4. Slug Companys stock price is $20, and the firm has 2 million shares outstanding. You believe you can increase the companys value if you buy it and replace the management. Slug has a poison pill in place with a 20% ownership threshold. If triggered, all Slugs shareholders other than the acquirer will be able to buy one new share in Slug for each share they own at a 50% discount. Assume that price remains at $20 while you acquire shares. Suppose Slugs management decides to resist your buyout attempt and you cross the 20% ownership threshold.

a. How many new shares will be issued and at what price?

b. What will happen to your percentage ownership in Slug?

c. What will happen to the price of Slug shares?

d. How much do you lose from triggering the poison pill?

e. How much do the other shareholders gain, per pre-trigger share held, at your expense?

Finance 435 Problem Set #5 Professor Sapp

5. Simtek projects year-end EBIT of $800M which is expected to grow at 5% annually, and capital expenditures will equal depreciation. Simtek has $4,638M of 6% perpetual debt trading at face value and no excess cash. The tax rate is 40%, and Simtek debt will grow at 5% annually with the rest of the firm. Simtek has an unlevered cost of capital RA equal to 10.10%.

a. Find the year-end free cash flow to the firm (FCF).

b. Use the adjusted present value (APV) method to find the value of equity.

c. Find the free cash flow to equity (FCFE).

d. Find the cost of equity RE.

e. Use the free cash flow to equity method to find the value of equity.

f. Find the weighted average cost of capital RWACC.

g. Use the free cash flow to the firm method to find the value of equity.

6. Your firm wants to acquire Gamma Company. Gamma is a privately held firm with no debt, and a majority shareholder who owns 51% of the shares of this company. All shares are illiquid. The firm has a discounted cash flow valuation of $180M, and there are 15M shares outstanding. You plan to offer the majority shareholder a higher price than the minority shareholders. You believe a 20% control premium and a 30% illiquidity discount are justified, relative to the base case valuation.

a. What is the value per share, assuming completely liquid stock and dispersed ownership?

b. What is the value of the controlling block of equity?

c. What is the highest price per share you could offer for the controlling equity?

d. What is the value of the minority block of equity? e. What is the highest price per share you could offer for the minority equity?

7. Kindle Corp. has announced an offer to acquire Readers Inc. The offer specifies that Kindle will exchange 1.1 shares of its own stock and $5.00 cash for each share of Readers. Estimated synergies are $8M. The following data are available.

Kindle Readers Combined EPS $2.00 $3.20 Common shares 8 M 3 M Pre-announcement stock price $4.00 $8.00 Net Income Market Capitalization

a. Under the terms of the offer, what synergies must be realized for Kindle to break even?

b. Fill in the table. What is the expected share price of the combined firm?

c. What is the total price paid to Readers shareholders?

d. What price is Kindle effectively offering for one share of Readers stock? What percent premium is Kindle offering for Readers shares?

e. What are the gains (losses) to each group of shareholders?

f. What fraction of expected synergies does each group capture?

g. Based on the combined EPS, is the merger accretive or dilutive to the acquirers EPS?

h. After the announcement was made, Readers stock price rose to $9.16. Find the arbitrage spread.

i. What is the markets forecast probability that the merger will be completed?