Hi all,

I need help with an assignment; i have attached it with this mail. I have also attached an excel file here which is the solver.It has to be answered on the excel solver orspreadsheet.

Problems Problem 28-9 Problem 28-10 Problem 28-14 Problem 28-16 Problem 28-9 Your company has earnings per share of $4. It has 1 million shares outstanding, each of which has a price of $40. You are thinking of buying TargetCo, which has earnings per share of $2, 1 million shares outstanding, and a price per share of $25. You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction. Your Company: Earnings per share Shares outstanding Price per share Target: Earnings per share Shares outstanding Price per share a. If you pay no premium to buy TargetCo, what will your earnings per share be after the merger? Purchase price Shares of acquirer issued New EPS 0.00 #DIV/0! #DIV/0! b. If you pay a 20% premium to buy TargetCo, what will your earnings per share be after the merger? Premium Purchase price Shares of acquirer issued New EPS 20.00% 0.00 #DIV/0! #DIV/0! c. What explains the change in earnings per share in part (a)? Are your shareholders any better or worse off? Focusing on EPS alone cannot tell you whether they're better or worse off. d. What will your price-earnings ratio be after the merger (if you pay no premium)? How does this compare to your P/E ratio before the merger? How does this compare to TargetCo's premerger P/E ratio? P/E ratio before P/E ratio after #DIV/0! #DIV/0! TargetCo.'s pre-merger P/E ratio #DIV/0! Problem 28-10 If companies in the same industry as TargetCo (from Problem 8) are trading at multiples of 14 times earnings, what would be one estimate of an appropriate premium for TargetCo? P/E Ratio of firms in TargetCo's industry Expected price of TargetCo based on industry P/E ratio Premium that should be paid 0.00 #DIV/0! Problem 28-14 Let's reconsider part (b) of Problem 9. The actual premium that your company will pay for TargetCo will not be 20%, because on the announcement the target price will go up and your price will go down to reflect the fact that you are willing to pay a premium for TargetCo. Assume that the takeover will occur with certainty and all market participants know this on the announcement of the takeover. Your Company: Earnings per share Shares outstanding Price per share Target: Earnings per share Shares outstanding Price per share a. What is the price per share of the combined corporation immediately after the merger is completed? Premium Purchase price New Total Shares Outstanding New Share Price 20.00% 0.00 #DIV/0! #DIV/0! b. What is the price of your company immediately after the announcement? Premium Purchase price New Total Shares Outstanding New Share Price 20.00% 0.00 #DIV/0! #DIV/0! c. What is the price of TargetCo immediately after the announcement? New TargetCo Share Price #DIV/0! d. What is the actual premium your company will pay? #DIV/0! Problem 28-16 BAD Company's stock price is $20, and the firm has 2 million shares outstanding. You believe that if you buy the company and replace its management, its value will increase by 40%. Assume that BAD has a poison pill with a 20% trigger. If it is triggered, all target shareholdersother than the acquirerwill be able to buy one new share in BAD for each share they own at a 50% discount. Assume that the price remains at $20 while you are acquiring your shares. If BAD's management decides to resist your buyout attempt, and you cross the 20% threshold of ownership: Stock price Shares outstanding Poison pill trigger Discount a. How many new shares will be issued and at what price? New shares issued 0.00 Price for new shares at a discount 0.00 b. What will happen to your percentage ownership of BAD? New percentage ownership #DIV/0! c. What will happen to the price of your shares of BAD? New price per share #DIV/0! d. Do you lose or gain from triggering the poison pill? If you lose, where does the loss go (who benefits)? If you gain, where does the gain come from (who loses)? #DIV/0! Compared to the pre-poison price, are you better off? FIN516 WEEK 6 - HOMEWORK Problem 28-9 on Acquisition Analysis Based on Chapter 28 Mergers and Acquisitions (Excel file included) Your company has earnings per share of $4. It has 1 million shares outstanding, each of which has a price of $40. You are thinking of buying TargetCo, which has earnings per share of $2, 1 million shares outstanding, and a price per share of $25. You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction. a) If you pay no premium to buy TargetCo, what will your earnings per share be after the merger? b) Suppose you offer an exchange ratio such that, at current preannouncement share prices for both firms, the offer represents a 20% premium to buy TargetCo. What will your earnings per share be after the merger? c) What explains the change in earnings per share in part a)? Are your shareholders any better or worse off? d) What will your price-earnings ratio be after the merger (if you pay no premium)? How does this compare to your P/E ratio before the merger? How does this compare to TargetCo's premerger P/E ratio? a. TargetCo's shares are worth $25, and your shares are worth $40. You will have to issue 25/40 = (5/8) shares per share of TargetCo to buy it. That means that in aggregate, you have to issue (5/8) 1 million = 625,000 new shares. After the merger, you will have a total of 1,625,000 shares outstanding (the original 1 million plus the 625,000 new shares). Your total earnings will be $6 million. This comes