Consider the following data on two companies: Company A $1m Company B $2m Expected cash flows...

 

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Consider the following data on two companies: Company A $1m Company B $2m Expected cash flows (end-of-year) Number of shares 1m 2m Cost of capital 10% 15% Growth rate of CFs 3% 0% Assume that the valuation is based on discounted cash flows. Assume all-equity firms.) Company A acquires company B for stock. The merger is as of time 0. As a result of the merger, B'S end-of-year CFs will rise by 10%, and its annual growth rate thereafter will rise to 2.5%. B's shareholders (SHs) are promised a premium of 40% over its current (pre-merger) value, using the current (pre-merger) price of A to determine the exchange ratio. a. What will be the price of A after the merger is completed and all the information is reflected in its price? b. What is the effective premium (in %) to B's SHs after the merger is completed? (That is, the premium received by target SHs in a stock offer after the buyer's stock price adjusts to reflect the information.) c. What would be A's stock price if it paid for B in cash, 40% over its pre-merger price, financed by debt (ignore tax, agency and bankruptcy effects, assume M&M)? Consider the following data on two companies: Company A $1m Company B $2m Expected cash flows (end-of-year) Number of shares 1m 2m Cost of capital 10% 15% Growth rate of CFs 3% 0% Assume that the valuation is based on discounted cash flows. Assume all-equity firms.) Company A acquires company B for stock. The merger is as of time 0. As a result of the merger, B'S end-of-year CFs will rise by 10%, and its annual growth rate thereafter will rise to 2.5%. B's shareholders (SHs) are promised a premium of 40% over its current (pre-merger) value, using the current (pre-merger) price of A to determine the exchange ratio. a. What will be the price of A after the merger is completed and all the information is reflected in its price? b. What is the effective premium (in %) to B's SHs after the merger is completed? (That is, the premium received by target SHs in a stock offer after the buyer's stock price adjusts to reflect the information.) c. What would be A's stock price if it paid for B in cash, 40% over its pre-merger price, financed by debt (ignore tax, agency and bankruptcy effects, assume M&M)?

Answer rating: 100% (QA)

Value of A 1 million 103 14285714 Premerger Share price of A 142857141000000 1429 per shar... View the full answer