Assignment 2 fin4930 PDF

Preview

Summary

Mandatory assignment covering chapters 4-5-6...

Description

Assignment 2 Q1-Q4 are based on the following information: The financial information of Z, Inc. is as follows: EBIT/share: $5 EPS:

$3

Growth rate:

15%

Stock Price per share: $48 The industry averages of price-EBIT ratio, PE ratio and PEG ratio are 10, 15, and 1.2 respectively. 1.

What is the implied stock price of Z, Inc. using the PE ratio? 3 * 15 = 45 2. What is the implied stock price of Z, Inc. using the PEG ratio? 1.2 * 15 * 3 = 54

3. What is the implied stock price of Z, Inc. using the price-EBIT ratio? 5 * 10 = 50 4.

Which of the ratio indicates that Z is overvalued?

PE ratio Q5-Q9 are based on the following information

Acquiring Company is considering the acquisition of Target Company in a stock for stock transaction in which Target Company would receive $50.00 for each share of its common stock. The Acquiring Company does not expect any change in its price/earnings multiple after the merger. Acquiring Co.

Target Co.

Earnings available for common stock

$150,000

$30,000

Number of shares of common stock outstanding Market price per share

60,000

20,000

$60.00

$40.00

Using the information provided above on these two firms and showing your work, calculate the following: 5.

What is the share exchange ratio? Exchange ratio = Price per share offered for Target Company / Market price per share for Acquiring Company = $50.00 / $60.00 = .8333 (i.e., Acquiring Company issues .8333 shares of stock for each share of Target Company’s stock)

6.

How many new shares will be issued by Acquiring Company? New shares issued by Acquiring Company = 20,000 (shares of Target Company) x .8333 (Exchange ratio) = 16,666

7.

What is the post-merger EPS of the combined company? Total shares outstanding of the combined companies = 60,000 + 16,666 = 76,666 Post-merger EPS of the combined companies = ($150,000 + $30,000)/ 76,666 = $2.35

8.

What is the post-merger share price of the combined company? Pre-merger EPS of Acquiring Company = $150,000 / 60,000 = $2.50 Post-merger share price = $2.35 x 24 (pre-merger P/E = $60.00/$2.50) = $56.40 (as compared to $60.00 pre-merger)

9.

If the purchase is using 100% cash and all the cash is borrowed at an annual rate of 8%, what is postmerger EPS of the combined company, assuming the tax rate is 40%?

Purchase price = 50 * 20,000 = 1,000,000 Interest expense = 1,000,000 * 8% = 80,000 Post-merger earnings = 150,000 + 30,000 – 80,000 * (1-0.4) = 132,000 Post-merger EPS of the combined companies = 132000/60000 = 2.2 Q10 to Q15 are based on the following information:

You are leading a team on a M&A deal. Suddenly your analyst has disappeared and you have the following unfinished spreadsheet. The acquirer and the target are assumed to have zero growth. Now it is up to you to finish this job. Sales Operating Expenses

Acquirer 400

Target 100

Combined 500

200

60

260

Annual cost savings

20

EBIT

200

40

?1?

EBIT(1 – t)

120

24

???

Depreciation

40

30

???

Gross Plant & Equipment

30

30

???

Change in Working Capital Free Cash Flow to Firm Discount rate Firm Value Long term debt Equity value

10

5

???

120

19

?2?

8.00%

9%

8%

1500

211.111

?3?

400

50

450

1100

161.111

?4?

10. Please fill in the numbers. What is ?1? 500-260+20 = 260 11. What is ?2?

Depreciation = 40 + 30 = 70 Gross P&E = 30 + 30 = 60 Change in NWC = 10 + 5 = 15 260*(1-0.4)+70-60-15 = 151 12. What is ?3? 151/8% = 1887.5 13. What is ?4? 1887.5-450 = 1437.5

14. Suppose you decide to share 30% of the synergy to the target shareholders, what is your initial offer? The synergy from this merger: 1437.5-1100-161.111 = 176.389 161.111+176.389*0.3=214 15. What is the maximum price you can offer? 161.11+176.389=337.5 16. a. b. c. d. e.

17. a. b. c. d. e.

Which of the following are often true about the challenges of valuing private firms? There is a lack of analyses generated by sources outside of the company. Financial reporting systems are often inadequate. Management depth and experience is often limited. Reported earnings are often understated to minimize taxes. All of the above. Answer: E

All of the following are often true of privately held firms except for Financial data is often inaccurate and out of date Internal controls are ineffective Have limited access to capital markets and product distribution channels Are more easily valued than public companies Have limited ability to influence customers, suppliers, unions, and regulators Answer: D

18. A business owner may overstate revenue and understate actual expenses when a. The business is about to be sold b. They are being audited by the IRS

c. d. e.

They are trying to minimize tax liabilities All of the above None of the above Answer: A

19. All of the following are true about the challenges of integrating firms with different corporate cultures except for a. Cultural issues can run the gamut from dress codes to compensation b. The acquired firm’s overarching culture is generally rapidly accepted by the target firm’s employees c. Small companies are usually highly unstructured and informal d. There are often differences in culture even between firms in the same industry e. Integration may be inappropriate if acquirer and acquired firm’s cultures are extremely different. Answer: B 20. Read the following piece from the Motley Fools, and answer the question:

Autonomous vehicle technology is all the rage right now, and that's being reflected in the valuations that both start-ups and established companies are fetching. The latest move in the space is today's announcement that Intel (NASDAQ:INTC) is acquiring Israelbased Mobileye (NYSE:MBLY) in a blockbuster $15.3 billion deal that will immediately and dramatically expand Intel's position in the market for autonomous vehicle technology while giving the chip giant relationships with over a dozen of the most prominent automakers in the world. … Mobileye generated ??? million in revenue last year and ??? million in net income, meaning it's getting taken out at 42.7 times sales and 141.7 times earnings What is Mobileye’s net income last year? (answer the number in million.) 15300 /141.7 = 108...