1. The Charles Corporation desires to expand. It is considering a cash purchase of Atlas Enterprises for $2,600,000. The Atlas Corporation has a $670,000 tax loss carry-forward that could be used immediately by the Charles Corporation, which is paying taxes at the rate of35 percent. Atlas will provide $370,000 per year in cash flow (aftertax income plus CCA) for the next 25 years.

a.If the Charles Corporation has a cost of capital of 13 percent. compute the net present value.(Use a Financial calculator to arrive at the answers. Negative answer should be indicated by a minus sign.Round the final answer to the nearest whole dollar.)

Net present value$

b.Should the merger be undertaken?

multiple choice

• Yes
• No

2. J & J Enterprises is considering a cash acquisition of Patterson Steel Company for $4,400,000. Patterson will provide the following pattern of cash inflows and synergistic benefits for the next 20 years. There is no tax loss carry-forward.

	Years
	1-5	6-15	16-20
Cash inflow (aftertax)	$480,000	$640,000	$840,000
Synergistic benefits (aftertax)	$ 44,000	$ 64,000	$ 74,000

The cost of capital for the acquiring firm is 11 percent.

a.Calculate the net present value.(Use a Financial calculator to arrive at the answers. Negative answer should be indicated by a minus sign. Do not round intermediate calculations. Round the final answer to nearest whole dollar.)

Net present value$

b.Should the merger be undertaken?

multiple choice

• Yes
• No

3. The Jeter Corporation is considering acquiring the A-Rod Corporation. The data for the two companies are as follows:

	A-Rod Corporation	Jeter Corporation
Total earnings		$689,000			$3,300,000
Number of shares of stock outstanding		265,000			1,650,000
EPS		$2.60			$2.00
P/E ratio		20			26
Market price per share		$52			$52

a.The Jeter Corp. is going to give A-Rod Corp. a 50 percent premium over A-Rod Corp.'s current market value. What price will it pay?

Price$

b.At the price computed in parta, what is the total market value of A-Rod Corp.?

Market value$

c.At the price computed in parta, what is the P/E ratio Jeter Corp. is assigning to A-Rod Corp.?(Round the final answer to 1 decimal place.)

P/E ratio

d.How many shares must Jeter Corp. issue to buy the A-Rod Corp. at the total value computed in partb?

New shares

e.Given the answer to partd, how many shares will Jeter Corp. have after the merger?

Total shares

f.Add together the total earnings of both corporations and divide by the total number of shares computed in part e. What are the new post merger EPS?(Round the final answer to 2 decimal places.)

New postmerger EPS$

4. A merger between Minnie Corporation and Mickey Corporation is under consideration. The financial information for these firms is as follows:

	Minnie Corporation	Mickey Corporation
Total earnings		$2,178,000		$3,069,000
Number of shares of stock outstanding		330,000		930,000
EPS		$6.60		$3.30
P/E ratio		10X		20X
Market price per share		$66		$66

a.On a share-for-share exchange basis, what will the postmerger EPS be?(Round the final answer to 2 decimal places.)

Postmerger earnings per share$

b.If Mickey Corporation pays a 25 percent premium over the market value of Minnie Corporation, how many shares will be issued?(Do not round intermediate calculations.)

Shares issued shares

c.With the 25 percent premium, what will the postmerger EPS be?(Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Postmerger earnings per share$

5. A merger between Minnie Corporation and Mickey Corporation is under consideration. The financial information for these firms is as follows:

	Minnie Corporation	Mickey Corporation
Total earnings		$910,000		$1,820,000
Number of shares of stock outstanding		227,500		910,000
Earnings per share		$4.00		$2
Price-earnings ratio (P/E)		10X		20X
Market price per share		$40		$40

a.Assume a 100 percent premium will be paid and there is a 10 percent synergistic benefit to total earnings from the merger. What is the change in Mickey Corporation's earnings if it merges with Minnie Corporation?(Round the final answer to 2 decimal places.)

Change in earnings per share post merger$

b.Will the postmerger earnings go up or down?

multiple choice

• Up
• Down

6. Assume the Shelton Corporation is considering the acquisition of Cook Inc. The expected EPS for the Shelton Corporation will be $8.00 with or without the merger. However, the standard deviation of the earnings will decrease from $1.92 to $1.36 with the merger because the two firms are negatively correlated.

a.Calculate the coefficient of variation for the Shelton Corporation before and after the merger.(Round the final answers to 2 decimal places.)

	Coefficient of Variation
Premerger
Postmerger

b.Comment onthe possible impact on Shelton's postmerger P/E ratio, assuming investors are risk averse.

Risk averse investors are being offered (Click to select) less more risk and may assign a (Click to select) lower higher P/E ratio to postmerger earnings.