Chapter 14 Cost of capital = required return = discount rate Cost of ...
Chapter 14 Cost of capital = required return = discount rate
L=
Range from 62 to 67
Cost of equity DGM:
P0 =
g
=
g
= ROE x Retention ration = ROE (1 – payout ratio) = ROE (1 – Do/EPS)
SML:
= 1/4
RE =
Chapter 16 Proposition I = the value of the firm is not affected by changes in the capital structure, the CF of the firm do not change. Proposition II = WACC of the firm is not affected by capital structure
-1 (using historical data)
Case I
RE = Rf – βE [E(RM) – Rf)
Cost of debt YTM using calc Preferred stock: solve for r =Rp = return on preferred stock P0 = Rp = WACC
=
(RE) +
PVCCATS
=
NAL
= 6,500,000 – 871,000 -
x
–
x )–
= $1,453,118 - 1,453,118
NAL > 0 the firm should lease it NAL < 0 the firm should buy it Max lease PMT acceptance to firm: NAL = 0 = 6,500,000 – M (1.0858) PVIFA (8.58%, 3) - 374,966 - 1,453,118 M (1.0858) PVIFA (8.58%, 3) = 6,500,000 – 374,966 - 1,453,118 = 4,671,916 PVIFA (8.58, 3): n= 3, r= 8.58%, PV = 2.55, PMT = 1 M= = 1,687,009 = 2,556,075
What if the firm security deposit of $210,00 and lease PMT is same I = 6,500,000 – 210,000=6,290,000 Salvage=480,000-210,000=270,000 Everything else same When no tax then no dep, no pvccats, pmt same, r same Asset cost = $340 CCA = 28% N = 10 yrs Salvage = 0 Tax = 38% Interest = 15%. After tax = .15(1-.38) =9.3% PMT = end of yr Breakeven pt btw lessee and lessor: = x = $93 = 0 = 340 – L x PVIFA (9.3%, 3) – 93
PVIFA (9.3%, 3): n=10, r=9.3%, PV= 6.334, PMT=1 L
=
PMT
=
= RA + (RA – RD) RA = Rf – βA (RM – Rf) = Rf – βE (1+ )(RM) – Rf)
(RE) +
= 39 = 62
Assume lessee pay no tax but lessor does. What range of lease pmt will have positive NAL for both parties? NAL = 0 = 340 – L x PVIFA (15%, 3)
CS Capital surplus R/E Total equity
= $11,000 = $204,000 = $561,500 = $776,500
(old + new surplus) (old R/E – Selling P x share outstanding)
Stock split = cheaper and more shares Reverse stock split = expensive and less shares RRC currently has outstanding shares = 150,000 Selling for $65 What will share price be? And determine new no. of shares outstanding
(RD)
Corporate tax No personal tax and no bankruptcy cost
RRC has 5 for 3 stock splits
=
RRC has 15% stock D
=
Has 4 for 7 reverse stock split
=
= $39 new shares = = $56
new shares = 150,000 (1.15)
=$114 new shares =
= 250,000 = 172,500 = 85,714
Nz Inc predict the earnings in the coming yr = $75,000 There are outstanding shares of = 20,000 Maintain a debt-equity ratio = 3
VU =
all equity no debt
VL = VU + DT E = VL – D
leverage with debt (VL = P/S x share outstanding + DT)
Max investment fund available without issuing new equity = $75,000 + (3x$75, 000) = 300,000 To keep D/E ratio same, new borrowing should be = $300,000-75,000=$225,000
WACC
= RA =
RE
= RU + (RU – RD)
Suppose the firm use residual policy planned capital expenditures total = $81,000 =3 Equity = ¼ Debt = ¾ Equity portion of investment plan = x $81,000 = $20,250 Residual = $75,000 - $20,250 = $54,750 D per share = = $2.74
(RE) +
(RD) (1-T) (1 – T)
WACC < RU → debt financing is advantage Cost of capital or cost of equity = RU
= 6,500,000 - 871,000 – 1,541,313 – 374,966 - 1,453,118 = $2,259,403
Max PMT =
= RA =
RE CAPM: RE Case II
(RD)(1 – T)
Chapter 22 Investment = $6,500,000 CCA rate = 23% Salvage = $480,000 N = 3 yrs Tax = 34% Borrow = 13%. After tax = 0.13(1-.34) = 8.58% PMTlease = $1,300,000. After tax = 1,300,000(1-.34) =$871,200
No corporate or personal tax No bankruptcy
WACC
