XYZ Corporation is analyzing the possible acquisition of Stake Technology Inc.. Both firms have no debt. XYZ Corporation believes the acquisition will increase its total after-tax annual cash flows by $0.33 million indefinitely. The current market value of Stake Technology Inc. is $10.80 million, and that of XYZ Corporation is $14.20 million. The appropriate discount rate for the incremental cash flows is 11 percent. XYZ Corporation is trying to decide whether it should offer 42 percent of its stock or $11.30 million in cash to Stake Technology Inc. shareholders. a) What is the cost of each alternative?
The cash alternative cost is given as $11,300,000.
Stock Alternative Cost
V*: the total value of firm Stake Technology Inc. to firm XYZ Corporation V: the market value of firm Stake Technology Inc.
ΔV: the incremental value of the acquisition
V* = V + ΔV
= $10,800,000 + ($330,000 ÷ 0.11)
Therefore: Stock Alternative Cost
= 0.42 × ($14,200,000 + 13,800,000)
b) What is the NPV of each alternative?
Npv cash=v*-cost cash=13800000-11300000=2500000
NPV stock=v*-cost stock=13800000-11760000=2040000
c) Which alternative should XYZ Corporation choose?
The cash cost is less than the stock cost, so XYZ Corporation should choose to acquire Stake Technology Inc. for $11.30 million in cash. Question 2
holden crop weber inc
Price-earning ratio 4 30
Shares outstanding 48,000 160,000
Earnings 360,000 720,000
a) What will EPS of Weber Inc. be after the merger? Merger for 3/4 of weber. EPS =$720,000 + $360,000/[160,000 + (3/4) × 48,000]= $5.51 b) What is the stock price of Weber Inc. before the merger?
Stock price = PE ratio × EPS = 30×$720,000/160,000
c) What will the PE ratio be if the NPV of the acquisition is zero? The market price of Weber Inc. will remain unchanged if...
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