Calculate the pre-merger earnings per share for Admiral and Favorite and the pre-merger price-to-earnings (P/E) ratio for
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Question:
- Calculate the pre-merger earnings per share for Admiral and Favorite and the pre-merger price-to-earnings (P/E) ratio for each company (based on the stated prices per share).
- Calculate the exchange ratio of Admiral shares for each share of Favorite, based on the stated price per share of each company.
- Calculate three additional exchange ratios of Admiral shares for each share of Favorite.
- Assume a 15%, 20%, and 25% premium price per share over the stated Favorite price of $15 per share.
- Calculate the Admiral Foods post-merger income statement and earnings per share, assuming an exchange ratio of 0.45.
- The VP of operations insists that the merger will generate $1.0 million in after tax earnings each year from synergies, due to Favorite using Admiral products in its cost of goods sold.
- Calculate the free cash flow from the synergies for 5 years, assuming $100,000 of depreciation for each year.
- Calculate Admiral's required rate of return on equity using the CAPM.
- Use Admiral's beta of 1.3, a risk-free rate of 2.0%, and a market risk premium of 7.0%.
- Calculate Admiral's weighted average cost of capital (WACC).
- Assume Admiral's cost of debt is 4% (pretax).
- Develop the terminal year value of the synergies based on the fifth year of the cash flows.
- Assume the growth rate of the synergistic cash flows after the terminal year is 1.0%.
- Determine the net present value of the cash flows resulting from synergies.
- Assume that the earnings due to synergies end after 5 years.
- Determine the EPS of the combined company in Year 1 if these synergies occur.
- Use the Admiral Foods post-merger income statement you calculated for this final project and the shares outstanding you calculated using an exchange ratio of 0.45.
Related Book For
Contemporary Financial Management
ISBN: 9780324289114
10th Edition
Authors: James R Mcguigan, R Charles Moyer, William J Kretlow
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