E = market value of equity (no. of share outstanding x Price per share) D = market value of debt (no. of outstanding bonds x bond price) V = market value of firm (V = E + D = 1) E/V = % financed with equity D/V = % financed with debt
PVCCATS NAL
New share issued = 11,000-10,000=1000 Capital gain surplus = 1000 ($25-$1) = $24,000
= 68
Capital investment = $3,000 Solely financed with common stock Generate stready OCF = $5,000 per yr Corporate tax = 38% Equity required return for Vu = 10% Considering to raise = $750 debt Interest on debt = 10%
New borrowing = $81,000 - $20,250 = $60,750 Total D = $75,000 - $81,000 = $54,750 Add to R/E = $75,000 - $54,750 = $20,250
CF to debt holder: VU = 0 VL = DT = 750(.10) = 75
D per share under a residual policy = $75,000/20,000 = 3.75
CF to equity holder: VU = EBIT (1-T) = 500(1-.38) = 310 VL = EBIT – interest (1-T) = 500 – 75 (1-.38) = 264 Total value of firm: VU = 3,100 VL = 3,385
P0 =
Case III Bankruptcy cost D/E ↑ bankruptcy ↑, Value of firm ↓, WACC↑ due to more debt added
= P –D (1-T) = 80 – 6 (1-.15) = 75
Owner’s equity of Nz Inc. CS ($1 par value) Capital surplus R/E Total equity
= $10,000 = $180,000 = $586,000 = $776,500
→ 10,000 unit of shares
Currently sells = $25 per share Declared =10% stock D How many new shares distributed? New share outstanding
= $34
P1 = 36/1.075 = $33 Total D currently receive = $.60 x 2000 shares = $1,200 You want in 1st yr = = $16 share CF at 2nd yr = $36(2000 x $16) = $72,591 PV of total homemade D = + = $63,420 Chapter 15 Choosing a venture capital: Financial strength is important Style is important Reference are important Contacts are important Exit strategy is important
Chapter 17 Lee lnc declared = $6 per share D Capital gain not taxed D tax = 15% Sells for = $80 per share About to go ex-D What is ex-D price? Ex-D
+
Suppose you want in 1st yr = $650 total in D PV of total homemade D over these two yrs?
Value of shareholder’s equity: VU = total value of unlevered firm = 3,100 VL = VL – D = 3,385 – 750 = 2,635
Rose own share = 2,000 Receive in 1st yr = $0.60 per share D 2nd yr, the company liquidating D at $36 per share The required return on company stock = 7.5%
= 10,000 (1.10) = 11,000
Issuing new securities: Public traditional negotiated cash offer – firm commitment cash offer, best effort cash offer, dutch auction cash offer Privileged subscription – direct rights offer, standby rights offer Nontraditional cash offer – shelf cash offer Private – direct placement New equity sales and the value of firm Stock P ↓ equity ↑ Stock P ↑ debt ↑ Managerial inform and signaling Debt usage and signaling Issue costs
Cost issuing securities: Spread Direct expense – legal, filling fees Indirect expense – management time spend working on issue Abnormal returns Under-pricing Over allotment (green shoe) – cost of additional shares the syndicate purchase after the issue has gone to market Suppose a comp want to raise = $10,000,000 Subscription p = $20 Current stock p = $25 Currently has outstanding share of = 5,000,000 No of new Shares raised = No of rights
=
Value of rights, R0
=
=
= +
= 500,000 = 10
= $0.45
R0 = value of right during the rights-on period M0 = comon share P during rights-on period S = subscription p N = no of rights required to buy one new share Ex-right P = [N(current P) + S]/N+1 Or P of ex-rights = Value of rights = present P – Px of ex-right Px = ex-right p = [N(right on p) + subscription p]/N+1 (xxx) Number of old shares = (xxx) (no of new share raised) Value of rights after ex-right date Me = Mo – R0 Re = Me = comon share p during ex-rights period X (1-.08) = $25 million (need to raise + expense cost) New shares offered = $27,173,913/$35 