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ThemomentumacquisitionapproachfocusesonthemaintenanceofasteadypathofgrowthinEPS,

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Assignment Questions;1.ThemomentumacquisitionapproachfocusesonthemaintenanceofasteadypathofgrowthinEPS,revenue,orassets.Therefore,howtomanagetheearningsdilutionoraccretionisessentialtothesuccessofthisstrategy.;Please briefly explain how dilution (or accretion) occurs and identify the factors that drive EPS dilution.;2. Assumethatabuyerandtargetagreetoastock-for-stockacquisition.Thebuyerhas1.5millionsharesoutstandingand$3millioninearnings.ItscurrentP/Eratiois25.Thetargethasonemillionsharesoutstandingand$1millioninearnings.Thetarget'scurrentP/Eratiois20.Supposethebuyeriswillingtooffera23percentpremiumforthetarget,andapurchase-relatedtransactionchargeof0.5percentoftotalpurchasepriceisexpected.(UsetheExcelfile,"Momentum.xls,"providedseparatelytoautomateyourcalculationsonthisproblem.);Calculate the earnings per share for Newco after the merger and the percentage change in the buyer's EPS.;Exhibit 17.3;Example of E.P.S. Dilution Induced by a;Stock-for-Stock, Purchase Deal;Before;Buyer;Target;After share-forshare acquisition;Newco % Change;Financial Data on Merging Firms;0.05;$1,000;$1,000;(50);$1,950;95%;2 Net Income;1,000;1,000;2,250;125%;3 Number of shares;$1.00;$1.00;$0.87;-13%;$25.00;25.00;$25.00;25.00;1.00;1 Purchase-related charges;4 Earnings Per Share (EPS);5 Current stock price;6 Price/Earnings Ratio;7 Ratio of earnings of Target to Buyer;Terms of share-for-share offer;8 Dollar value of bid;9 Premium over Targets pre-bid price;10 Ratio of P/E Paid to P/E of Buyer;$31.25;25%;1.25;Dilution to the buyer resulting from the deal;11 Dollar accretion (dilution) in Buyer E.P.S.;12 Percentage accretion (dilution);$(0.13);-13%;Exhibit 17.4;Dilution/Accretion in a Purchase;E P S D ilut ion (-) o r Ac c r e d t ion (+);Ratio of;Offered P/E to;P/E of Buyer;0.05;0.25;0.50;0.75;1.00;1.25;1.50;1.75;2.00;0.50;41%;29%;16%;5%;16%;-11%;-17%;-23%;16%;0.75;64%;43%;16%;9%;16%;-12%;-20%;-26%;16%;Stock-for-stock Deal;Relative Size (Earnings of Target/Buyer);1.00;1.25;86%;107%;56%;68%;16%;16%;11%;14%;16%;16%;-13%;-14%;-22%;-23%;-29%;-31%;16%;16%;1.50;128%;78%;16%;15%;16%;-15%;-25%;-32%;16%;1.75;148%;88%;16%;17%;16%;-15%;-26%;-34%;16%;N.B.: Shading indicates result found in the "base case" example.;EPS D ilut ion (-) or Accret ion (+) In Sha re-for-Sha re D ea ls by Rela tive Size of T a rget;and Relat ive P/E (Given in Box at Right);0%;-2%;-4%;-6%;-8%;-10%;-12%;-14%;0.50;0.50;1.00;2.00;0.75;1.00;1.25;Siz e of T arg et Relat ive t o Bid der;1.50;1.75;View Full Attachment

 

Paper#28649 | Written in 18-Jul-2015

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