The BETA firm is proposing to acquire ACE Products, described in Problem 1. BETA estimates that ACE’s free cash flow for next year could be improved to $5.5 million because of synergistic benefits in the form of operating or distribution economies. The potential acquirer also believes that ACE’s perpetuity growth rate could be increased to 7 percent annually. However, the riskiness of the cash flows would be increased, causing the appropriate WACC to increase to 16 percent. Interest-bearing debt owed by ACE is $17.5 million. The venture also has surplus cash of $4 million. ACE Products has five million shares of common stock outstanding.
A. Determine ACE’s enterprise value from the perspective of BETA. What is ACE’s equity worth to BETA in dollar amount and on a per-share basis?
B. Use the per-share value of ACE from Problem 1 and the per-share value from this problem and establish a range of values (i.e., without and with expected synergistic benefits). If one-half of the synergy-derived benefits were allocated to ACE’s venture investors and founders, at what price per share would the merger take place?
C. BETA has thirty million shares of stock outstanding with a market capitalization value of $600 million. What is BETA’s stock price? Determine the exchange ratio between ACE’s stock value and BETA’s stock price at each of ACE’s values established in Part B. That is, what would ACE’s venture investors and founders receive in BETA’s shares for each share of common stock they currently hold in ACE Products?