Two companies announced IPOs at $45 per share One of these is undervalued by $13, and the other is overvalued by $7 You plan on buying 10,000 shares of each issue If an issue is underpriced, only half your order will be filled Profit = Amount undervalued (profit) - Amount overvalued (loss) = $13×10,000 - $7×10,000 = $60,000 Expected profit = Half of amount undervalued (profit) - Amount overvalued (loss) = $13×5,000 $7×10,000 = -$5,000 Stan has $3,060 to invest in common stock It will cost 6 rights plus $44 cash to buy one new share Company’s stock is selling for $68 ex-rights Re = = = $4 No of rights
=
= 765
No of shares
=
= 45
Forward contracts Legal binding contract btw two parties on sale of assets in future upon today’s agree P Buyer obligated to pay for goods and receive the goods. Profit if P↑ cus they pay less today Seller obligated to deliver and received pmts. Profit if P ↓ cus they receive higher p today Zero-sum game Realize gain/loss on settlement day When settlement date arrive, the party on losing side have incentive to default on agreement Hedging is cancel each other n share profit/loss together Future contract Same as above and realize gain/loss on daily basis Marketing to market Investment deal maintain credit gain, debit loss on daily basis Reduced default risk Financial future – stock, bond, currencies, commodities, oil, gold Cross-hedging (closely related, not identical asset) Rarely reach maturity Sell future contract the buy it at future date eliminating it position SWAP contract
Agreement btw two parties Its just a portfolio Multiple exchanges instead of one like forward contract Future and swap are not trade on organized exchange Banks are dominant swap dealer Exchange, or swap CF at specific intervals in future Currency swap Interest rate Commodity swap
Option Call option – right not obligated to buy asset Call writer Put option – right not obligated to sell Put writer Premium Strict or exercising p Interest rate cap – prevents a floating rate from going above a certain level (buy a call on interest rate) Interest rate floor – “ from going below a certain level (sell a put on interest rate) Collar – premium received from selling the put will help offset the cost of buying a call Chapter 23 Synergy: VAB > (VA + VB) Incremental net gain from acquisition: ∆V = VAB - (VA + VB) A acquires B so value of B to A: V*B = ∆V + VB NPV = V*B – cost Goodwill = cost – B(CA and FA MV)
United corp Callaho Inc. Price-earning ration 7.50 30 Share outstanding 60 320 Earnings $200 $625 United corp shareholder receive 3 shares of Callaho for every 4 shares they hold in united corp EPS of Callaho after the merger = = $2 ( )
Stock rises to $92 per share ex-rights, what would his dollar profit on the rights be? Re = $8 $8 - $4 = $4 profit per right Total Profit on Rights = $4 × 765 rights = $3,060 $92 - $68 = $24 profit per share Total Profit on Shares = $24 × 45 shares = $1,080 Chapter 24 Reduce firm risk expose called hedging Volatility – measure risk Interest rate volatility Exchange rate Commodity price Managing financial risk Risk profile of wheat grower and wheat buyer ∆V n ∆P - the unexpected ↑ in P, profit ↑, value of firm↑ Unexpected ↑ in P will decrease the value of firm cus P ↑, manufac cost ↑, selling P↑, demand ↓, value of firm ↓ Price fluctuation has two components: Short run exposure – transaction exposure Long run exposure – economic exposure, adopt to change, update tech
Stock P of callaho before merger = PE x EPS = 30 x PE ration when NPV of acquisition is zero =
= $58
= 26
