C h a p t e r 2 1 M e r g e r sa n d A c q u i s i t i o n s

a. What discount rate should be used to discount the estimated cash flows? (Hint:
Use Goldilocks' r, to determine the market risk premium.)
b.

What is the dollar value of Black-Wolf to Goldilocks?

c.

Black-Wolf has 1.2 million common shares outstanding. What is the maximum
price per share that Goldilocks should offer for Black-Wolf? If the tender offer is
accepted at this price, what will happen to Goldilocks' stock price?

2'l-5

CAPITAL BUDGETINGANALYSIS The Stanley Stationery Shoppe wants to acquire

The Carlson Card Callery for $400,000. Stanley expects the merger to provide
incremental earnings of about $64,000 a year for 10 years. Ken Stanley has calculated the marginal cost of capital for this investment to be 10%. Conduct a capital
budgeting analysis for Stanley to determine whether he should purchase The
Carlson Card Gallery.

{lra{{*ruqlruq 21-6
Fruhl*ml #

MERGERANALYSIS SingTel Corporation, alarge telecomrnr.rnicationscompany, is

evaluating the possible acquisition of Pixable Inc., a social photo aggregation service
company. SingTel's analysts project the following post-merger data for Pixable (in
thousands of dollars):

Net sales
S e l l i n ga n d a d m i n i s t r a t i v ee x p e n s e
Interest
Tax rate after meroer

35orc

Cost of goods sold as a percent of sales

650/o

Betaafter merger

1.50

rate
Risk-free

8o/o

Marketrisk premium

4o/o

2912

ZO13

2014

2015

s4s0
45
18

5s18
s3
21

ssss
60
24

5600
68
27

C o n t i n u i n gg r o w t h r a t e o f c a s h f l o w
available to SingTel

7o/o

If the acquisition is made, it will occur on January 7,2073. AII cash flows shown in
the income statements are assumed to occur at the end of the year. Pixable
currently has a capital structure of 40% debt, but SingTel would increase that to
50"/, if the acquisition were made. Pixable, if independent, would pay taxes at 20'h;
but its income would be taxed at 35'/" if it were consolidated. Pixable's current
market-determined beta is 1.40, and its investment bankers think that its beta
would rise to 1.50 if the debt ratio were increased to 50%. The cost of goods sold is
expected to be 65u/"of sales, but it could vary somewhat. Depreciation-generated
funds would be used to replace worn-out equipment, so they would not be
available to SingTel's shareholders. The risk-free rate is 8"/o, and the market risk
premium is 4'k.
a. What is the appropriate discount rate for valuing the acquisition?
b.

What is the continuing value?

c. What is the value of Pixable to SingTel?

COMPREHENSIVE
/ SPREADSHEET
PROBLEM
21-7

MERGERANALYSIS Use the spreadsheet model to rework Problem 21-6 and then
answer the following question:

d. SupposePixablehas 120,000sharesoutstanding.What is the maximum pershareprice SingTelshould offer for Pixable?

757