FINCE620 – Quiz – WEEK – 6 – EXCEL SOLUTION – INPUT YOUR FIGURES AND GET 100% CORRECT ANSWERS

1.
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 flow by $4 million indefinitely. The current market value of
Teller is $43 million, and that of Penn is $88 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 $69 million in cash
to Teller’s shareholders.

a.

What is the cost of
each alternative?(Do
not round intermediate calculations. Enter your answers in dollars, not
millions of dollars, i.e. 1,234,567.)

Cash cost

$

Equity
cost

$

b.

What is the NPV of
each alternative?(Do
not round intermediate calculations. Enter your answers in dollars, not
millions of dollars, i.e. 1,234,567.)

NPV cash

$

NPV stock

$

c.

Which alternative
should Penn choose?

Stock

Cash

2.
Plant,
Inc., is considering making an offer to purchase Palmer Corp. Plant’s vice
president of finance has collected the following information:

Plant

Palmer

Price-earnings
ratio

15.7

11.3

Shares
outstanding

1,620,000

870,000

Earnings

$

4,390,200

$

1,044,000

Dividends

$

1,062,000

$

482,000

Plant also knows that securities analysts expect the earnings
and dividends of Palmer to grow at a constant rate of 4 percent each year.
Plant management believes that the acquisition of Palmer will provide the
firm with some economies of scale that will increase this growth rate to 6
percent per year.

a.

What is the value of Palmer to Plant?(Do not round intermediate calculations and
round your final answer to 2 decimal places. (e.g., 32.16))

Value of
Palmer

$

b.

What would Plant’s gain be from this acquisition?(Do not round intermediate calculations and
round your final answer to 2 decimal places. (e.g., 32.16))

Gain

$

c.

If Plant were to offer $24 in cash for each share of Palmer,
what would the NPV of the acquisition be?(Do not round intermediate calculations and round your
final answer to 2 decimal places. (e.g., 32.16))

NPV

$

d.

What is the most Plant should be willing to pay in cash per
share for the stock of Palmer?(Do not round intermediate calculations and round your
final answer to 2 decimal places. (e.g., 32.16))

Maximum
bid price

$

e.

If Plant were to offer 237,000 of its shares in exchange for
the outstanding stock of Palmer, what would the NPV be.(Do not round intermediate calculations and
round your final answer to 2 decimal places. (e.g., 32.16))

NPV

$

Plant’s outside financial consultants think that the 6 percent
growth rate is too optimistic and a 5 percent rate is more realistic.

f-1.

If Plant still offers $24 per share, what is the NPV with this
new growth rate?(Negative
amount should be indicated by a minus sign. Do not round intermediate
calculations and round your final answer to 2 decimal places. (e.g.,
32.16))

NPV

$

f-2.

If Plant still offers 237,000 shares, what is the NPV with
this new growth rate? (Do
not round intermediate calculations and round your final answer to 2
decimal places. (e.g., 32.16))

NPV

$

f-3.

Should the
acquisition be attempted?

Yes

No

3.
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

6,000

1,200

Price per
share

$

47

$

17

Firm B has
estimated that the value of the synergistic benefits from acquiring Firm T is
$9,500.

a.

If Firm T is
willing to be acquired for $19 per share in cash, what is the NPV of the
merger?(Do not round
intermediate calculations.)

NPV

$

b.

What will the price
per share of the merged firm be assuming the conditions in (a)?(Do not round intermediate calculations and
round your final answer to 2 decimal places. (e.g., 32.16))

Share
price

$

c.

If Firm T is
willing to be acquired for $19 per share in cash, what is the merger premium?(Do not round intermediate calculations.)

Merger
premium

$

d.

Suppose Firm T is
agreeable to a merger by an exchange of stock. If B offers
one of its share for every two of T ‘s shares, what will the
price per share of the merged firm be?(Do not round intermediate calculations and round your final
answer to 2 decimal places. (e.g., 32.16))

Price per
share

$

e.

What is the NPV of the
merger assuming the conditions in (d)? (Do not round intermediate calculations and round your
final answer to 2 decimal places. (e.g., 32.16))

NPV

$

4.
Fair-to-Midland
Manufacturing, Inc., (FMM) has applied for a loan at True Credit Bank. Jon
Fulkerson, the credit analyst at the bank, has gathered the following
information from the company’s financial statements:

Total
assets

$77,000

EBIT

7,000

Net
working capital

3,500

Book value
of equity

20,000

Accumulated
retained earnings

16,900

Sales

93,000

The stock price of FMM
is $22 per share and there are 5,100 shares outstanding. What is the Z-score
for this company?(Do
not round intermediate calculations and round your final answer to 3 decimal
places. (e.g., 32.161))

Z-score

5.
Consider
the following premerger information about Firm A and Firm B:

Firm A

Firm B

Total
earnings

$

2,100

$

800

Shares
outstanding

900

200

Price per
share

$

27

$

31

Assume that Firm A acquires
Firm B via an exchange of stock at a price of $33 for each
share of B’s stock. Both A and B have
no debt outstanding.

a.

What will the earnings
per share, EPS, of Firm A be after the merger?(Do not round intermediate calculations and
round your final answer to 2 decimal places. (e.g., 32.16))

EPS

$

b.

What will Firm A’s
price per share be after the merger if the market incorrectly analyzes this
reported earnings growth (that is, the price–earnings ratio does not change)? (Do not round intermediate calculations
and round your final answer to 2 decimal places. (e.g., 32.16))

Price per
share

$

c.

What will the
price–earnings ratio of the post-merger firm be if the market correctly
analyzes the transaction?(Do not round intermediate calculations and round your final
answer to 2 decimal places. (e.g., 32.16))

Price-earnings

times

d-1.

If there are no
synergy gains, what will the share price of A be after the
merger? (Do not round
intermediate calculations and round your final answer to 2 decimal places.
(e.g., 32.16))

Price per
share

$

d-2.

What will the
price–earnings ratio be?(Do not round intermediate calculations and round your final
answer to 2 decimal places. (e.g., 32.16))

Price-earnings

times

d-3.

What does your answer
for the share price tell you about the amount A bid for B?
Was it too high? too low?

Too high
Too Low

Assume that the
following balance sheets are stated at book value. The fair market value of
James’ fixed assets is equal to the book value. Jurion pays $19,000 for James
and raises the needed funds through an issue of long-term debt.

Jurion Co.

Current
assets

$

20,100

Current
liabilities

$

6,850

Net fixed
assets

36,850

Long-term
debt

11,260

Equity

38,840

Total

$

56,950

Total

$

56,950

James, Inc.

Current
assets

$

4,060

Current
liabilities

$

2,800

Net fixed
assets

9,880

Long-term
debt

1,820

Equity

9,320

Total

$

13,940

Total

$

13,940

Construct a postmerger
balance sheet assuming that Jurion Co. purchases James, Inc., and the
purchase method of accounting is used.(Do not round intermediate calculations.)

Jurion Co., post-merger

Current
assets

$

Current
liabilities

$

Fixed
assets

Long-term
debt

Goodwill

Equity

Total

$

Total

$