经济类课件汇集_Module05 TAKEOVERS

FIN2101 BUSINESS FINANCE II MODULE5- TAKEOⅤERS QUESTION 1 Luxe Foods is contemplating the acquisition of valley Canning Company for a cash price of $180 000. Luxe currently has high financial leverage and therefore has a cost of capital of 15%. As a result of acquiring Valley Canning, which is financed entirely with equity, the firm expects its financial leverage to be reduced and its cost of capital therefore to drop to 000 per year for the first 3 years and by $30 000 per year for the following 12 year vs by $20 10%. The acquisition of valley Canning is expected to increase Luxe's cash inflow a) Determine whether the proposed cash acquisition is desirable b) If the firms financ ial leverage would actually remain unchanged as a result of the proposed acquisition, would this alter your recommendation? Support your answer with numerical data QUESTION 2 Firm a is planning to acquire Firm B for $140 million cash. The values of the two companies as separate entities are $200 million and $100 million respectively. Firm A estimates that by combining the two companies it will increase operating cash flows by million annually in perpetuity. If the relevant cost of capital is 20%, what is the NPV of merger to Firm a's shareholders? QUESTION 3 Crocodile Ltd is considering the acquisition of Shark Finance. The values of the two companies as separate entities are $10 million and $5 million respectively. Crocodile estimates that by combining the two companies it will reduce its annual selling and administrative costs by $250 000 in perpetuity. Crocodile can either pay $7 million cash for Shark or offer Shark a 50% holding in Crocodile. If the opportunity cost of capital is 10% er annum (a) What is the gain, in present value terms, from the merger? (b) What is the net cost of the cash offer? (c) What is the net cost of the share alternative? (d) What is the NPv of the acquisition under the cash offer? (e) What is the NPv of the acquisition under the share offer?

August 2003 FIN2101 BUSINESS FINANCE II MODULE 5 - TAKEOVERS QUESTION 1 Luxe Foods is contemplating the acquisition of Valley Canning Company for a cash price of $180 000. Luxe currently has high financial leverage and therefore has a cost of capital of 15%. As a result of acquiring Valley Canning, which is financed entirely with equity, the firm expects its financial leverage to be reduced and its cost of capital therefore to drop to 10%. The acquisition of Valley Canning is expected to increase Luxe's cash inflows by $20 000 per year for the first 3 years and by $30 000 per year for the following 12 years. a) Determine whether the proposed cash acquisition is desirable. b) If the firm's financial leverage would actually remain unchanged as a result of the proposed acquisition, would this alter your recommendation? Support your answer with numerical data. QUESTION 2 Firm A is planning to acquire Firm B for $140 million cash. The values of the two companies as separate entities are $200 million and $100 million respectively. Firm A estimates that by combining the two companies it will increase operating cash flows by $5 million annually in perpetuity. If the relevant cost of capital is 20%, what is the NPV of the merger to Firm A's shareholders? QUESTION 3 Crocodile Ltd is considering the acquisition of Shark Finance. The values of the two companies as separate entities are $10 million and $5 million respectively. Crocodile estimates that by combining the two companies it will reduce its annual selling and administrative costs by $250 000 in perpetuity. Crocodile can either pay $7 million cash for Shark or offer Shark a 50% holding in Crocodile. If the opportunity cost of capital is 10% per annum: (a) What is the gain, in present value terms, from the merger? (b) What is the net cost of the cash offer? (c) What is the net cost of the share alternative? (d) What is the NPV of the acquisition under the cash offer? (e) What is the NPV of the acquisition under the share offer?

QUESTION 4 Fly-By-Night Couriers is analysing the possible acquisition of Flash-in-the-Pan Restaurants Neither firm has debt. The forecasts of Fly-By-Night show that the purchase would increase its annual after-tax cash flow by $600 000 indefinitely. The current market value of Flash-in- the-Pan is $20 million. The current market value of Fly- By-Night is $35 million. The appropriate discount rate for the incremental cash flows is 8% a) What is the gain from the takeover? b) What is the value of Flash-in-the-Pan to Fly-By-Night? Fly-By-Night is trying to decide whether it should offer 25% of its stock or $15 million in cash to flash-in-the-Pan c) What is the net cost of each alternative? d) what is the NPv of each alternative? e) Which alternative should Fly-By-Night choose?

August 2003 QUESTION 4 Fly-By-Night Couriers is analysing the possible acquisition of Flash-in-the-Pan Restaurants. Neither firm has debt. The forecasts of Fly-By-Night show that the purchase would increase its annual after-tax cash flow by $600 000 indefinitely. The current market value of Flash-in￾the-Pan is $20 million. The current market value of Fly-By-Night is $35 million. The appropriate discount rate for the incremental cash flows is 8%. a) What is the gain from the takeover? b) What is the value of Flash-in-the-Pan to Fly-By-Night? Fly-By-Night is trying to decide whether it should offer 25% of its stock or $15 million in cash to Flash-in-the-Pan. c) What is the net cost of each alternative? d) What is the NPV of each alternative? e) Which alternative should Fly-By-Night choose?

