Finance I, Problem Set 8 Questions: Mergers and Acquisitions

1. Evaluate the following comments.
   “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.”
   b. “Merge with Fledgling Electronics? No way! Their P/E’s too high. That deal would knock 20% off our earnings per share”.
   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.”
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.
b. What is the acquisition premium if Steinberg borrows €600 million and pays this amount in cash for Dietrich?
c. Suppose that Steinberg offers 1.65 Steinberg shares for each Dietrich share.

What is the acquisition premium in this case?

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. Complete the above table for the merged firm.
b. How many shares of Nedwin are exchanged for each share of Feldmania?
c. What is the acquisition premium paid by Nedwin?
d. What is the change in the total market value of the Nedwin shares that were outstanding before the merger?

BRIEF SOLUTIONS  AND ANSWERS!!!

Question 1 Part b

Part b

Merging with a target with higher P/E will decrease the acquirer’s EPS. However, it is worth noting that the decrease in EPS of the acquirer will be offset by the increase in its P/E. As a result, the question of whether the merger increases or decreases EPS is not considered relevant. Thus, the most substantial question is whether there are synergies from the merger.

Question 3 Part a
Completing the Table

GET THE SOLUTIONS OF ALL THE QUESTIONS 100% PLAGIARISM FREE AT ONLY $55 NOW!!