Star plc and Kalo plc belong to the same industry. Both firms are entirely equity financed....

 

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Star plc and Kalo plc belong to the same industry. Both firms are entirely equity financed. Table 1 shows relevant information for the two firms. Number of shares Price per share Table 1 Star 1,000,000 £6.53 Kalo 1,400,000 £2.40 Star plans to acquire Kalo either by issuing new shares or by making a cash offer. Assume Star holds enough cash to make a cash offer. The acquisition will lead to reduced after-tax administrative costs for the post-acquisition firm, compared to those costs for the two separate firms. Star's managers have issued a statement that the total saving in costs has a present value of £1,595,000. (a) What is the total value of the combined post-acquisition firm? (3 marks) (b) Assume the managers of Star and Kalo agree that Star will pay a premium of 20% to acquire the shares of Kalo. (i) If Star makes a cash offer for all the Kalo shares, what is the post-acquisition share price of Star? (5 marks) (ii) If Star decides to acquire Kalo by issuing new shares, how many shares must it issue? What is the post-acquisition share price of Star? (6 marks) (c) Assume Star announces that it will acquire the entire 1.4 million shares of Kalo for a price of £2.88 in cash per Kalo share. What proportion of the synergy from the acquisition will go to the shareholders of Kalo, and what proportion to the shareholders of Star? (5 marks) (d) Provide reasons why the market's valuation of the synergy gain from the merger may differ from that of Star's managers. (maximum of 150 words) Star plc and Kalo plc belong to the same industry. Both firms are entirely equity financed. Table 1 shows relevant information for the two firms. Number of shares Price per share Table 1 Star 1,000,000 £6.53 Kalo 1,400,000 £2.40 Star plans to acquire Kalo either by issuing new shares or by making a cash offer. Assume Star holds enough cash to make a cash offer. The acquisition will lead to reduced after-tax administrative costs for the post-acquisition firm, compared to those costs for the two separate firms. Star's managers have issued a statement that the total saving in costs has a present value of £1,595,000. (a) What is the total value of the combined post-acquisition firm? (3 marks) (b) Assume the managers of Star and Kalo agree that Star will pay a premium of 20% to acquire the shares of Kalo. (i) If Star makes a cash offer for all the Kalo shares, what is the post-acquisition share price of Star? (5 marks) (ii) If Star decides to acquire Kalo by issuing new shares, how many shares must it issue? What is the post-acquisition share price of Star? (6 marks) (c) Assume Star announces that it will acquire the entire 1.4 million shares of Kalo for a price of £2.88 in cash per Kalo share. What proportion of the synergy from the acquisition will go to the shareholders of Kalo, and what proportion to the shareholders of Star? (5 marks) (d) Provide reasons why the market's valuation of the synergy gain from the merger may differ from that of Star's managers. (maximum of 150 words)

Answer rating: 100% (QA)

a To determine the total value of the combined postacquisition firm we need to calculate the sum of the preacquisition values of Star and Kalo and add the present value of the cost savings Preacquisit... View the full answer