NPV = O = V* + ∆V – cost = $200 x 7.5 + ∆V – (¾)60 x 58 → ∆V = $1,136 Tech inc Star inc Price per share $75 $10 Share outstanding 450 200 Earnings $900 $600 Assume tech inc acquires star inc exchange of stock at price $15 for each share star inc’s stock EPS of tech inc after merger = = $3 Premerger EPS of tech inc = 900/450 = $2
[(200x15)/75 = 40 shares tech inc gives up]
Old P/E = 75/2 = $37 New P = 3x37=$114 P/E after the merger = 75/3 = 24 P when no synergy gain P/E when no synergy gain
= = 73/3 = 24
= 73
Callaho inc Holden corp Price earning ration 20 4.8 Share outstanding 1,500 400 Earnings $2,400 $750 Callaho acquire Holden Earning and D (0.80 per share) of Holden grow at constant rate of 7% Acquisition of Holden will increase Calloho at growth of 10% Value of Hoden to Calloho: EPS (Holden)= 750/400 = $1.9 per share P (Holden) = 1.9 x 4.8 = $9 9=
→r = 0 6
P of postmerger = = $14 V*B = 14 x 400 $5,406 Gain for Callaho = 5,406 – (400 x 9) = $1,806 If Callaho offer $12 in cash for each share of Holden NPV = 5,406 – (400 x 12) = $606 Max payable price Calloho pay NPV = 0 = 5,406 – (Y x 400) → Y =
4
Callaho offer 120 shares in exchange for the outstanding EPS (callaho) = 2400/1500 = $1.6 per share P (callaho) = 1.6 x 20 $32 P post merger callaho =
= $33
NPV = 5,406 – (120 x 33) = $1,450
A B Price per share 20 10 No. of outstanding share 25 10 MV 500 100 Firm B demand $150 chase or stock to agree to sale of its firm * V B = ∆V + VB = 100 + 100 = 200 Cash acquisition NPV = V*B – cost = 200-150 = 50 VAB = VA - (V*B + cost) = 500 + 200 – 150 = 550 P per share = 550/25 = $22 higher than 20 gain of 2 per share Stock acquisition VAB = ∆V + VA + VB = 100 + 500 + 100 = 700 Shares = 150/20 = 7.5 + 25 =32.5 shares outstanding P per share = 700/32.5 = 21.54 Total value received by B = 7.5 x 21.54 = 161.55 NPV = 200 – 161.55 = 38.45 Gain to A = 38.45/25 = 1.54 per share Cash acquisition is better
L=
Range from 62 to 67
Cost of equity DGM:
P0 =
g
=
g
= ROE x Retention ration = ROE (1 – payout ratio) = ROE (1 – Do/EPS)
SML:
= 1/4
RE =
Chapter 16 Proposition I = the value of the firm is not affected by changes in the capital structure, the CF of the firm do not change. Proposition II = WACC of the firm is not affected by capital structure
-1 (using historical data)
Case I
RE = Rf – βE [E(RM) – Rf)
Cost of debt YTM using calc Preferred stock: solve for r =Rp = return on preferred stock P0 = Rp = WACC
=
(RE) +
PVCCATS
=
NAL
= 6,500,000 – 871,000 -
x
–
x )–
= $1,453,118 - 1,453,118
NAL > 0 the firm should lease it NAL < 0 the firm should buy it Max lease PMT acceptance to firm: NAL = 0 = 6,500,000 – M (1.0858) PVIFA (8.58%, 3) - 374,966 - 1,453,118 M (1.0858) PVIFA (8.58%, 3) = 6,500,000 – 374,966 - 1,453,118 = 4,671,916 PVIFA (8.58, 3): n= 3, r= 8.58%, PV = 2.55, PMT = 1 M= = 1,687,009 = 2,556,075
What if the firm security deposit of $210,00 and lease PMT is same I = 6,500,000 – 210,000=6,290,000 Salvage=480,000-210,000=270,000 Everything else same When no tax then no dep, no pvccats, pmt same, r same Asset cost = $340 CCA = 28% N = 10 yrs Salvage = 0 Tax = 38% Interest = 15%. After tax = .15(1-.38) =9.3% PMT = end of yr Breakeven pt btw lessee and lessor: = x = $93 = 0 = 340 – L x PVIFA (9.3%, 3) – 93
PVIFA (9.3%, 3): n=10, r=9.3%, PV= 6.334, PMT=1 L
=
PMT
=
= RA + (RA – RD) RA = Rf – βA (RM – Rf) = Rf – βE (1+ )(RM) – Rf)
(RE) +
= 39 = 62
Assume lessee pay no tax but lessor does. What range of lease pmt will have positive NAL for both parties? NAL = 0 = 340 – L x PVIFA (15%, 3)
CS Capital surplus R/E Total equity
= $11,000 = $204,000 = $561,500 = $776,500
