Question 6: [10 Marks) The following information is used for Parts A, B, and C. Rearden Metal has earnings per share of $2. It has 10 million shares outstanding and is trading at $20 per share. Rearden Metal is planning to acquire Associated Steel, which has earnings per share of $1.25,4 million shares outstanding, and a price per share of $15. Both companies have no debt in their capital structure. A. Rearden Metal estimates that there are no expected synergies from the takeover. Rearden Metal will pay for Associated Steel by issuing new shares. If Rearden offers an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents a 30% premium to buy Associated Steel (i) What is the price per share of the combined firm after the takeover? (ii) What is the price per share of Associated Steel immediately after the announcement? B. Assuming that Rearden Metal seeks an independent valuation from an external financial analyst. The analyst estimates that Rearden Metal will increase its revenue with a net cash flow of $500,000 per annum in perpetuity after acquiring Associated Steel. The cost of capital of Rearden Metal is 10% per annum. Rearden Metal will pay for Associated Steel by issuing new shares. If the exchange ratio is 0.5, what is the earning per share (EPS) of the combined firm after the takeover? If Rearden would like achieve an EPS of $2 in the combined firm after the takeover, what is the exchange ratio? (11) C. Assuming that Rearden Metal seeks an independent valuation from an external financial analyst. The analyst estimates that Rearden Metal will increase its revenue with a net cash flow of $500,000 per annum in perpetuity after acquiring Associated Steel. The cost of capital of Rearden Metal is 10% per annum. Rearden Metal will pay for Associated Steel by cash payment and the offer price is $70 million. () What is the stock price of Rearden Metal and what is the stock price of Associated Steel after the announcement of the takeover? Explain why there is an increase or a decrease in stock prices each of these two firms after the announcement of the takeover? What is the net present value (NPV) of this takeover to Associated Steel and what is the net present value (NPV) of this takeover to Rearden Metal? (11) Question 6: [10 Marks) The following information is used for Parts A, B, and C. Rearden Metal has earnings per share of $2. It has 10 million shares outstanding and is trading at $20 per share. Rearden Metal is planning to acquire Associated Steel, which has earnings per share of $1.25,4 million shares outstanding, and a price per share of $15. Both companies have no debt in their capital structure. A. Rearden Metal estimates that there are no expected synergies from the takeover. Rearden Metal will pay for Associated Steel by issuing new shares. If Rearden offers an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents a 30% premium to buy Associated Steel (i) What is the price per share of the combined firm after the takeover? (ii) What is the price per share of Associated Steel immediately after the announcement? B. Assuming that Rearden Metal seeks an independent valuation from an external financial analyst. The analyst estimates that Rearden Metal will increase its revenue with a net cash flow of $500,000 per annum in perpetuity after acquiring Associated Steel. The cost of capital of Rearden Metal is 10% per annum. Rearden Metal will pay for Associated Steel by issuing new shares. If the exchange ratio is 0.5, what is the earning per share (EPS) of the combined firm after the takeover? If Rearden would like achieve an EPS of $2 in the combined firm after the takeover, what is the exchange ratio? (11) C. Assuming that Rearden Metal seeks an independent valuation from an external financial analyst. The analyst estimates that Rearden Metal will increase its revenue with a net cash flow of $500,000 per annum in perpetuity after acquiring Associated Steel. The cost of capital of Rearden Metal is 10% per annum. Rearden Metal will pay for Associated Steel by cash payment and the offer price is $70 million. () What is the stock price of Rearden Metal and what is the stock price of Associated Steel after the announcement of the takeover? Explain why there is an increase or a decrease in stock prices each of these two firms after the announcement of the takeover? What is the net present value (NPV) of this takeover to Associated Steel and what is the net present value (NPV) of this takeover to Rearden Metal? (11)
