Question

• Firms A & T are both 100% equity financed. Firm A can acquire firm T for K330,000 in the form of either cash or stock. The Synergy value of the deal is k60, 000.

• The following information relates to the two companies

                                                                               A                         T

No.of Shares                                                       50,000              25,000

Price per share                                                        K30                    k12

EPS                                                                              k3                        k3

Market value                                               k1,500,00           k300,000

P/E         Ratio                                                         10X                     4X

Required:

1. What is the merger premium in percentage over firm T’s stock

2. if based on market price per share, would the merger happen on cash or stock basis

3. Calculate the NPV of the Merger based on Cash or Stock basis

4. Calculate the Post Merger Earnings per share for the firm.

Answer 1

1. Merger premium in percentage:-

(Deal price - market price)/market price*100

= (330000-300000)/300000*100

=10%

2. It is advisable to conduct the merger on stock basis if the eps of firm A post merger increases the the current eps.

For this, step 1 calculate the number of shares in firm a to be offered to the shareholders of firm T,i.e. calculate exchange ratio

Offer price per share of T/price per share of A

=(330000/25000)/30

=0.44

Hence number of ahare offered =0.44*25000=11000

Hence total share of firm A pist merger =50000+11000=61000

Step 2 calculate the total earnings of firm A post merger:

=(Total Earnings of A)+(Total Earnings of T)+Synergy

=(50000*3)+(25000*3)+60000=285000

Step 3 Calculate post merger EPS for Firm A

Total Earnings/ number of shares

=285000/61000=4.67K

Conclusion, since the eps has increased from 3 to 4.67, so it is advisable to go for stock option

Question 3

Calculating the NPV of merger:-

Synergy value- Premium paid for merger

60000-(330000-300000)= +30000Kis the NPV

Question 4

Post merger EPs for the firm is calculated in part 2.