Precious Metal Mining (PMM) is considering a takeover of Rare Earth Exploration (REE) The annual financial results for the two companies are as follows Revenues (millions) Exploration costs (millions) Fuel costs (millions) Personnel costs (millions) Overhead costs (millions) PMM 8,000 3,100 1,000 2500 300 REE 2,800 900 325 1075 70 The proposed takeover will increase the combined revenues by 5 Fuel costs will remain unchanged, personnel costs will drop by $275 million, while the combined exploration costs will decrease by 5 In addition, the entire overhead costs of the combined company will be $300 million What are the expected incremental cash flows per year after the merger (5 marks) REE has 160 million shares trading at $15 5 per share The incremental cash flows from the merger are expected to continue for 10 years PMM estimates the acquisition costs will be $65 million PMMs tax rate is 10 Shareholders of PMM require 15 return on equity What is the maximum price PMM can pay for REE (5 marks) PMM currently has 160 million shares outstanding Without the takeover, the cash flows of PMM are expected to be stable in perpetuity PMMs tax rate is 10 Shareholders of PMM require 15 return on equity What should be the current share price of PMM ( 3 marks) You check the market and find that REEs current market price is $12 5 per share PMM offers REE shareholders $20 per share in cash If the offer is accepted, what would be the new price per share of PMM after the takeover (5 marks)

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Precious Metal Mining (PMM) is considering a takeover of Rare Earth Exploration (REE). The annual financial results for the two companies are as follows: Revenues

Precious Metal Mining (PMM) is considering a takeover of Rare Earth Exploration (REE). The annual financial results for the two companies are as follows:

Revenues (millions)

Exploration costs (millions)

Fuel costs (millions)

Personnel costs (millions)

Overhead

costs (millions)

PMM

8,000

3,100

1,000

2500

300

REE

2,800

900

325

1075

The proposed takeover will increase the combined revenues by 5%. Fuel costs will remain unchanged, personnel costs will drop by $275 million, while the combined exploration costs will decrease by 5%. In addition, the entire overhead costs of the combined company will be $300 million.

What are the expected incremental cash flows per year after the merger? (5 marks)

REE has 160 million shares trading at $15.5 per share. The incremental cash flows from the merger are expected to continue for 10 years. PMM estimates the acquisition costs will be $65 million. PMMs tax rate is 10%. Shareholders of PMM require 15% return on equity. What is the maximum price PMM can pay for REE? (5 marks)

PMM currently has 160 million shares outstanding. Without the takeover, the cash flows of PMM are expected to be stable in perpetuity. PMMs tax rate is 10%. Shareholders of PMM require 15% return on equity. What should be the current share price of PMM? (3 marks)

You check the market and find that REEs current market price is $12.5 per share. PMM offers REE shareholders $20 per share in cash. If the offer is accepted, what would be the new price per share of PMM after the takeover? (5 marks)