CBA Ltd has just announced a plan to acquire XYZ Ltd. Both CBA and XYZ have no debt in their capital structure. Just before the takeover announcement, the two companies have the following information: CBA Ltd XYZ Ltd Earnings per share (EPS) ($) 1.00 2.00 Price per share ($) 20.00 15.00 Number of shares (in millions) 2 1 A. Assume that CBA estimates that there are no economic benefits from combining the two companies. CBA plans to pay for XYZ by issuing new shares and swapping them with the shares of XYZ. CBA is willing to pay for XYZ shares with the exchange ratio of 0.75. (i) What is the earnings per share of the combined company after the takeover? [1 mark] (ii) What is the premium of the takeover? [1 mark] (iii) Suppose that XYZ never pays dividends and there are no taxes, if an investor could buy XYZ shares just before the takeover announcement and then sell them immediately after the takeover completion, what is the rate of return for the investor? [2 marks] B. Assume that CBA uses a better valuation method and estimates that the net present value of the economic benefits from combining the two companies is $200,000. (i) Suppose that CBA is considering whether it should pay for XYZ by stock payment or by cash payment. Explain which method of payment CBA should use. [2 marks] (ii) Suppose that now CBA wants to achieve an EPS of $1.20 in the combined company after the takeover. CBA decides to pay for XYZ through stock payment. Calculate the exchange ratio for CBA. [2 marks] C. Assume that CBA now seeks an independent valuation from an external financial analyst. The analyst estimates that CBA will reduce its selling and administrative costs by $25,000 per annum in perpetuity after acquiring XYZ. If the cost of capital of CBA is 10% per annum, what is the maximum exchange ratio that CBA can offer in a stock swap for acquiring XYZ and still generate a positive net present value (NPV) of the takeover for CBA? [2 marks]