from the $4 per share 1 million shares = $4 million you were earning before the merger and the $2 per share 1 million shares = $2 million that TargetCo was earning. Thus your new EPS will be $6 million/1.625 million shares = $3.69. b. A 20% premium means that you will have to pay $30 per share to buy TargetCo = ($25 1.20). Thus you will have to issue $30/$40 = 0.75 of your shares per share of TargetCo, or a total of 750,000 new shares. With total earnings of $6 million and total shares outstanding after the merger of 1,750,000, you will have EPS of $6 million/1.75 million shares = $3.43. c. In part (a), the change in the EPS simply came from combining the two companies, one of which was earning $4 per share and the other was earning $2 per share. However, you will notice that even though TargetCo has half your EPS, it is trading for more than half your value. That is possible if TargetCo's earnings are less risky or if they are expected to grow more in the future. Thus, although your share holders end up with lower EPS after the transaction, they have paid a fair price, exchanging their $4 per share before the transaction for either lower, but safer, EPS after the transaction, or lower EPS that are expected to grow more in the future. Either way, focusing on EPS alone cannot tell you whether shareholders are better or worse off. d. If you simply combine the two companies without any indicated synergies, then the total value of the company will be $40 million + $25 million = $65 million. You will have earnings totaling $6 million, so your P/E ratio is $65/$6 = 10.83. Your P/E ratio before the merger was $40/$4 = 10, and TargetCo's was $25/$2 = 12.5. You can see that by buying TargetCo for its market price and creating no synergies, the transaction simply ends up with a company whose P/E ratio is between the P/E ratios of the two companies going into the transaction. Again, simply focusing on metrics like P/E does not tell you whether you are better or worse off. (Your P/E went up from 10 to 10.83 but your shareholders are no better or worse off.) FIN516 WEEK 6 - HOMEWORK Problem 16-8 on Managerial Decision Based on Chapter 16 Financial Distress, Managerial Incentives, and Information (Excel file included) As in Problem 1, Gladstone Corporation is about to launch a new product. Depending on the success of the new product, Gladstone may have one of four values next year: $150 million, $135 million, $95 million, or $80 million. These outcomes are all equally likely, and this risk is diversifiable. Suppose the risk-free interest rate is 5% and that, in the event of default, 25% of the value of Gladstone's assets will be lost to bankruptcy costs. (Ignore all other market imperfections, such as taxes.) a) What is the initial value of Gladstone's equity without leverage? Now suppose Gladstone has zero-coupon debt with a $100 million face value due next year. b) What is the initial value of Gladstone's debt? c) What is the yield-to-maturity of the debt? What is its expected return? d) What is the initial value of Gladstone's equity? What is Gladstone's total value with leverage? Suppose Gladstone has 10 million shares outstanding and no debt at the start of the year. e) If Gladstone does not issue debt, what is its share price? f) If Gladstone issues debt of $100 million due next year and uses the proceeds to repurchase shares, what will its share price be? Why does your answer differ from that in part e)? a. b. 150 135 95 80 0.25 $109.52 1.05 million 100 100 95 0.75 80 0.75 0.25 $78.87 1.05 million FIN516 WEEK 6 - HOMEWORK c. YTM 100 1 26.79% 78.87 expected return = 5% d. 50 35 0 0 equity 0.25 $20.24 1.05 million total value 150 135 95 0.75 80 0.75 0.25 $99.11 1.05 million (or 78.87 + 20.24 = $99.11 million) e. f. 109.52 $10.95 / share 10 99.11 $9.91 / share 10 Note that Bankruptcy cost lowers share price. Gladstone 78.87 7.96 million shares 9.91 20.24 $9.91 10 7.96 will raise $78.87 million from the debt, and repurchase . Its equity will be worth $20.24 million, for a share price of after the transaction is completed. Problem 16-9 on Financial Distress Based on Chapter 16 Financial Distress, Managerial Incentives, and Information Kohwe Corporation plans to issue equity to raise $50 million to finance a new investment. After making the investment, Kohwe expects to earn free cash flows of $10 million each year. Kohwe currently has 5 million shares outstanding, and it has no other assets or opportunities. Suppose the appropriate discount rate for Kohwe's future free cash flows is 8%, and the only capital market imperfections are corporate taxes and financial distress costs. a) What is the NPV of Kohwe's investment? FIN516 WEEK 6 - HOMEWORK b) What is Kohwe's share price today? Suppose Kohwe borrows the $50 million instead. The firm will pay interest only on this loan each year, and it will maintain an outstanding balance of $50 million on the loan. Suppose that Kohwe's corporate tax rate is 40%, and expected free cash flows are still $10 million each year. c) What is Kohwe's share price today if the investment is financed with debt? Now suppose that with leverage, Kohwe's expected free cash flows will decline to $9 million per year due to reduced sales and other financial distress costs. Assume that the appropriate discount rate for Kohwe's future free cash flows is still 8%. d) What is Kohwe's share price today given the financial distress costs of leverage? a. b. c. d. 10 50 $75 0.08 million 75 $15 / share 5 75 0.4 50 $19 / share 5 9 50 0.4 50 0.08 $16 / share 5