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5. P 0 =66.25; D 1 = 5.30 g =4% R e =? R e = 12%

5. P 0 =66.25; D 1 = 5.30 g =4% R e =? R e = 12%. 9. W e =.55; W d =.45;P 0 =43; D 1 = 1.30; g=3% R e =?; C r = 7%; YTM=6.8%; T=34% ; . 11. WACC=? EBIT=2mln; T=34%; R e = 14; D=4mln; R d =9% Vl =10,788571.43. 12. EBIT=300,000; 100000sh*18; D=600,000; Intr =8%; ROE=?.

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5. P 0 =66.25; D 1 = 5.30 g =4% R e =? R e = 12%

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  1. 5. P0=66.25; D1 = 5.30 g =4% Re =? Re= 12%

  2. 9. We=.55; Wd=.45;P0=43; D1 = 1.30; g=3% Re =?; Cr= 7%; YTM=6.8%; T=34%;

  3. 11. WACC=? EBIT=2mln; T=34%; Re = 14; D=4mln; Rd =9% Vl=10,788571.43

  4. 12. EBIT=300,000; 100000sh*18; D=600,000; Intr=8%; ROE=?

  5. Problem 13, 14, 16 (yellow) 13. EBIT=400; D=600; VU =100 T=34%; VL =? • VL = VU + DTC =1000+600*.34=1204 14. T=35% Re =14% D=1000 EBIT= 300.00 • VU = 300*.65/.14 =1,392.85 16. D=500;V=1100; T=34%; RD=7% Re =14% WACC= (6/11).1785+ (5/11)(.07)(.66)=.1184 Re=.1785

  6. 17, 18, 19, 20 17. EBIT=46,000; Re =15%; T=34%; Vu =? If D=75,000 -- Vu = 202,400 VL = VU + DTC=202,400+25,500=227,900 18. D/E=.4; WACC=16%; YTM=13%; Re=? D/E=.4 ; We =.7143 Wd =.2857 .16=.7143*Re+. 2857*.13 Re=.1720 19. P=12; 10% stock div. P=12/1.1=10.90 20. D/E=1/2; New Fin=2700 New Eq=1800 NI=1700; no res div can be paid..

  7. Chapter 23 mergers and acquisitions http://www.potashcorp.com/news/1040/ /

  8. Definition • The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity.

  9. Business valuation The five most common ways to valuate a business are • asset valuation, • historical earnings valuation, • future maintainable earnings valuation, • relative valuation (comparable company & comparable transactions), • discounted cash flow (DCF) valuation

  10. Chapter Outline • The Legal Forms of Acquisitions • Accounting for Acquisitions • Gains from Acquisition • The Cost of an Acquisition • Defensive Tactics • Some Evidence on Acquisitions • Divestitures and Restructurings

  11. Legal Forms of Acquisitions • Merger or consolidation • Acquisition of stock • Acquisition of assets

  12. Merger versus Consolidation • Merger • One firm is acquired by another • Acquiring firm retains name and acquired firm ceases to exist • Consolidation • Entirely new firm is created from combination of existing firms

  13. Stock Acquisition (1) • A firm can be acquired by purchasing voting shares of the firm’s stock • Tender offer – public offer to buy shares • Circular bid – takeover bid communicated to shareholders by direct mail • Stock exchange bid – takeover bid communicated to shareholders through a stock exchange

  14. Stock Acquisition (2) • No stockholder vote required • Can deal directly with stockholders, even if management is unfriendly • May be delayed if some target shareholders hold out for more money – complete absorption requires a merger

  15. Acquisition Classifications • Horizontal – both firms are in the same industry • Vertical – firms are different stages of the production process • Conglomerate – firms are unrelated

  16. Takeovers • Control of a firm transfers from one group to another • Possible forms • Acquisition • Proxy contest • Going private (LBO vs. MBO)

  17. Alternatives to Merger • Strategic alliance = agreement between firms to cooperate in pursuit of a joint goal • Joint venture = an agreement between firms to create a separate, co-owned entity established to pursue a joint goal

  18. Accounting for Acquisitions • The Purchase Method • Assets of acquired firm are written up to fair market value • Goodwill is created – difference between purchase price and estimated fair market value of net assets

  19. Gains from Acquisition • Synergy • Revenue enhancement • Cost reductions • Tax gains

  20. Synergy • The whole is worth more than the sum of the parts • Synergies should create enough benefit to justify the cost

  21. Revenue Enhancement • Marketing gains • Advertising • Distribution network • Product mix • Strategic benefits • Market power

  22. Cost Reductions • Economies of scale • Ability to produce larger quantities while reducing the average per unit cost • Economies of vertical integration • Coordinate operations more effectively • Reduced search cost for suppliers or customers • Complimentary resources

  23. Taxes • Tax losses • Unused debt capacity • Surplus funds • Asset write-ups

  24. Reducing Capital Needs • Firms may be able to manage existing assets more effectively under one umbrella • Some assets may be sold if they are not needed in a combined firm

  25. Diversification • Diversification, in and of itself, is not a good reason for a merger • Stockholders can diversify their own portfolio cheaper than a firm can diversify by acquisition

  26. EPS Growth • Mergers may create the appearance of growth in earnings per share • If there are no synergies or other benefits to the merger, then the growth in EPS is just an artifact of a larger firm and is not true growth • In this case, the P/E ratio should fall because the combined market value should not change

  27. The Cost of Acquisition: Cash Acquisition • The NPV of a cash acquisition is • NPV = VB* – cash cost • Value of the combined firm is • VAB = VA + (VB* - cash cost)

  28. The Cost of Acquisition: Stock Acquisition • Value of combined firm • VAB = VA + VB + V • Cost of acquisition • Depends on the number of shares given to the target stockholders • Depends on the price of the combined firm’s stock after the merger

  29. Shares vs. Common Stock • Sharing rights • Taxes • Control

  30. Defensive Tactics(1) • Corporate charter • Establishes conditions that allow for a takeover • Supermajority voting requirement • Targeted repurchase (Greenmail) • Standstill agreements • Exclusionary offers • Poison pills • Share rights plans

  31. Defensive Tactics (2) • Leveraged buyouts (LBO) • Other defensive tactics • Golden parachutes • Crown jewels • White knight

  32. Evidence on Acquisitions • Shareholders of target companies tend to earn excess returns in a merger • Shareholders of target companies gain more in a tender offer than in a straight merger • Target firm managers have a tendency to oppose mergers, thus driving up the tender price

  33. More Evidence • Shareholders of bidding firms do not earn much excess return in either a tender offer or a straight merger • Anticipated gains from mergers may not be achieved • Bidding firms are generally larger, so it takes a larger dollar gain to get the same percentage gain • Management may not be acting in stockholders best interest • Takeover market may be competitive • Announcement may not contain new information about the bidding firm

  34. Divestitures and Restructurings • Divestiture = sale of assets, operations, or divisions to a third party • Equity carve-out • Spin-off • Split-up

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