1. 1. Strongest Motivations for Fashion to Acquire Flavoring:

   • Fashion Inc. has several compelling reasons to consider acquiring Flavoring International:
     • Earnings Growth: Flavoring’s earnings growth rate has been consistently above competitors and even exceeded Fashion’s experience. This presents an opportunity for Fashion to benefit from Flavoring’s strong financial performance.
     • Upscale Customer Appeal: Flavoring’s products resonate with upscale customers, which aligns with Fashion’s focus on high-quality women’s jewelry and accessories.
     • Dynamic Management Team: Flavoring’s management team is dynamic, which could contribute to overall growth and efficiency.
     • Financial Flexibility: The merger would grant Fashion greater financial flexibility, allowing it to explore expansion opportunities more effectively.
     • Access to Lower Cost Financing: Flavoring’s acquisition would provide Fashion access to lower-cost sources of financing for product expansion in new geographic areas.

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3. 2. Bootstrap Earnings Effect:

   • If Fashion issues common stock at the current market price to acquire Flavoring’s outstanding common stock, the bootstrap earnings effect on post-merger earnings would likely occur if Flavoring’s acquisition price is below the current market price.
   • In other words, if Fashion acquires Flavoring at a price lower than the current market price, it could lead to an increase in earnings per share (EPS) for the combined company due to the dilution effect of issuing additional shares.

4. 3. Estimated Takeover Values:

   • Smith uses the comparable transaction approach based on key valuation variables from recently acquired companies. Let’s calculate the estimated takeover values:
     • Initial Takeover Value (Equally Weighted):
       • Price/Sales per share: (5.0 + 3.7 + 4.0 + 3.8) / 4 = 4.13
       • Estimated takeover value = Price/Sales per share * Flavoring’s sales = 4.13 * $105 million = $432.65 million
     • Adjusted Takeover Value (Higher Weighting for Cash Flow per Share):
       • Weighted average calculation: (0.66 * Price/Sales) + (0.34 * Price/Cash Flow per share)
       • Adjusted estimated takeover value = Weighted average * Flavoring’s sales = (0.66 * 4.13 + 0.34 * 11.58) * $105 million ≈ $1,062.45 million

5. 4. Mean Takeover Premium for Flavoring:

   • Calculate the mean takeover premium using pre-acquisition prices:
     • Mean takeover premium = [(Flavoring’s acquisition price) - (Mean pre-acquisition price)] / (Mean pre-acquisition price)
     • Mean pre-acquisition price = (20 + 26 + 35 + 40) / 4 = $30.25
     • Assuming Flavoring’s acquisition price is $20.00 (current market price), the mean takeover premium would be:
       • Mean takeover premium = ($20.00 - $30.25) / $30.25 ≈ -33.06% (rounded to 2 decimal places)

Answer rating: 100% (QA)

1 Fashion Inc has strong motivations to consider acquiring Flavoring International Earnings Growth Flavoring has consistently outperformed competitors in terms of earnings growth offering Fashion Inc ... View the full answer