Question
Hey Chegg, I really need your help with this problem. I solved it on my own, but I am not sure if I am right
Hey Chegg, I really need your help with this problem. I solved it on my own, but I am not sure if I am right or wrong. I would really appreciate if you can look at my steps and tell me if I am right or wrong. If I happen to be wrong, tell me what my mistakes were. It would help me a lot.
The market capitalization and debt of a public firm are $500 million and $1,500 million respectively. The firm has $50 and $150 million of minority interest and preferred stock respectively. Moreover, it has a cash position of $450 million. Explicate how a hedge fund, which feels there is value in this company, can orchestrate a takeover, if it estimates it has to pay a 5% premium for the companys stock. What will the statement of financial position look like before after the acquisition?
My solution:
During the acquisition, the public firm is priced by using enterprise value. In order to utilize this method, the market value of all capital invested in the public firm is computed by following the formula shown below:
Calculate the Enterprise Value:
Enterprise Value = Market Capitalization + Debt + Minority Interest + Preferred Stock Cash
Keep in mind that cash is subtracted because potential buyers can indirectly use it to buy out a company. They take out a loan, which goes into buying the company. Afterwards, they use the cash to pay off the loan.
Enterprise Value = $500 million + $1,500 million + $50 million + $150 million - $450 million
Enterprise Value = $1,750 million
Statement of Financial Position
Before Acquisition:
ASSETS $ (million)
Cash and Cash Equivalents 450
Other Current & Noncurrent Assets 1,750
Total Assets 2,200
LIABILITIES
Debt 1,500
Total Liabilities 1,500
SHAREHOLDERS EQUITY
Common Stock 500
Preferred Stock 50
Minority Interest 150
700
Total Liabilities & Shareholders Equity 2,200
A hedge fund feels that the public firm has value. It wants to orchestrate a takeover, meaning it wants to acquire the public firm. In order for this action to take place, the hedge fund needs to pay a premium, which is estimated at 5%.
Enterprise Value = $500 million (1 + 5%) + $1,500 million + $50 million + $150 million (1 + 5%) - $450 million
Enterprise Value = $500 million (1 + .05) + $1,500 million + $50 million + $150 million (1 + 5%) - $450 million
Enterprise Value = $500 million (1.05) + $1,500 million + $50 million + $150 million (1.05) - $450 million
Enterprise Value = $525 million + $1,500 million + $50 million + $157.5 million - $450 million = $1,782.5 million
Statement of Financial Position
After Acquisition:
ASSETS $ (million)
Cash and Cash Equivalents 450
Other Current & Noncurrent Assets 1,782.5
Goodwill 32.5
Total Assets 2,265
LIABILITIES
Debt 1,500
Total Liabilities 1,500
SHAREHOLDERS EQUITY
Common Stock 525
Preferred Stock 50
Minority Interest 157.5
Retained Earnings 32.5
Total Shareholders Equity 765
Total Liabilities & Shareholders Equity 2,265
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