6. (Stock for Stock Merger) A Corporation is considering the acquisition of X Corporation. Each corporation has the following data:

				Existing Income		Number of Shares
A Corporation				$8,200,000		621,000
X Corporation				$4,200,000		365,000
Synergistic additional benefits from the combination are.					$1,800,000
					$14,200,000

a. What is minimum exchange ratio is necessary to keep the X shareholders whole in terms of earnings per share?

b. What is the maximum exchange ratio would the A Corporation shareholder accept in taking over X Corporation and remain whole in terms of earnings per share?

7. (Cash for Stock Merger) This problem requires that you integrate the material learned in prior chapters. You have been given the job of evaluating the following merger candidate. You have collected the following cash flow estimates for the acquisition candidate for the proposed merger (in millions):

Year				1	2	3	4	5
Cash flows now for the target				60	80	100	125	150
Additional cash flows (synergy)				40	70	100	125	150
Total cash flows from the target (after the merger)				100	150	200	250	300
The risk-free rate of return						4%
Beta for this project (the company after merging)						1.07
Market risk premium						5%
The pre-tax cost of debt						8%
Marginal after-tax rate						20%
Number of shares outstanding for the target company (millions)						14
Current market price per share for the target company						$51
Percentage of the acquisition financing with debt						34%
Percentage of the acquisition financing with common equity						66%

1. What is the after-tax cost of debt for this merger (as we did in chapter 16)?

2. What is the after-tax cost of common equity for this merger (as we did in chapter 16)?

3. What is the weighted average cost of capital for this acquisition candidate (as we did in chapter 16)?

4. Run a net present value using the WACC calculated above with the total cash flows from the target (given above) to determine the maximum price per share you are willing to pay for this target candidate?

5. Based on what you calculated and the current market price, would you pursue this candidate?

Answer rating: 100% (QA)

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