• 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.

Calculate Admirals required rate of return on equity using the CAPM.

• Use Admirals beta of 1.3, a risk-free rate of 2.0%, and a market risk premium of 7.0%.

Calculate Admirals weighted average cost of capital (WACC).

• Assume Admirals cost of debt is 4% (pretax).

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.

• Assume an exchange ratio of 0.45.

• Compare this EPS (including synergies) to the EPS of the combined company without the synergies.
  • What percentage increase in EPS is this?

$101 Admiral Foods Corporation Balance Sheet (in Millions of Dollars) Current assets $225 Current liabilities Fixed assets, net 307 Long-term debt Common equity (10,000,000 shares) Total assets $532 Total liabilities and equity 106 325 $532 Admiral Foods Corporation Income Statement (in Millions of Dollars) Sales $1,261.0 Less: Expenses, excluding depreciation 1,118.2 Less: Depreciation 36.0 Earnings before interest and taxes $ 106.8 Less: Interest 12.8 Earnings before taxes $ 94.0 Less: Taxes (40%) 37.6 Earnings after taxes $ 56.4 $ 6.5 2.2 Favorite Food Systems, Inc. Balance Sheet (in Millions of Dollars) Current assets $10.6 Current liabilities Fixed assets, net 12.1 Long-term debt Common equity Total assets $22.7 (2,000,000 shares) Total liabilities and equity 14.0 $22.7 Favorite Food Systems, Inc. Income Statement (in Millions of Dollars) Sales $75.2 65.4 1.4 $ 8.4 Less: Expenses, excluding depreciation Less: Depreciation Earnings before interest and taxes Less: Interest Earnings before taxes Less: Taxes (40%) Earnings after taxes 0.4 $ 8.0 3.2 $ 4.8 Additional Information Admiral Foods Corporation $ 2.50 Favorite Food Systems $ 0.60 Dividends per share Common stock (price per share) $50 $15 $101 Admiral Foods Corporation Balance Sheet (in Millions of Dollars) Current assets $225 Current liabilities Fixed assets, net 307 Long-term debt Common equity (10,000,000 shares) Total assets $532 Total liabilities and equity 106 325 $532 Admiral Foods Corporation Income Statement (in Millions of Dollars) Sales $1,261.0 Less: Expenses, excluding depreciation 1,118.2 Less: Depreciation 36.0 Earnings before interest and taxes $ 106.8 Less: Interest 12.8 Earnings before taxes $ 94.0 Less: Taxes (40%) 37.6 Earnings after taxes $ 56.4 $ 6.5 2.2 Favorite Food Systems, Inc. Balance Sheet (in Millions of Dollars) Current assets $10.6 Current liabilities Fixed assets, net 12.1 Long-term debt Common equity Total assets $22.7 (2,000,000 shares) Total liabilities and equity 14.0 $22.7 Favorite Food Systems, Inc. Income Statement (in Millions of Dollars) Sales $75.2 65.4 1.4 $ 8.4 Less: Expenses, excluding depreciation Less: Depreciation Earnings before interest and taxes Less: Interest Earnings before taxes Less: Taxes (40%) Earnings after taxes 0.4 $ 8.0 3.2 $ 4.8 Additional Information Admiral Foods Corporation $ 2.50 Favorite Food Systems $ 0.60 Dividends per share Common stock (price per share) $50 $15