(old + new surplus) (old R/E – Selling P x share outstanding)
Stock split = cheaper and more shares Reverse stock split = expensive and less shares RRC currently has outstanding shares = 150,000 Selling for $65 What will share price be? And determine new no. of shares outstanding
(RD)
Corporate tax No personal tax and no bankruptcy cost
RRC has 5 for 3 stock splits
=
RRC has 15% stock D
=
Has 4 for 7 reverse stock split
=
= $39 new shares = = $56
new shares = 150,000 (1.15)
=$114 new shares =
= 250,000 = 172,500 = 85,714
Nz Inc predict the earnings in the coming yr = $75,000 There are outstanding shares of = 20,000 Maintain a debt-equity ratio = 3
VU =
all equity no debt
VL = VU + DT E = VL – D
leverage with debt (VL = P/S x share outstanding + DT)
Max investment fund available without issuing new equity = $75,000 + (3x$75, 000) = 300,000 To keep D/E ratio same, new borrowing should be = $300,000-75,000=$225,000
WACC
= RA =
RE
= RU + (RU – RD)
Suppose the firm use residual policy planned capital expenditures total = $81,000 =3 Equity = ¼ Debt = ¾ Equity portion of investment plan = x $81,000 = $20,250 Residual = $75,000 - $20,250 = $54,750 D per share = = $2.74
(RE) +
(RD) (1-T) (1 – T)
WACC < RU → debt financing is advantage Cost of capital or cost of equity = RU
= 6,500,000 - 871,000 – 1,541,313 – 374,966 - 1,453,118 = $2,259,403
Max PMT =
= RA =
RE CAPM: RE Case II
(RD)(1 – T)
Chapter 22 Investment = $6,500,000 CCA rate = 23% Salvage = $480,000 N = 3 yrs Tax = 34% Borrow = 13%. After tax = 0.13(1-.34) = 8.58% PMTlease = $1,300,000. After tax = 1,300,000(1-.34) =$871,200
No corporate or personal tax No bankruptcy
WACC
E = market value of equity (no. of share outstanding x Price per share) D = market value of debt (no. of outstanding bonds x bond price) V = market value of firm (V = E + D = 1) E/V = % financed with equity D/V = % financed with debt
PVCCATS NAL
New share issued = 11,000-10,000=1000 Capital gain surplus = 1000 ($25-$1) = $24,000
= 68
Capital investment = $3,000 Solely financed with common stock Generate stready OCF = $5,000 per yr Corporate tax = 38% Equity required return for Vu = 10% Considering to raise = $750 debt Interest on debt = 10%
New borrowing = $81,000 - $20,250 = $60,750 Total D = $75,000 - $81,000 = $54,750 Add to R/E = $75,000 - $54,750 = $20,250
CF to debt holder: VU = 0 VL = DT = 750(.10) = 75
D per share under a residual policy = $75,000/20,000 = 3.75
CF to equity holder: VU = EBIT (1-T) = 500(1-.38) = 310 VL = EBIT – interest (1-T) = 500 – 75 (1-.38) = 264 Total value of firm: VU = 3,100 VL = 3,385
P0 =
Case III Bankruptcy cost D/E ↑ bankruptcy ↑, Value of firm ↓, WACC↑ due to more debt added
= P –D (1-T) = 80 – 6 (1-.15) = 75
Owner’s equity of Nz Inc. CS ($1 par value) Capital surplus R/E Total equity
= $10,000 = $180,000 = $586,000 = $776,500
→ 10,000 unit of shares
Currently sells = $25 per share Declared =10% stock D How many new shares distributed? New share outstanding
= $34
P1 = 36/1.075 = $33 Total D currently receive = $.60 x 2000 shares = $1,200 You want in 1st yr = = $16 share CF at 2nd yr = $36(2000 x $16) = $72,591 PV of total homemade D = + = $63,420 Chapter 15 Choosing a venture capital: Financial strength is important Style is important Reference are important Contacts are important Exit strategy is important
Chapter 17 Lee lnc declared = $6 per share D Capital gain not taxed D tax = 15% Sells for = $80 per share About to go ex-D What is ex-D price? Ex-D
+
Suppose you want in 1st yr = $650 total in D PV of total homemade D over these two yrs?
