facts:

    There are no gains from merging. In exchange for Feldmania shares, Nedwin issues just enough of its
    own shares to achieve its $2.67 EPS objective.

    a.
    Total earnings = 700,000

    Total Value = 9 mm

    EPS = 2.67

    Share = 700,000/2.67 = 262.17

    Price = Total value / share = 34.33

    P/E = price/EPS = 34.33/2.67 = 12.86

    b.
    100 + ratio * 200 = 262

    Ratio = 0.81

    c.

    d.
    V_before = 100k*P = 4000 k
    V_after = 100/262.17 * Vat = 100/262.17*9mm = 3433 k
    Negative change by -567k.

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