Please answer 3a, 3b and 3c with work thank you
To solve these problems you need to apply the formula PV_ = CF_ /(k - g), CF_1 - cashflow received in period 1 (end of the first period), k = cost of capital, g = growth rate. For all problems, when a company pays for the target's stock with its own stock, it simply issues additional shares. Also, I suggest you value the post-merger combined company by adding up the values of its components. Consider a merger between two companies, 1 and 2, that is carried out by an exchange of stock. Company 1 is the acquirer. Each company has 100 shares. EPSI = $1, EPS2 = 2 (both received at the end of the year). Assume for simplicity that dividend-earnings beta 1 = 1, beta 2 = 2.5. R_F = 0.07, Risk premium = 0.06. The growth rate is zero. There are no expected synergies. a. What is the exchange ratio that will leave the price of company 1 unchanged? b. What happens to the EPS of company 1 after the merger? Should its price change as a result, and in what direction? Consider the following data on two companies: Assume that the valuation is based on discounted cash flows. Assume all-equity firms.) Company A acquires company B for stock. The merger is as of time 0. As a result of the merger, B'S end-of-year CFs will rise by 10%, and its annual growth rate thereafter will rise to 2%, B's shareholders (SHs) are promised a premium of 40% over its current (re-merger) value, using the current (pre-merger) price of A to determine the exchange ratio. a. What will be the price of A after the merger is completed and all the information is reflected in its price? b. What is the effective premium (in %) to B's SHs after the merger is completed? (That is, the premium received by target SHs in a stock offer after the buyer's stock price adjusts to reflect the information.) c. What would be A's stock price if it paid for B in cash, 40% over its pre-merger price, financed by debt (ignore tax, agency and bankruptcy effects, assume M&M)? Company T and H merge in a stock-for-stock deal. T will be the surviving company. The following is some information about the companies: a. The exchange ratio offered by T is based on the current market prices of both companies. According to this, what will be the EPS of T after the merger? b. The management of H demands an exchange ratio such that H's SHs receive a premium of 20%, and T's price is according to its current level, What will be the EPS of T after the merger? c. Under the conditions of (b), assume that no value is created in the merger (no synergies). The market recognizes it and the price of T adjusts accordingly. What will be the effective % premium to H's SHS (show also the dollar premium per share)
