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Buyout, Spot and Forward Rate

1. Simon Manufacturing Co. is planning to acquire Garfunkel Engineering in a two-step buyout. Garfunkel has 3,000,000 shares of common stock currently outstanding, and the market price is currently at $25 per share. The first step of the buyout would offer to purchase 51% of Garfunkel Engineering common stock for $34 per share, The second step would be to exchange each remaining share of Garfunkel common for $5 in cash and a newly issued share of Simon Manufacturing convertible preferred stock, valued at $27.50 per share.

Simon Manufacturing's investment banker has suggested, as an alternative, a single-stage buyout at $32.50 per share for all of Garfunkel's common stock.

(a) What is the total cost of the two-step buyout?
(b) What is the total cost of the single step proposal?
(c) If it wants to minimize the total cost of the acquisition, what should Simon Manufacturing do?

2. Assume the following spot and forward rates for the New Zealand dollar ($/NZD).

SPOT Rate $.6317
30 day forward rate .6330
90 day forward rate .6353
120 day forward rate .6387

(a) What is the U.S. dollar value of one New Zealand dollar in the spot market?
(b) Suppose you issued a 90-day forward contract to exchange 100,000 New Zealand dollars into U.S. dollars. How many U.S. dollars are involved?
(c) How many New Zealand dollars can you get for one U.S. dollar in the spot market?
(d) What is the 120-day forward premium?

Solution Preview

1. Simon Manufacturing Co. is planning to acquire Garfunkel Engineering in a two-step buyout. Garfunkel has 3,000,000 shares of common stock currently outstanding, and the market price is currently at $25 per share. The first step of the buyout would offer to purchase 51% of Garfunkel Engineering common stock for $34 per share, The second step would be to exchange each remaining share of Garfunkel common for $5 in cash and a newly issued share of Simon Manufacturing convertible preferred stock, valued at $27.50 per share.
Simon Manufacturing's investment banker has suggested, as an alternative, a single-stage buyout at $32.50 per share for all of Garfunkel's common stock.

(a) What is the total cost of ...

Solution Summary

This solution provides calculations for the total cost of the two-step buyout, the total cost of the single step proposal, a recommendation for minimizing the total cost of the acquisition, the U.S. dollar value of one New Zealand dollar in the spot market (and vica versa), how many U.S. dollars are involved in a forward contract and the 120-day forward premium. Calculations are provided in plain text and in the attached Excel sheet.

$2.19