Log in
Finance
1
answer
0
watching
113
views

GBE Inc. is analyzing the possible acquisition of AWA Media Inc. Neither company has debt. The financial analyst of GBE has collected the following information:
GBE
AWA
Pre-merger stock price
$42
$20
Number of shares outstanding
12 million
8 million
GBE and AWA have agreed on a transaction value of $24 per share for AWA’s stock, but are negotiating methods of payment: an all-cash offer, and a stock exchange offer. GBE estimates the acquisition will increase its total after-tax annual cash flows by $7.6 million indefinitely. The appropriate discount rate for the incremental cash flows is 10 percent.
a. What is the synergy from the acquisition? Calculate the takeover premium of each alternative. (9 marks)
b. Calculate the NPV of each alternative. (2 marks)
c. Assume the synergy is re-estimated to be $80million based on the recent market information. What is the maximum cash price per share that could be paid for AWA? (2 marks)
d. Assume the synergy remains to be $80million. Calculate the takeover premium for a cash and stock exchange offer ($6.5 cash per share of AWA plus 0.35 shares of GBE per share of AWA). (4 marks)
e. Name and describe two pre-offer and two post-offer defensive tactics. (3 marks)

Watch
1
answer
0
watching
113
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Jean Keeling
Jean KeelingLv2
28 Sep 2019

Unlock all answers

Get 1 free homework help answer.
Already have an account? Log in
Share

Related questions

Problem 29-14 Merger NPV

Fly-By-Night Couriers is analyzing the possible acquisition of Flash-in-the-Pan Restaurants. Neither firm has debt. The forecasts of Fly-By-Night show that the purchase would increase its annual aftertax cash flow by $380,000 indefinitely. The current market value of Flash-in-the-Pan is $10 million. The current market value of Fly-By-Night is $24 million. The appropriate discount rate for the incremental cash flows is 10 percent. Fly-By-Night is trying to decide whether it would offer 35 percent of its stock or $13 million in cash to Flash-in-the-Pan.
a.

What is the synergy from the merger? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
Synergy value $
b.

What is the value of Flash-in-the-Pan to Fly-By-Night? (Do not round intermediate calculations.Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
Value $
c.

What is the cost to Fly-By-Night of each alternative? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, i.e. 1,234,567.)
Cost of cash $
Cost of stock $
d.

What is the NPV to Fly-By-Night of each alternative? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, i.e. 1,234,567.)
NPV of cash $
NPV of stock $
e.

What alternative should Fly-By-Night use?
Cash offer
Stock offer

Fly-By-Night Couriers is analyzing the possible acquisition of Flash-in-the-Pan Restaurants. Neither firm has debt. The forecasts of Fly-By-Night show that the purchase would increase its annual aftertax cash flow by $330,000 indefinitely. The current market value of Flash-in-the-Pan is $10 million. The current market value of Fly-By-Night is $18 million. The appropriate discount rate for the incremental cash flows is 10 percent. Fly-By-Night is trying to decide whether it should offer 40 percent of its stock or $13 million in cash to Flash-in-the-Pan.
a.

What is the synergy from the merger? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)
Synergy value $
b.

What is the value of Flash-in-the-Pan to Fly-By-Night? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)
Value $
c.

What is the cost to Fly-By-Night of each alternative? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, e.g., 1,234,567.)
Cost of cash $
Cost of stock $
d.

What is the NPV to Fly-By-Night of each alternative? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, e.g., 1,234,567.)
NPV cash $
NPV stock $
e.

Which alternative should Fly-By-Night use?
Stock offer
Cash offer

References

eBook & Resources

Given Information:

- X Corporation is considering acquiring Y Corporation.

- Neither corporation has any debt.

- X Corporation expects the acquisition of Y Corporation will generate synergy equal to $1 million per year in after-tax cash flow, indefinitely (a perpetuity).

- X Corporation's current market value is $65 million.

- Y Corporation's current market value is $35 million.

- The appropriate discount rate, based on the risk of Y Corporation, is 10%.

- X Corporation needs to decide between offering 40% of its stock or $40 million in cash to Y Corporation's shareholders.

a) What is the cost of the stock offer? (Hint: First calculate the value of the target to the acquirer.)

b) What is the cost of the cash offer?

c) What are the NPVs of the stock offer and of the cash offer?

d) Which alternative should X Corporation pursue?

*Please show your work as best as possible including formulas used, Thank you*

Weekly leaderboard

Home
Homework Help 3,900,000
Finance 370,000
Start filling in the gaps now
Log in