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Chapter 17 Assignment Questions




Question;Chapter 17Assignment Questions1. The momentum acquisition approach focuses on the maintenance of a steady path of growth in EPS, revenue, or assets. Therefore, how to manage the earnings dilution or accretion is essential to the success of this strategy. Please briefly explain how dilution (or accretion) occurs and identify the factors that drive EPS dilution.2. Assume that a buyer and target agree to a stock-for-stock acquisition. The buyer has 1.5 million shares outstanding and $3 million in earnings. Its current P/E ratio is 25. The target has one million shares outstanding and $1 million in earnings. The target's current P/E ratio is 20. Suppose the buyer is willing to offer a 23 percent premium for the target, and a purchase-related transaction charge of 0.5 percent of total purchase price is expected. (Use the Excel file, "Momentum.xls," provided separately to automate your calculations on this problem.)Calculate the earnings per share for Newco after the merger and the percentage change in the buyer's EPS.Exhibit 17.3Example of E.P.S. Dilution Induced by aStock-for-Stock, Purchase DealBeforeBuyerTargetAfter share-forshare acquisitionNewco % ChangeFinancial Data on Merging Firms0.05$1,000$1,000(50)$1,95095%2 Net Income1,0001,0002,250125%3 Number of shares$1.00$1.00$0.87-13%$25.0025.00$25.0025.001.001 Purchase-related charges4 Earnings Per Share (EPS)5 Current stock price6 Price/Earnings Ratio7 Ratio of earnings of Target to BuyerTerms of share-for-share offer8 Dollar value of bid9 Premium over Target?s pre-bid price10 Ratio of P/E Paid to P/E of Buyer$31.2525%1.25Dilution to the buyer resulting from the deal11 Dollar accretion (dilution) in Buyer E.P.S.12 Percentage accretion (dilution)$(0.13)-13%Exhibit 17.4Dilution/Accretion in a PurchaseE P S D ilut ion (-) o r Ac c r e d t ion (+)Ratio ofOffered P/E toP/E of Buyer0.050.250.500.751.001.251.501.752.000.5041%29%16%5%16%-11%-17%-23%16%0.7564%43%16%9%16%-12%-20%-26%16%Stock-for-stock DealRelative Size (Earnings of Target/Buyer)1.001.2586%107%56%68%16%16%11%14%16%16%-13%-14%-22%-23%-29%-31%16%16%1.50128%78%16%15%16%-15%-25%-32%16%1.75148%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%0.500.501.002.000.751.001.25Siz e of T arg et Relat ive t o Bid der1.501.75


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