Question

In: Finance

Microsoft Co. is considering a takeover of Zoom Inc. Microsoft has 150 Million shares outstanding that...

Microsoft Co. is considering a takeover of Zoom Inc. Microsoft has 150 Million shares outstanding that are currently trading at $50 per share. Zoom has 20 Million shares outstanding trading at $25 per share. Microsoft’s Board of Directors believes that Zoom is currently not operated efficiently. The appropriate discount rate for both firms is 10%. Both firms face a 20% tax rate.

a) Suppose Microsoft has offered to pay Zoom’s shareholders $600 Million in cash to acquire Zoom. What is the minimum amount of after-tax synergies per year created by the acquisition that would justify such an offer? (Hint: Assume that the annual synergies are constant and perpetual.) Show your work. [5 marks]

b) Microsoft’s consultants have determined that the acquisition of Zoom will generate annual synergies of $12.50 Million before taxes. Including these synergies, what would be the market value of the combined company (Micro-Zoom) after the acquisition? Show your work. [5 marks]

c) Suppose that instead of using cash, Microsoft is offering the shareholders of Zoom 10 Million new shares in Microsoft as payment. (Hint: You can assume the same constant, perpetual, annual synergies as in part (b)) Show your work. What will be the new share price of Microsoft after the acquisition?

[5 marks] What is the premium (in $ per share) that Zoom shareholders would receive in this case? [10 marks]

Expert Solution

a. Annual After tax Synergies = Excess payment to Zoom * Discount Rate

Annual After tax Synergies = (600 M - 20 M * 25) * 10%

Annual After tax Synergies = 10 Million

Minimum amount of after-tax synergies per year created by the acquisition that would justify offer = $10 Million

b. Market value of combined company = Value of Microsoft + value of Zoom + Value of Synergy

Market value of combined company = 150 M * 50 + 20 M * 25 + $12.5 M / 10%

Market value of combined company = $8125 Million

c. Shares after acquisition = Current Shares + New Shares = 150 M + 10 M = 160 M

New Share Price = Market value of Combined Company / Shares After Acquisition

New Share Price = 8125 M / 160 M

New Share Price = $50.78125

Premium to Zoom Shareholders = (((New Share Price * Shares Issued) - Value of Zoom) / Shares of Zoom)

Premium to Zoom Shareholders = ((($50.78125 * 10 Million) - $500 M) / 20 M)

Premium to Zoom Shareholders = 7.8125 M / 20 M

Premium to Zoom Shareholders = $0.390625 per Share

Please dont forget to upvote

jeff jeffy answered 1 year ago

Winterbourne is considering a takeover of Monkton Inc. Winterbourne has 27 million shares outstanding, which sell...

Winterbourne is considering a takeover of Monkton Inc. Winterbourne has 27 million shares outstanding, which sell for $74 each. Monkton has 22 million shares outstanding, which sell for $37 each. Merger gains are estimated at $110 million. If Winterbourne has a price-earnings ratio of 15 and Monkton has a P/E ratio of 10, what should be the P/E ratio of the merged firm? Assume in this case that the merger is financed by an issue of new Winterbourne shares. Monkton...

Amoril Co. currently has 3,000 shares outstanding each sold for $150, whereas, Poter Inc. has 1,500...

Amoril Co. currently has 3,000 shares outstanding each sold for $150, whereas, Poter Inc. has 1,500 shares outstanding each sold for $100. The earnings per share for Amoril Co. and Poter Inc. is S12 per share. Amoril Co. decides to acquire Poter Inc. by offering one new share of Amoril Co. for every three shares of Poter Inc. Assume that there is no economic gain from the merger. 1- what is the earning per share for amoril co. after merger...

Fairyland Inc. has 4 million shares of common stock outstanding, 1 million shares of preferred stock...

Fairyland Inc. has 4 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 200 thousand bonds. The common shares are selling for $25 per share, the preferred share are selling for $10 per share, and the bonds are selling for 95 percent of their $1,000 par. (See P10-3 for formula to calculate weights). A. What would be the weight used for equity in the computation of FarCry’s WACC? B. What weight should you use for...

OMG Inc. has 6 million shares of common stock outstanding, 5 million shares of preferred stock...

OMG Inc. has 6 million shares of common stock outstanding, 5 million shares of preferred stock outstanding, and 7,000 bonds. Suppose the common shares sell for $17 per share, the preferred shares sell for $16 per share, and the bonds sell for 108 percent of par. What weight should you use for preferred stock in the computation of OMG’s WACC? (Round your answer to 2 decimal places.)

Google currently has a 5 million common shares outstanding, and a 1 million preferred shares outstanding,...

Google currently has a 5 million common shares outstanding, and a 1 million preferred shares outstanding, and 100,000 bonds outstanding. Calculate Google Weighted Average Cost of Capital (WACC) if the corporate tax rate is 35%. (Using excel and making formulas viewable) The average cost of equity of Google is 19.04%. The cost of Google’s preferred stocks if it is currently priced at $100 is 6%. The pre-tax cost of debt of Google is 6.85%.

Aaron Inc. has 335 million shares outstanding. It expectsearnings at the end of the year...

Aaron Inc. has 335 million shares outstanding. It expects earnings at the end of the year to be $650 million. The firm's equity cost of capital is 10%. Aaron pays out 50% of its earnings in total: 30% paid out as dividends and20% used to repurchase shares. If Aaron's earnings are expected to grow at a constant 6% per year, what is Aaron's share price?

ABC Inc. has 10 million shares of common stock outstanding. The firm also has 1,200,000 shares...

ABC Inc. has 10 million shares of common stock outstanding. The firm also has 1,200,000 shares of 6 percent preferred stock (annual dividend=$6) and 300,000 semi-annual bonds of $1,000 face value with a coupon rate of 8 percent semiannual bonds outstanding. The bonds were issued five years ago with maturity of 30 years when they were issued. The market price of common stock is $46 per share and has a beta of 0.85, the preferred stock currently sells for $90...

Inc has 200 million of shares outstanding trading at $10/share. The company has a beta of...

Inc has 200 million of shares outstanding trading at $10/share. The company has a beta of 1.2 and expected market return is 7%. T bill rate is 1.5%. the company has $25 million in interest expenses and a book value of debit of 125 million. The debt will mature in 12 years and it has a BB rating. The spread for a BB rating is 2.5 and the long term T bonds yield 4%. The company has an effective tax...

Dooley, Inc., has outstanding $150 million (par value) bonds that pay an annual coupon rate of...

Dooley, Inc., has outstanding $150 million (par value) bonds that pay an annual coupon rate of interest of 9.5 percent. Par value of each bond is $1,000. The bonds are scheduled to mature in 17 years. Because of Dooley’s increased risk, investors now require a 13 percent rate of return on bonds of similar quality with 17 years remaining until maturity. The bonds are callable at 108 percent of par at the end of 12 years. Use calculator to find...

26) ABC Inc. has 10 million shares of common stock outstanding. The firm also has1,200,000 shares...

26) ABC Inc. has 10 million shares of common stock outstanding. The firm also has1,200,000 shares of 6 percent preferred stock (annual dividend=$6) and 300,000 semi-annual bonds of $1,000 face value with a coupon rate of 8 percent semiannual bonds outstanding. The bonds were issued five years ago with maturity of 30 years when they were issued. The market price of common stock is $46 per share and has a beta of 0.85, the preferred stock currently sells for $90...