1. Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total after tax annual cash flow by $4 million indefinitely. The current market value of Teller is $43 million, and that of Penn is $88 million. The appropriate discount rate for the incremental cash flows is 10 percent. Penn is trying to decide whether it should offer 40 percent of its stock or $69 million in cash to Tellers shareholders. a. What is the cost of each alternative? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, i.e. 1,234,567.) Cash cost $ Equity cost $ b. What is the NPV of each alternative? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, i.e. 1,234,567.) NPV cash $ NPV stock $ c. Which alternative should Penn choose? Stock Cash 2. Plant, Inc., is considering making an offer to purchase Palmer Corp. Plants vice president of finance has collected the following information: Plant Palmer Price-earnings ratio 15.7 11.3 Shares outstanding 1,620,000 870,000 Earnings $ 4,390,200 $ 1,044,000 Dividends $ 1,062,000 $ 482,000 Plant also knows that securities analysts expect the earnings and dividends of Palmer to grow at a constant rate of 4 percent each year. Plant management believes that the acquisition of Palmer will provide the firm with some economies of scale that will increase this growth rate to 6 percent per year. a. What is the value of Palmer to Plant? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Value of Palmer $ b. What would Plants gain be from this acquisition? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Gain $ c. If Plant were to offer $24 in cash for each share of Palmer, what would the NPV of the acquisition be? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) NPV $ d. What is the most Plant should be willing to pay in cash per share for the stock of Palmer? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Maximum bid price $ e. If Plant were to offer 237,000 of its shares in exchange for the outstanding stock of Palmer, what would the NPV be. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) NPV $ Plant’s outside financial consultants think that the 6 percent growth rate is too optimistic and a 5 percent rate is more realistic. f-1. If Plant still offers $24 per share, what is the NPV with this new growth rate? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) NPV $ f-2. If Plant still offers 237,000 shares, what is the NPV with this new growth rate? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) NPV $ f-3. Should the acquisition be attempted? Yes No 3. Consider the following premerger 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 6,000 1,200 Price per share $ 47 $ 17 Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $9,500. a. If Firm T is willing to be acquired for $19 per share in cash, what is the NPV of the merger? (Do not round intermediate calculations.) NPV $ b. What will the price per share of the merged firm be assuming the conditions in (a)? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Share price $ c. If Firm T is willing to be acquired for $19 per share in cash, what is the merger premium? (Do not round intermediate calculations.) Merger premium $ d. Suppose Firm T is agreeable to a merger by an…
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