# Mergers, Acquisitions, Financial Distress and Int Finance

Please see the attached question.

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...

Q1- 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.

Net cash flow per year (Perpetual) in millions Discount rate% Value in millions

SFC $ 8 16% ?

WC 20 10 ?

Benefit from acquisition 5 ? 42.5

Revenue enhancement 2.5 ? 12.5

Cost reduction 2 10 ?

Tax shelter 0.5 5 ?

WC 33 ? ?

Q2- FP. Is considering making an offer to purchase PI. The treasurer of FM has collected the following information

FP PI

Price-earning ratio 15 12

Number of share 1,000,000 250,000

Earnings $1,000,000 $750,000

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?

Q3

What are some benefits of financial distress?

Explain the following two terms

a. APR

b. DIP

Q4 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)?

Foreign currency in dollars Dollar in foreign currency

Britain (pound)

30-day fut

60-day fut

90-day fut 1.6317

1.6277

1.6238

1.6204 0.6129

0.6144

0.6158

0.6171

Indonesia (Rupiah) 0.000611 1635.75

Japan-yen

30-day fut

60-day fut

90-day fut 0.006993

0.007009

0.007027

0.007042 143.00

142.66

142.30

142.01

Switzerland -franc

30-day fut

60-day fut

90-day fut 0.6691

0.6710

0.6730

0.6743

1.4945

1.4904

1.4858

1.4830

#### Solution Preview

Please see the attached file.

Mergers, Acquisitions, Financial Distress, and International Finance

Q1- 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.

Net cash flow per year (Perpetual) in millions Discount rate% Value in millions

SFC $ 8 16% ?50

WC 20 10 ?200

Benefit from acquisition 5 ?11.7 42.5

Revenue enhancement 2.5 ?20 12.5

Cost reduction 2 10 ?20

Tax shelter 0.5 5 ?10

WC 33 ?11.28 ?292.50

The value of a perpetual cash flow is given by Net cash flow per year/discount rate.

We use this formula to fill the table above. For example

SFC. - Value = 8/0.16 = 50

WC - Value = 20/10% = 200

Cost reduction = 2/10% = $20

Tax shelter = 0.5/5% = $10

The rates are calculated as

Benefit from acquisition = 5/42.5 = 11.7%

Revenue enhancement = 2.5/12.5 = 20%

We add up the benefits of acquisition, which is 42.5 to the value of WC and SFC to get the total value. It comes to 292.5 (50+200+42.50). Again use the value formula to get the discount rate. The discount rate = 33/292.5=11.28%.

The value of the firm is $292.5 million. Of this debt is $100 million. The value of equity is 292.5-100=$192.5 million. The number of shares outstanding are 5 million. The stock price of the firm is 192.5/5=$38.5.

Q2- FP. Is considering making an offer to purchase PI. The treasurer of FM has collected the following information

FP PI

Price-earning ratio 15 12

Number of share 1,000,000 250,000

Earnings $1,000,000 $750,000

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?

The current value of PI is Earnings X P/E. This is 750,000X12=$9,000,000. We also know that the value of a firm is the discounted sum of dividends. It is given that the ...

#### Solution Summary

The solution has questions from Ross, Westerfield and Jaffe relating to Mergers, Acquisitions, Financial Distress and Int Finance.