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Tutorial Ch24 Answers Detailed

The document provides step-by-step solutions to problems related to mergers and acquisitions, including premium calculations, EPS and P/E analysis, CEO incentives, maximum exchange ratios, poison pill impacts, and leveraged buyouts. Each problem outlines the necessary calculations and explanations to illustrate the financial implications of various scenarios. The overall focus is on how these financial metrics affect stakeholders in merger and acquisition contexts.

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Mishell Duan
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12 views3 pages

Tutorial Ch24 Answers Detailed

The document provides step-by-step solutions to problems related to mergers and acquisitions, including premium calculations, EPS and P/E analysis, CEO incentives, maximum exchange ratios, poison pill impacts, and leveraged buyouts. Each problem outlines the necessary calculations and explanations to illustrate the financial implications of various scenarios. The overall focus is on how these financial metrics affect stakeholders in merger and acquisition contexts.

Uploaded by

Mishell Duan
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Tutorial Answers - Chapter 24: Mergers and

Acquisitions (Step-by-Step)

Problem 1: Premium Calculation

Step 1: Identify given data:


- EPS of TargetCo = $5.50
- Current price per share = $66
- Industry P/E multiple = 16

Step 2: Calculate implied price using industry P/E:


Implied Price = EPS × Industry P/E = 5.50 × 16 = $88

Step 3: Calculate premium:


Premium = (Implied Price - Current Price) ÷ Current Price × 100%
Premium = (88 - 66) ÷ 66 × 100% = 33.3%

Explanation: The premium reflects the difference between TargetCo's current price and its estimated
fair value based on industry multiples.

Problem 2: Merger EPS and P/E Analysis

Given:
- Kyle's EPS = $4, shares = 1M, price = $40
- TargetCo's EPS = $2, shares = 1M, price = $25

(a) No premium:
Total earnings = Kyle's earnings + TargetCo's earnings = (4 × 1M) + (2 × 1M) = $6M
Total shares = 1M + 1M = 2M
EPS after merger = Total earnings ÷ Total shares = 6M ÷ 2M = $3

(b) 20% premium:


Target price with premium = 25 × 1.20 = $30
Exchange ratio = Target price ÷ Kyle's price = 30 ÷ 40 = 0.75
New shares issued = TargetCo shares × exchange ratio = 1M × 0.75 = 0.75M
Total shares = 1M + 0.75M = 1.75M
EPS = Total earnings ÷ Total shares = 6M ÷ 1.75M ≈ $3.43

(c) Explanation:
EPS fell from $4 to $3 or $3.43, so Kyle's shareholders are worse off without synergies.

(d) P/E ratio after merger:


Assume price remains $40. New EPS = $3
P/E = Price ÷ EPS = 40 ÷ 3 ≈ 13.3
Compare: Kyle's original P/E = 10, TargetCo's P/E = 12.5.
Problem 3: CEO Incentives

Step 1: Value destroyed = $59M


Step 2: CEO ownership = 3%
Loss to CEO = 59M × 0.03 = $1.77M
Step 3: Compensation gain = $7M
Net gain = Compensation gain - Loss = 7M - 1.77M = $5.23M

Explanation: CEO benefits personally despite destroying shareholder value.

Problem 4: Maximum Exchange Ratio

Step 1: LE pre-merger value = $5.4B


Step 2: Synergies = $0.77B
Max value NFF can pay = 5.4B + 0.77B = $6.17B
Step 3: NFF share price = $62
Exchange ratio = (Max value ÷ LE value) × (LE price ÷ NFF price)
LE price = $23
Exchange ratio = (6.17 ÷ 5.4) × (23 ÷ 62) ≈ 0.423

Explanation: This ratio ensures NFF does not overpay and still creates positive NPV.

Problem 5: Poison Pill Impact

Step 1: BAD price = $18, shares = 3M


Step 2: Greg crosses 20% ownership → owns 0.6M shares
Step 3: Poison pill triggered → other shareholders buy new shares at 50% discount ($9)
New shares issued = 3M - 0.6M = 2.4M
Step 4: Total shares after issuance = 3M + 2.4M = 5.4M
Greg's ownership = 0.6M ÷ 5.4M ≈ 11.1%

Explanation: Greg loses because dilution reduces his stake; other shareholders gain from discounted
shares.

Problem 6: Leveraged Buyout

Step 1: UnderWater price = $22, shares = 2M


Step 2: Offer = $27.50 for 50% → cost = 27.5 × 1M = $27.5M
Step 3: Post-buyout value = Current value × (1 + 35%) = (22 × 2M) × 1.35 = $59.4M
Step 4: Price of non-tendered shares = New value ÷ total shares = 59.4 ÷ 2M = $29.70
Step 5: Shareholders will not tender because price rises above offer.
Step 6: Gain = New value - cost = 59.4M - 27.5M = $31.9M
Explanation: LBO firm gains $31.9M from the transaction.

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