FIN2101 BUSINESS FINANCE II SOLUTIONS TO TUTORIAL QUESTIONS MODULE5- TAKEOⅤERS

August 2003 FIN2101 BUSINESS FINANCE II SOLUTIONS TO TUTORIAL QUESTIONS MODULE 5 - TAKEOVERS

QUESTION 1 NPV=∑( F x PVIF)-Ⅱ S20000 PVIFAA1 +S30000 PVIFAo. PVIF-$180000 =(s200002487)+(S30006814×0.751-180000 =$49740+$153519-$180000 =$23259 Conclusion NPV20, therefore proceed with the proposed acquisition NPV=S(CF,×PVIF,)-Il S20000 PVIFA153+$30000 PVIFA o15.12 PVIF.153-$180000 ($20000×2283)+(S30000×5421×0.658)-$180000 =S45660+$107011-$180000 27329 Conclusion NPV<O, therefore do not proceed with the takeover

August 2003 QUESTION 1 (a) ( ) ( ) ( ) = $23 259 = $49 740 + $153519 - $180 000 = $20 000 2.487 + $30 000 6.814 0.751 - $180 000 = $20 000 PVIFA + $30 000 PVIFA PVIF - $180 000 NPV = CF PVIF - II 0.10,3 0.10,12 0.10,3 n t=1 t k ,t      Conclusion NPV  0, therefore proceed with the proposed acquisition. (b) ( ) ( ) ( ) = - $27 329 = $45 660 + $107 011- $180 000 = $20 000 2.283 + $30 000 5.421 0.658 - $180 000 = $20 000 PVIFA + $30 000 PVIFA PVIF - $180 000 NPV = CF PVIF - II 0.15,3 0.15,12 0.15,3 n t=1 t k ,t      Conclusion NPV < 0, therefore do not proceed with the takeover

QUESTION 2 Present value of incremental cash flows $5000000÷0.20 $25000000 Net cost Cash paid-PⅤB =$140000000-$100000000 $40000000 NPV= Gain -Net cost $25000000-S40000000 $15000000 ALTERNATIVEAPPROACH PVA+B PVA+PVB+ Gain $200000000+$100000000+$25000000 $325000000 Maximum price PVA+B-PVA (IfNPV=0) $325000000-$200000000 l25000000 The value of Firm A will increase by $125 000 000 as a result of the takeover. If we pay S140 000000. the deal has a negative npv of$15 000 000

August 2003 QUESTION 2 Gain = Present value of incremental cash flows = $5 000 000 ÷ 0.20 = $25 000 000 Net cost = Cash paid - PVB = $140 000 000 - $100 000 000 = $40 000 000 NPV = Gain - Net cost = $25 000 000 - $40 000 000 = -$15 000 000 ALTERNATIVE APPROACH PVA+B = PVA + PVB + Gain = $200 000 000 + $100 000 000 + $25 000 000 = $325 000 000 Maximum Price = PVA+B - PVA (If NPV = 0) = $325 000 000 - $200 000 000 = $125 000 000 The value of Firm A will increase by $125 000 000 as a result of the takeover. If we pay $140 000 000, the deal has a negative NPV of $15 000 000

QUESTION 3 Present value of the savings $250000÷0.10 $2500000 Net cost $7000000-$5000000 $2000000 (c) Net cost= x PVc+s-PVShark Where x=50% PVS= S51 m PVc+ PVs+ Gain $10000000+$5000000+$2500000 $17500000 Net cost (0.5×$17500000)-$5000000 $8750000-$5000000 $3750000 (d NPV Gain -Net cost $2500000-$2000000 $500000 (e) Gain- Net cost $2500000-$3750000 l250000

August 2003 QUESTION 3 (a) Gain = Present value of the savings = $250 000 ÷ 0.10 = $2 500 000 (b) Net cost = Cash paid - PVShark = $7 000 000 - $5 000 000 = $2 000 000 (c) Net cost = x.PVC+S - PVShark Where x = 50% PVS = $5m PVC+S = PVC + PVS + Gain = $10 000 000 + $5 000 000 + $2 500 000 = $17 500 000  Net cost = (0.5 ×$17 500 000) - $5 000 000 = $8 750 000 - $5 000 000 = $3 750 000 (d) NPV = Gain - Net cost = $2 500 000 - $2 000 000 = $500 000 (e) NPV = Gain - Net cost = $2 500 000 - $3 750 000 = -$1 250 000

QUESTION 4 Present value of incremental cash flows 600000÷0.08 $7500000 (b) PVT(A)= Gain+PV $7500000+$20000000 $27500000 (c) Cash Alternative Net cost Cash Paid-PVT 20000000 $5000000 Share alternative et cost x PVA+T-PVT Where x=25% PVa+T E PVA+PVT+ Gain $35000000+$20000000+$7500000 62500000 Net cost 025×$6250000)-S20000000 $15625000-$20000000 $4375000 NPⅤ Gain-Net cost NPVCASH $7500000-($5000000 $12500000 NPVSHARES=$7500000-(-$4375000 ll875000 (e) Choose the Cash alternative which has the higher NPV

August 2003 QUESTION 4 (a) Gain = Present value of incremental cash flows = $600 000 ÷ 0.08 = $7 500 000 (b) PVT(A) = Gain + PVT = $7 500 000 + $20 000 000 = $27 500 000 (c) Cash Alternative Net cost = Cash Paid - PVT = $15 000 000 - $20 000 000 = -$5 000 000 Share Alternative Net cost = x.PVA+T - PVT Where x = 25% PVT = $20m PVA+T = PVA + PVT + Gain = $35 000 000 + $20 000 000 + $7 500 000 = $62 500 000  Net cost = (0.25 ×$62 500 000) - $20 000 000 = $15 625 000 - $20 000 000 = -$4 375 000 (d) NPV = Gain - Net cost NPVCASH = $7 500 000 - (-$5 000 000) = $12 500 000 NPVSHARES = $7 500 000 - (-$4 375 000) = $11 875 000 (e) Choose the CASH alternative which has the higher NPV