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MACR Problem set 2


1. Purchase Price and EV
Using the assumptions below, calculate ValueCo's equity
purchase price and enterprise value

a. Calculate equity purchase price


b. Calculate enterprise value

2. EPS Calculation
i) If the pro forma EPS of two combined companies is higher than the EPS of the acquirer on a
standalone basis, the transaction is said to be
A. Accretive B. Dilutive
C. Breakeven D. Consensus
Use the information below for the following four questions

ii) Calculate pro forma combined EPS


A. $2.80 B. $3.50
C. $4.00 D. $5.00
iii) Calculate the accretion/(dilution) on a dollar amount basis
A. ($0.50) B. $0.50
C. ($0.88) D. $0.88
iv) Calculate the accretion/(dilution) on a percentage basis
A. (14.3%) B. 14.3%
C. (12.5%) D. 12.5%
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v) Calculate the breakeven pre-tax synergies/(cushion)


A. ($161.3) million B. $161.3 million
C. ($201.6) million D. $201.6 million
vi) Assuming all else being equal, if a company with a P/E of 15x acquires a company with a P/E of
12x in an all-stock deal, the transaction is ?
A. Accretive B. Dilutive
C. Breakeven D. Cannot be determined
vii) An accretion/(dilution) analysis is typically performed by
A. Public strategic buyers B. Sponsor buyers
C. Family-owned sellers D. Non-public foreign buyers
3. Diluted shares
Calculate fully diluted shares using the information below

4. Diluted shares
Using the information provided for Gasparro Corp., complete the questions regarding fully diluted
shares outstanding
Current Share Price Rs.50
Basic Shares outstanding 98.50m
ESOPs
Tranche 1 , 1.25 m at ex price of Rs.10
Tranche 2 , 1.00 m at ex price of Rs.30
Tranche 3 , 0.50 m at ex price of Rs.40
Tranche4 , 0.25 m at ex price of Rs.60
a. Calculate Gasparro Corp.'s in-the-money options/warrants
______________________________________________________
b. Calculate proceeds from in-the-money options/warrants
______________________________________________________
c. Calculate net new shares from the options/warrants
______________________________________________________
d. Calculate fully diluted shares outstanding
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5. Mergers
Indicate whether the following statements are true or false.
a. Sellers almost always gain in mergers.
b. Buyers usually gain more than sellers.
c. Firms that do unusually well tend to be acquisition targets.
d. Merger activity in the United States varies dramatically from year to year.
e. On the average, mergers produce economic gains.
f. Tender offers require the approval of the selling firm’s management.

6. Cash versus Stock Payment


Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn
believes the acquisition will increase its total after-tax annual cash flows by $2.4 million indefinitely.
The current market value of Teller is $58 million, and that of Penn is $107 million. The appropriate
discount rate for the incremental cash flows is 10 percent. Penn is trying to decide whether it should
offer 40 percent of its stock or $73 million in cash to Teller’s shareholders. What is the NPV of each
alternative? Which alternative should Penn choose?

7. Cash versus Stock as Payment


Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm
T). Assume that both firms have no debt outstanding.
Firm B Firm T
Shares outstanding 3,400 1,500
Price per share $43 $18
Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $6,000.
a. If Firm T is willing to be acquired for $20.50 per share in cash, what is the NPV of the
merger? What will the price per share of the merged firm be assuming the conditions in (a)?
b. In part (a), what is the merger premium?
c. Suppose Firm T is agreeable to a merger by an exchange of stock. If B offers one of its
shares for every two of T’s shares, what will the price per share of the merged firm be? What
is the NPV of the merger to the buyer?
8. Merger NPV
Fly-By-Night Couriers is analyzing the possible acquisition of Flash-in-the-Pan Restaurants. Neither
firm has debt. The forecasts of Fly-By- Night show that the purchase would increase its annual
aftertax cash flow by $450,000 indefinitely. The current-market value of Flash-in-the-Pan is $14
million. The current market value of Fly-By-Night is $31 million. The appropriate discount rate for
the incremental cash flows is 8 percent. Fly-By-Night is trying to decide whether it should offer 35
percent of its stock or $18.5 million in cash to Flashin- the-Pan. What is the synergy from the
merger? What is the NPV to Fly-By-Night of each alternative?
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9. Comparison
Three alternative asset restructuring strategies are listed at the top of the columns in the following
table. The five rows are identified as strengths or benefits of each of the strategies. Fill in the blanks
with your judgment of whether the benefits for the strategy are High, Medium or Low.
Divestiture Equity Carve-out Spin-off
Raise funds _______ ___________ _______
Improve efficiency
by focus _______ ___________ _______
Measure performance
better _______ ___________ _______
Tie Compensation to
Performance _______ ___________ _______
Parent focus on core
business _______ ___________ _______

Case: Stanley Black & Decker, Inc.


Readings: Evaluating M&A Deals—Equity Consideration
Evaluating M&A Deals—Introduction to the Deal NPV
Evaluating M&A Deals—Accretion vs. Dilution of EPS Study
1. What is the incremental value to shareholders of the cost savings (synergies) projected in this
merger? How will the value of the synergies be shared in the proposed transaction?
2. After failing to complete a merger following the three prior attempts noted in the case, why
should the proposed transaction be successful this time?
3. How much of the incremental value created in this transaction will go to the CEO’s of the two
firms involved?
4. How do you think the leadership team at Black& Decker (other than the CEO) will view this
transaction? How about the governor of Maryland (Black & Decker’s headquarters state)?
5. What issues of corporate governance and social policy are raised by the Stanley Black & Decker
merger?
6. If you were a shareholder of Stanley would you vote in favor of this transaction? Would you vote
in favor of the compensation arrangements? Would you vote to reelect the directors at the next
annual meeting?