Task: Mergers, Acquisitions, Financial Distress, and International Finance
Question 1: The following table shows the projected cash flows and their respective discount rates after the acquisition of SFC by WC. Fill in the blanks and calculate the stock price of the new firm if it has $100 million of debts and 5 million shares of stock outstanding.
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Net cash flow per year (Perpetual) in millions
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Discount rate%
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Value in millions
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|
SFC
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$ 8
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16%
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?
|
|
WC
|
20
|
10
|
?
|
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Benefit from acquisition
|
5
|
?
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42.5
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|
Revenue enhancement
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2.5
|
?
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12.5
|
|
Cost reduction
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2
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10
|
?
|
|
Tax shelter
|
0.5
|
5
|
?
|
|
WC
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33
|
?
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?
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Question 2: FP. Is considering making an offer to purchase PI. The treasurer of FM has collected the following information
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FP
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PI
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Price-earning ratio
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15
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12
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Number of share
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1,000,000
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250,000
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|
Earnings
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$1,000,000
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$750,000
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The treasurer also knows that securities analysis expect the earnings and dividends (currently at $1.80 per share) of PI to grow at a constant rate of 5% each year. His research indicates, however, that the acquisition would provide PI with some economies of scale that would improve this growth rate to 7% per year.
a. What is the value of PI to FP?
b. If FP offers $40 in cash for each outstanding share of PI, what would the NPV of the acquisition be?
c. If instead FP were to offer 600,000 of its shares in exchange for the outstanding stock of PI, what would the NVP of the acquisition be?
d. Should the acquisition be attempted, and if so should it be cash or stock offer?
e. FP’s management thinks that 7% growth is too optimistic and that6% is more realistic. How does this change your previous answer?
Question 3: What are some benefits of financial distress?
Explain the following two terms
a. APR
b. DIP
Question 4: Use the table to answer the following questions
a. What is the quote in dierect terms for the British pound sterling and the U.S. dollar on spot exchangfe?
b. Is the Japanese yen at premium or discount to the U.S. dollars in the forward markets?
c. To which type of forign exvhange participants would te forward prices of the Japanese yen be important? Why? What types of transactions night thes participants use to cover their expose risk in the foreign exchange markets?
d. Suppose you are a Swiss exporter of watches. If you are to be paid in U.S. dollars three months from now for a shipmant made to the U.S. worth $100,000, how may Swiss francs would you receive if you locked in the price today with a forward contract? Would you buy or sell the dollar forward?
e. Calculate the U.K. pound-Indonesian rupia cross rate for spot exchange in terms of the U.S. dollar. Do the same for the yen-Swiss franc cross rate.
f. Why might both banks profit from the use of such a mutual agreement( a swap transaction)?
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Foreign currency in dollars
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Dollar in foreign currency
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Britain (pound)
30-day fut
60-day fut
90-day fut
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1.6317
1.6277
1.6238
1.6204
|
0.6129
0.6144
0.6158
0.6171
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|
Indonesia (Rupiah)
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0.000611
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1635.75
|
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Japan-yen
30-day fut
60-day fut
90-day fut
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0.006993
0.007009
0.007027
0.007042
|
143.00
142.66
142.30
142.01
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|
Switzerland -franc
30-day fut
60-day fut
90-day fut
|
0.6691
0.6710
0.6730
0.6743
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1.4945
1.4904
1.4858
1.4830
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