Firm A is considering a merger with Firm B. The current market value of A is...

Firm A is considering a merger with Firm B. The current market value of A is $20,000,000 and the volatility of asset return is 58% percent. A also has a zero coupon bond with a face value of $8,000,000 that matures in 3 years. B’s market value is $9,000,000 with standard deviation of asset return of 70% and a zero coupon bond of $3,000,000 that matures in 3 years. The continuously compounded risk free rate is 4%. After the merger the combined company will have asset volatility of 48%. What are the current market values of debt and equity for A, B, and the combined firm? You need to compute 6 values (1 for D and 1 for E for the three firms: A, B, and (A+B).

Expert Solution

Current market value of debt for firm A = Face value of ZCB/[(1+risk free rate)^3] = $8,000,000/[(1+0.04)^3] = $8,000,000/(1.04^3) = $8,000,000/1.124864 = $7,111,970.87

Current market value of equity for firm A = Current market value of firm A - Current market value of debt for firm A = $20,000,000-$7,111,970.87 = $12,888,029.13

Current market value of debt for firm B = Face value of ZCB/[(1+risk free rate)^3] = $3,000,000/[(1+0.04)^3] = $3,000,000/(1.04^3) = $3,000,000/1.124864 = $2,666,989.08

Current market value of equity for firm B = Current market value of firm B - Current market value of debt for firm B = $9,000,000-$2,666,989.08 = $6,333,010.92

Current market value of debt for merged firm (A+B) = Face value of ZCB/[(1+risk free rate)^3] = ($8,000,000+$3,000,000)/[(1+0.04)^3] = $11,000,000/(1.04^3) = $11,000,000/1.124864 = $9,778,959.95

Current market value of equity for merged firm (A+B) = (Current market value of firm A+Current market value of firm B) - Current market value of debt for merged firm (A+B) = ($20,000,000+$9,000,000-$9,778,959.95 = $19,221,040.05

Note: ZCB=Zero coupon bond; Volatality is irrelevant; assume there is no synergy benefit.

jeff jeffy answered 1 year ago

Firm A is considering a merger/acquisition with Firm B. Firm A: Market value of debt: $2...

Firm A is considering a merger/acquisition with Firm B. Firm A: Market value of debt: $2 million Market value of equity: $4 million Number of shares: 200,000 Firm B: Market value of debt: $5 million Market value of equity: $5 million Number of shares: 500,000 Investment rate for the combined firm (bA+B): 70% WACC for the combined firm (WACCA+B): 10% Total net operating income before synergy gain: (X): $3 million Synergy rate (a): 15% Corporate tax rate (T): 40% Growth...

merger and acquisition Firm Z has a current market value of $35 million and is considering...

merger and acquisition Firm Z has a current market value of $35 million and is considering the acquisition of firm Y, whose current market value is $20 million. Both firms are all-equity. A market research study by the investment bank hired by firm Z shows that a purchase of firm Y will increase the after-tax cash flows of Y by $600,000 in perpetuity. The appropriate discount rate for the incremental cash flow is 8%. a) What is the value of...

Firm A is considering a merger with Firm B. Based on the following data, what is...

Firm A is considering a merger with Firm B. Based on the following data, what is the stock exchange ratio if Firm A negotiates a merger with Firm B and if all the synergy gain goes to Firm B's shareholders? Firm A: Market value of debt: $2 million Market value of equity: $4 million Number of shares: 0.2 million Estimated total firm value based on value-based management model if the merger takes place: 10 million Firm B: Market value of...

Discuss the relation between the types of integration and market structure, considering the current merger between...

Discuss the relation between the types of integration and market structure, considering the current merger between Ghana Home Loans and First National Bank of Ghana in the mortgage industry.

Consider a firm that currently has a market value of $2,000,000. The firm is considering a...

Consider a firm that currently has a market value of $2,000,000. The firm is considering a project with the following yearly cash flows and a required return (hurdle rate) of 12%. T=0 -1,500,000 T=1 400,000 T=2 -200,000 T=3 900,000 T=4 700,000 T=5 500,000 a) What is the NPV of the project? b) Calculate the Modified IRR (MIRR) using a 12% discount rate. c) If the firm decided to go forward with (i.e., accept) this project, what would the firm's new...

Consider the following pre-merger information about a bidding firm (Firm B) and a target firm (Firm...

Consider the following pre-merger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that both firms have no debt outstanding. Firm B Firm T Shares Outstanding 8,700 3,600 Price per Share $47 $19 Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $16,700. Suppose Firm B agrees to a merger by an exchange of stock. If B offers one of its shares for every 2 of T's shares....

A firm has a current book value per share of $21.10 and a market price per...

A firm has a current book value per share of $21.10 and a market price per share of $37.57. Next year's earnings are expected to be $5.60 per share and the expected earnings growth rate is 2.5 percent. What is the required rate of return on this stock? A. 14 percent B. 15 percent C. 16 percent D. 17 percent E. 18 percent

1.The pre merger balance sheets of firm A and B are given below.Firm A is interested...

1.The pre merger balance sheets of firm A and B are given below.Firm A is interested in taking over firm B.Prepare the post- merger balance sheet for firm A according to the pooling of interest method. Firm A Current Assets US $10000 Current Liabilities US $6000 Net Fixed Assets US$35000 Long Term Debt US $10000 Equity US$29000 Total US $45000 US$45000 Firm B Current Assets US$4000 Current Liabilities US$2000 Net Fixed Assets US$7000 Long Term Debt US$2500 Equity US$6500 Total...

1.) The HHI in this market is Market share Firm A 50% Firm B 30% Firm...

1.) The HHI in this market is Market share Firm A 50% Firm B 30% Firm C 20% a. 3800 b. 1800 c. 100% d. 6800 2.) A good example of a vertical merger is a a. Fast food franchise buying another franchise b. Wire manufacturer buying a copper mine c. Cigarette company buying a cookie company d. Airline buying a car manufacturer 3. You would most often find economies of scale in a (n) a. Natural monopoly b. Very...

I am considering two alternative investments: growth firm with earnings of $50,000 and a market value...

I am considering two alternative investments: growth firm with earnings of $50,000 and a market value of $70,000,000 or value firm with earnings of $400,000 and a market value of $10,000,000. Assume the appropriate discount rates for growth firms is 15% and the appropriate discount rate for value firms is 9%. What are the implied growth rates for each of the firms? What are the present value of growth opportunities (PVGO) for each firm?

Question