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(StockforStockMerger)ACorporationisconsideringtheacquisitionofXCorporation.

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1. (StockforStockMerger)ACorporationisconsideringtheacquisitionofXCorporation.Eachcorporationhasthefollowing;data;ExistingIncome;$4,200,000;$2,200,000;ACorporation;XCorporation;NumberofShares;621,000;365,000;Synergisticadditionalbenefitsfromthecombinationare$1,200,000.;WhatistheminimumexchangeratioisnecessarytokeeptheXshareholderswholeintermsofearningspershare?;WhatisthemaximumexchangeratiowouldtheACorporationshareholderacceptintakingoverXCorporationandremainwholein;termsofearningspershare?;2. (CashforStockMerger)Youhavebeengiventhejobofevaluatingthefollowingmergercandidate.Youhavecollectedthe;followingcashflowestimatesfortheacquisitioncandidatefortheproposedmerger(inmillions);Year;Cashflowsnowforthetarget;Additionalcashflows(synergy);1;2;3;4;5;60;80;100;125;150;40;70;100;125;150;Totalcashflowsfromtarget(aftermerger);100;150;200;250;300;Riskfreerateofreturn;Betaforthisproject(thecompanyaftermerging);Marketriskpremium;Pretaxcostofdebt;Marginalaftertaxrate;Numberofsharesoutstandingforthetargetcompany(millions);Currentmarketpricepershareforthetargetcompany;Percentageoftheacquisitionfinancedwithdebt;Percentageoftheacquisitionfinancedwithcommonequity;$51;4%;1.47;5%;8%;25%;10;40%;60%;Whatistheaftertaxcostofdebtforthismerger?;Whatistheaftertaxcostofcommonequityforthismerger?;Whatistheweightedaveragecostofcapitalforthisacquisitioncandidate?;PleaserunanetpresentvalueusingtheWACCcalculatedabovewiththetotalcashflowsfromthetarget(givenabove)todetermine;themaximumpricepershareyouarewillingtopayforthistargetcandidate?;Basedwhatyoucalculatedandthecurrentmarketprice,wouldyoupursuethiscandidate?;3. Whydoyouthinkleasingisaspopularasitisinpractice?;4.Basedonseveralstudies,between60%to80%ofcorporatemergersdecreasethewealthoftheacquiringfirm's;shareholders(orincreasewealthlessthannonmergingcompanies).Whatcouldaccountforthisdismalrecord?

 

Paper#29923 | Written in 18-Jul-2015

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