The following applies to Company A:

YEAR	1	2	3	4	5
Revenues	5,000,000	6,700,000	8,500,000	7,200,000	8,200,000
Cost of Goods Sold	1,200,000	1,300,000	2,400,000	1,890,000	1,950,000
Working Capital	3,500,000	3,800,000	2,100,000	2,900,000	0

Additional information about Company A: At Time 0 (today) the working capital is 0 and the company issued 7,500,000 worth of debt, which it plans to keep constant. The interest rate is 3.50%. After year 5 the company will end. The assets are fully depreciated and they will have 0 salvage value. The company has 320,000 outstanding shares. Company As unlevered return on equity is 8.50%.

The Following applies to Company B:

YEAR	1	2	3
Revenues	20,000,000	15,000,000	3,000,000
Cost of Goods Sold	21,000,000	5,000,000	4,000,000
Working Capital	5,000,000	3,500,000	0

Additional information about Company B: At Time 0 (today) the working capital is 0, and the company has no debt. After 3 years the company will end. The assets are fully depreciated and they have a 0 salvage value. The company has 100,000 outstanding shares. Company Bs unlevered return on equity is 6.55%.

For both companies the tax rate is 23%.

a) What is the asset value of Company A and Company B?

b) What is the share price of Company A and Company B?

Assume now that company B is planning to acquire Company A. The acquisition will bring about two benefits: An increase in revenues for Company A and a reduction in costs for Company B. Nevertheless the asset riskiness for the two companies will stay the same after the acquisition.

Y ear	1	2	3	4	5
Company A Revenue Increase	1,500,000	800,000	1,900,000	0	2,500,000
Company B Cost Reduction	4,500,000	830,000	920,000	-	-

At Time 0, Company B is planning to pay for the acquisition by issuing new shares of B to be distributed to the shareholders of company A. The shareholders of Company B will just retain their original shares. The boards of the two companies decides to split the value of the acquisition benefits in the following way: 30% of the benefit value will be given to shareholders of Company A and 70% of the value will be assigned to shareholders of Company B.

c) What is the equity value at Time 0 of the newly formed company after the acquisition?

d) How many shares of Company B will a shareholder of company A receive for each share she held in A before the acquisition?

e) What is the new price of the shares of Company B after the acquisition?

Answer rating: 100% (QA)

Company Valuation and Acquisition Analysis This scenario involves valuing Companies A and B and analyzing a potential acquisition with synergy benefit... View the full answer