1. Firm A is considering the acquisition of Firm B. For Firm A, PV = $4,000 and N= 100. For Firm B, PV = $1,200 and N = 80. Proforma financial information for Firm AB is below; the appropriate discount rate for Firm AB is 15%. After year 20, you will assume that the cash flow from year 20 will then grow at 2% forever. The tax rate is 25%. Firm AB Years 1-6 Year 7 Years 8-14 Year 15 Years 16-20 Sales 2,100 2,700 2,700 2,700 3,000 Depreciation 200 200 210 210 300 EBIT is assumed to be 60% of Sales. 300 300 300 100 200 Interest Capital Expenditures 0 = 800 1000 Increases in Working Capital_ is 10% of the change in sales; invested the period before the sales increase. 0 0 5000 Principal Payment a. Calculate the PV of AB. In your calculations, round your numbers to the nearest whole number (e.g. 1544.78 rounds to 1545). (4) b. Suppose the owners of B ask for a time 0 cash payment of $1,800. If A accepts, what will the split of the GAIN be (in dollars)? (4) C. Suppose the owners of B ask for an exchange of common shares, and they want to have a 25% ownership in the merged firm? What would be the COST and the NPV? What exchange ratio are the B owners requesting? (4) d. Suppose A agrees to the split of the GAIN in part c, but only wants to give B a 20% ownership. How much time 0 cash must now be offered, with the 20% ownership, to achieve the same split as in part c? (4) e. Suppose A agrees to the split of the GAIN in part c, but wants to pay with shares of preferred stock. The preferred will have a $2.50 per share dividend and the market requires an 8% return on their preferred stock. How many preferred stock shares would A have to give B? 1. Firm A is considering the acquisition of Firm B. For Firm A, PV = $4,000 and N= 100. For Firm B, PV = $1,200 and N = 80. Proforma financial information for Firm AB is below; the appropriate discount rate for Firm AB is 15%. After year 20, you will assume that the cash flow from year 20 will then grow at 2% forever. The tax rate is 25%. Firm AB Years 1-6 Year 7 Years 8-14 Year 15 Years 16-20 Sales 2,100 2,700 2,700 2,700 3,000 Depreciation 200 200 210 210 300 EBIT is assumed to be 60% of Sales. 300 300 300 100 200 Interest Capital Expenditures 0 = 800 1000 Increases in Working Capital_ is 10% of the change in sales; invested the period before the sales increase. 0 0 5000 Principal Payment a. Calculate the PV of AB. In your calculations, round your numbers to the nearest whole number (e.g. 1544.78 rounds to 1545). (4) b. Suppose the owners of B ask for a time 0 cash payment of $1,800. If A accepts, what will the split of the GAIN be (in dollars)? (4) C. Suppose the owners of B ask for an exchange of common shares, and they want to have a 25% ownership in the merged firm? What would be the COST and the NPV? What exchange ratio are the B owners requesting? (4) d. Suppose A agrees to the split of the GAIN in part c, but only wants to give B a 20% ownership. How much time 0 cash must now be offered, with the 20% ownership, to achieve the same split as in part c? (4) e. Suppose A agrees to the split of the GAIN in part c, but wants to pay with shares of preferred stock. The preferred will have a $2.50 per share dividend and the market requires an 8% return on their preferred stock. How many preferred stock shares would A have to give B
