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- Date Submitted: 05/02/2016 5:09 AM
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FIN 516 Week 6 Homework Problem

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FIN 516 Week 6 Homework Problem

Problem 28-9 on Acquisition Analysis Based on Chapter 28 Mergers and Acquisitions

(Excel file included)

Your company has earnings per share of $4. It has 1 million shares outstanding, each of which has a price of $40. You are thinking of buying TargetCo, which has earnings per share of $2, 1 million shares outstanding, and a price per share of $25. You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction.

a) If you pay no premium to buy TargetCo, what will your earnings per share be after the merger?

b) Suppose you offer an exchange ratio such that, at current preannouncement share prices for both firms, the offer represents a 20% premium to buy TargetCo. What will your earnings per share be after the merger?

c) What explains the change in earnings per share in part a)? Are your shareholders any better or worse off?

d) What will your price-earnings ratio be after the merger (if you pay no premium)? How does this compare to your P/E ratio before the merger? How does this compare to TargetCo’s premerger P/E ratio?

Problem 16-8 on Managerial Decision Based on Chapter 16 Financial Distress, Managerial Incentives, and Information

(Excel file included)

As in Problem 1, Gladstone Corporation is about to launch a new product. Depending on the success of the new product, Gladstone may have one of four values next year: $150 million, $135 million, $95 million, or $80 million. These outcomes are all equally likely, and this risk is diversifiable. Suppose the risk-free interest rate is 5% and that, in the event of default, 25% of the value of Gladstone’s assets will be lost to bankruptcy costs. (Ignore all other market...

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