Finance I, Problem Set 8 Questions: Mergers and Acquisitions
|Earnings per share||€6.00||€8.80|
|Current dividends per share||€3.73||€5.28|
|Number of shares||10 million||5.5 million|
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?
|Earnings per Share||$2.00||$2.50||$2.67|
|Price per Share||$40||$25||?|
|Number of shares||100,000||200,000||?|
|Total market value||$4,000,000||$5,000,000||?|
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?
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Question 1 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
|Earnings per Share||2||2.5||2.67|
|Price per Share||40||25||34.33|
|Number of shares||100,000||200,00||262,172|
|Total market value||4,000,000||5,000,000||9,000,000|
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