5. (a) NY Corporation has 4,000,000 shares outstanding which is selling at $45 per share. It intends to acquire e-Build Corporation which has 2,500,000 shares outstanding, selling at $10 a share. NY Corporation estimates the economic gain from the merger to be $15,000,000. (i) Calculate the possible selling price of NY Corporation when the market learns that it plans to acquire e-Build Corporation for $15 a share. Moreover, calculate the percentage gains to the shareholders of NY Corporation. [15 marks] Suppose that the merger takes place through an exchange of stock. Based on the premerger prices of the firms, instead of paying $15 cash, NY Corporation issues 0.30 of its shares for every e-Build Corporation share acquired. Calculate the price of the merged firm. [15 marks] (iii) To utilize the operating losses of the target firm is the economic justification and to reduce the price-to-earnings ratio is the financial justification for takeovers. Critically discuss each of them. [Word Limit: 1200 words] [40 marks] (b) John & John Corporation currently sells at a price-earnings multiple of 10. The firm has 2.5 million shares outstanding, and sells at a price per share of $45. HNK Corporation has a P/E multiple of 6, has 1.5 million shares outstanding, and sells at a price per share of $15. John & John Corporation acquires HNK by exchanging one of its shares for every three of HNK's share and there is no synergy of this takeover. (i) What will happen to John & John's price per share if the market does not realize that the P/E ratio of the merged firm ought to differ from John & John's P/E ratio before the takeover. Show your calculation. [20 marks] (ii) How are the gains from the merger split between shareholders of the two firms if the market is fooled as in part (b)(i)? Show your calculation. [10 marks] 5. (a) NY Corporation has 4,000,000 shares outstanding which is selling at $45 per share. It intends to acquire e-Build Corporation which has 2,500,000 shares outstanding, selling at $10 a share. NY Corporation estimates the economic gain from the merger to be $15,000,000. (i) Calculate the possible selling price of NY Corporation when the market learns that it plans to acquire e-Build Corporation for $15 a share. Moreover, calculate the percentage gains to the shareholders of NY Corporation. [15 marks] Suppose that the merger takes place through an exchange of stock. Based on the premerger prices of the firms, instead of paying $15 cash, NY Corporation issues 0.30 of its shares for every e-Build Corporation share acquired. Calculate the price of the merged firm. [15 marks] (iii) To utilize the operating losses of the target firm is the economic justification and to reduce the price-to-earnings ratio is the financial justification for takeovers. Critically discuss each of them. [Word Limit: 1200 words] [40 marks] (b) John & John Corporation currently sells at a price-earnings multiple of 10. The firm has 2.5 million shares outstanding, and sells at a price per share of $45. HNK Corporation has a P/E multiple of 6, has 1.5 million shares outstanding, and sells at a price per share of $15. John & John Corporation acquires HNK by exchanging one of its shares for every three of HNK's share and there is no synergy of this takeover. (i) What will happen to John & John's price per share if the market does not realize that the P/E ratio of the merged firm ought to differ from John & John's P/E ratio before the takeover. Show your calculation. [20 marks] (ii) How are the gains from the merger split between shareholders of the two firms if the market is fooled as in part (b)(i)? Show your calculation. [10 marks]