Value of shareholder’s equity: VU = total value of unlevered firm = 3,100 VL = VL – D = 3,385 – 750 = 2,635
Rose own share = 2,000 Receive in 1st yr = $0.60 per share D 2nd yr, the company liquidating D at $36 per share The required return on company stock = 7.5%
= 10,000 (1.10) = 11,000
Issuing new securities: Public traditional negotiated cash offer – firm commitment cash offer, best effort cash offer, dutch auction cash offer Privileged subscription – direct rights offer, standby rights offer Nontraditional cash offer – shelf cash offer Private – direct placement New equity sales and the value of firm Stock P ↓ equity ↑ Stock P ↑ debt ↑ Managerial inform and signaling Debt usage and signaling Issue costs
Cost issuing securities: Spread Direct expense – legal, filling fees Indirect expense – management time spend working on issue Abnormal returns Under-pricing Over allotment (green shoe) – cost of additional shares the syndicate purchase after the issue has gone to market Suppose a comp want to raise = $10,000,000 Subscription p = $20 Current stock p = $25 Currently has outstanding share of = 5,000,000 No of new Shares raised = No of rights
=
Value of rights, R0
=
=
= +
= 500,000 = 10
= $0.45
R0 = value of right during the rights-on period M0 = comon share P during rights-on period S = subscription p N = no of rights required to buy one new share Ex-right P = [N(current P) + S]/N+1 Or P of ex-rights = Value of rights = present P – Px of ex-right Px = ex-right p = [N(right on p) + subscription p]/N+1 (xxx) Number of old shares = (xxx) (no of new share raised) Value of rights after ex-right date Me = Mo – R0 Re = Me = comon share p during ex-rights period X (1-.08) = $25 million (need to raise + expense cost) New shares offered = $27,173,913/$35 Two companies announced IPOs at $45 per share One of these is undervalued by $13, and the other is overvalued by $7 You plan on buying 10,000 shares of each issue If an issue is underpriced, only half your order will be filled Profit = Amount undervalued (profit) - Amount overvalued (loss) = $13×10,000 - $7×10,000 = $60,000 Expected profit = Half of amount undervalued (profit) - Amount overvalued (loss) = $13×5,000 $7×10,000 = -$5,000 Stan has $3,060 to invest in common stock It will cost 6 rights plus $44 cash to buy one new share Company’s stock is selling for $68 ex-rights Re = = = $4 No of rights
=
= 765
No of shares
=
= 45
Forward contracts Legal binding contract btw two parties on sale of assets in future upon today’s agree P Buyer obligated to pay for goods and receive the goods. Profit if P↑ cus they pay less today Seller obligated to deliver and received pmts. Profit if P ↓ cus they receive higher p today Zero-sum game Realize gain/loss on settlement day When settlement date arrive, the party on losing side have incentive to default on agreement Hedging is cancel each other n share profit/loss together Future contract Same as above and realize gain/loss on daily basis Marketing to market Investment deal maintain credit gain, debit loss on daily basis Reduced default risk Financial future – stock, bond, currencies, commodities, oil, gold Cross-hedging (closely related, not identical asset) Rarely reach maturity Sell future contract the buy it at future date eliminating it position SWAP contract
Agreement btw two parties Its just a portfolio Multiple exchanges instead of one like forward contract Future and swap are not trade on organized exchange Banks are dominant swap dealer Exchange, or swap CF at specific intervals in future Currency swap Interest rate Commodity swap
