SECTION B: PLEASE ANSWER ONE (1) QUESTION

QUESTION 3 (20 Marks) UNIT 8: CORPORATE RESTUCTURING & FIRM VALUE

a)Pizza Palace (PP), is considering purchasing a smaller chain, Western Mountain Pizza. PP's analysts expect the merger to result in incremental net cash flows as follows: Y1=$1,900,000, Y2 = $2,200,000,

Y3 = $3,500,000, Y4 =$5,800,000. In addition, Western's Y4 cash flows are expected to grow at a constant rate of 4% after Y4. Western's post merger beta is expected to be 2 and its tax rate would be 30%.

The risk free rate is presently 6% and the market risk premium is 5%.

What is the value of Western to Pizza Palace?

b)WhippleIndustriesisconsideringtheacquisitionofBlanchardCompanyinastock-for-stockexchange.Selected financialdataforthetwocompaniesisshownbelow.

Nosynergyisexpectedinthismerger.

Whipple Blanchard

Sales(millions) $150 $30

Netincome(millions) $25 $3.5 Commonsharesoutstanding(millions) 8 2

Earningspershare $3.125 $1.75

Dividendspershare $1.50 $0.75 Commonstockpricepershare $40 $19.50

Determinethepost-mergerearningspershareiftheBlanchardcompanyshareholders

acceptanofferof$22per shareinastock-for-stockexchange.

c)Therearethreemethodsforvaluingmergercandidates.Brieflyexplaineachofthem.

d)The current market shares for U.S. airlines is as follows:

AirlineMarket Share

Delta 16.3%

United 15.7%

Southwest 15.4%

American 12.8%

US Airways 8.4%

JetBlue5.1%

Alaska 4.1%

If American and US Airways successfully merge. According to Justice Department merger guidelines, what type of industry would this merger result in ?

OR

QUESTION 4 (20 Marks) UNIT 8: CORPORATE RESTUCTURING & FIRM VALUE

a)MorganFoodsisconsideringtheacquisitionofOldSpaghettiWarehouseInc.inastock-for-stockexchange.Selected financialdataforthetwocompaniesisshownbelow.

Animmediatesynergisticearningsbenefitof$1.5millionis expectedinthismerger,

duetocostsavings.

Morgan OldSpaghetti

Sales(millions) 360 $80

Netincome(millions) $30 $8

Commonstockoutstanding(millions) 10 2

Earningspershare $3.00 $4.00

Commonstock(pricepershare) $36.00 $44.00

CalculatethepostmergerEPSiftheOldSpaghettishareholdersacceptanofferof$54pershare

inastock-for-stock exchange.

b)Explainthedifferencebetweenastockpurchaseandanassetpurchaseinamergertransaction.

Whichispreferred andwhy?

c)Suppose the market for dishwashing liquid has the following firms and market shares:

Cascade-60%, Palmolive - 20%, Dawn - 10%, Sparkle - 10%

Suppose Dawn and Sparkle merge to form "Sparkling-Dawn."

Calculate the Pre- and Post- Merger H.H.I. for this industry

d)Pizza Palace (PP), is considering purchasing a smaller chain, Western Mountain Pizza. PP's analysts expect the merger to result in incremental net cash flows as follows: Y1=$1,200,000, Y2 = $2,100,000,

Y3 = $3,200,000, Y4 =$5,100,000. In addition, Western's Y4 cash flows are expected to grow at a constant rate of 3% after Y4.

Western's post merger beta is expected to be 1.6 and its tax rate would be 40%. The risk free rate is presently 6% and the market risk premium is 8%.

What is the value of Western to Pizza Palace?