Option Call option – right not obligated to buy asset Call writer Put option – right not obligated to sell Put writer Premium Strict or exercising p Interest rate cap – prevents a floating rate from going above a certain level (buy a call on interest rate) Interest rate floor – “ from going below a certain level (sell a put on interest rate) Collar – premium received from selling the put will help offset the cost of buying a call Chapter 23 Synergy: VAB > (VA + VB) Incremental net gain from acquisition: ∆V = VAB - (VA + VB) A acquires B so value of B to A: V*B = ∆V + VB NPV = V*B – cost Goodwill = cost – B(CA and FA MV)
United corp Callaho Inc. Price-earning ration 7.50 30 Share outstanding 60 320 Earnings $200 $625 United corp shareholder receive 3 shares of Callaho for every 4 shares they hold in united corp EPS of Callaho after the merger = = $2 ( )
Stock rises to $92 per share ex-rights, what would his dollar profit on the rights be? Re = $8 $8 - $4 = $4 profit per right Total Profit on Rights = $4 × 765 rights = $3,060 $92 - $68 = $24 profit per share Total Profit on Shares = $24 × 45 shares = $1,080 Chapter 24 Reduce firm risk expose called hedging Volatility – measure risk Interest rate volatility Exchange rate Commodity price Managing financial risk Risk profile of wheat grower and wheat buyer ∆V n ∆P - the unexpected ↑ in P, profit ↑, value of firm↑ Unexpected ↑ in P will decrease the value of firm cus P ↑, manufac cost ↑, selling P↑, demand ↓, value of firm ↓ Price fluctuation has two components: Short run exposure – transaction exposure Long run exposure – economic exposure, adopt to change, update tech
Stock P of callaho before merger = PE x EPS = 30 x PE ration when NPV of acquisition is zero =
= $58
= 26
NPV = O = V* + ∆V – cost = $200 x 7.5 + ∆V – (¾)60 x 58 → ∆V = $1,136 Tech inc Star inc Price per share $75 $10 Share outstanding 450 200 Earnings $900 $600 Assume tech inc acquires star inc exchange of stock at price $15 for each share star inc’s stock EPS of tech inc after merger = = $3 Premerger EPS of tech inc = 900/450 = $2
[(200x15)/75 = 40 shares tech inc gives up]
Old P/E = 75/2 = $37 New P = 3x37=$114 P/E after the merger = 75/3 = 24 P when no synergy gain P/E when no synergy gain
= = 73/3 = 24
= 73
Callaho inc Holden corp Price earning ration 20 4.8 Share outstanding 1,500 400 Earnings $2,400 $750 Callaho acquire Holden Earning and D (0.80 per share) of Holden grow at constant rate of 7% Acquisition of Holden will increase Calloho at growth of 10% Value of Hoden to Calloho: EPS (Holden)= 750/400 = $1.9 per share P (Holden) = 1.9 x 4.8 = $9 9=
→r = 0 6
P of postmerger = = $14 V*B = 14 x 400 $5,406 Gain for Callaho = 5,406 – (400 x 9) = $1,806 If Callaho offer $12 in cash for each share of Holden NPV = 5,406 – (400 x 12) = $606 Max payable price Calloho pay NPV = 0 = 5,406 – (Y x 400) → Y =
4
Callaho offer 120 shares in exchange for the outstanding EPS (callaho) = 2400/1500 = $1.6 per share P (callaho) = 1.6 x 20 $32 P post merger callaho =
= $33
NPV = 5,406 – (120 x 33) = $1,450
A B Price per share 20 10 No. of outstanding share 25 10 MV 500 100 Firm B demand $150 chase or stock to agree to sale of its firm * V B = ∆V + VB = 100 + 100 = 200 Cash acquisition NPV = V*B – cost = 200-150 = 50 VAB = VA - (V*B + cost) = 500 + 200 – 150 = 550 P per share = 550/25 = $22 higher than 20 gain of 2 per share Stock acquisition VAB = ∆V + VA + VB = 100 + 500 + 100 = 700 Shares = 150/20 = 7.5 + 25 =32.5 shares outstanding P per share = 700/32.5 = 21.54 Total value received by B = 7.5 x 21.54 = 161.55 NPV = 200 – 161.55 = 38.45 Gain to A = 38.45/25 = 1.54 per share Cash acquisition is better
