Purchase Solution

ABC & XYZ Co: Financial Analysis of shares and company mergers

Not what you're looking for?

Ask Custom Question

Expected Earning Number of Shares Market Price Per Share Tax Rate
ABC Company $5,000,000 1,000,000 $100 50%
XYZ Company $3,000,000 500,000 $ 60 50%

The ABC Company wishes to acquire the XYZ Company. If the merger were effected through an exchange of shares, ABC would be willing to pay a 25% premium for the XYZ shares. If done for cash, the terms would have to be just as favourable to the XYZ shareholders. In order to obtain the cash, ABC would have to issue new shares in the market.

a. Compute the share exchange ratio and the combined expected earnings per share for ABC under an exchange of shares.
b. Assume that all XYZ shareholders have held their shares for more than one year, have a 28% marginal capital gains tax rate, and paid an average of $14 for their shares. What cash price would have to be offered to be just as attractive as the terms in part (a)?

Assume the exchange of ABC shares for XYZ shares as outlined above:

c. What is the share exchange rate?
d. Compare the earnings per XYZ share before and after the merger. Compare the earnings per ABC share before and after the merger. On this basis alone, which merger group fared better? Why?
e. Why do you imagine that ABC commanded a higher P/E ratio than XYZ? What should be the change in P/E ratio resulting from the merger? Does this conflict with your previous result? Why?

Attachments
Purchase this Solution
Solution Summary

The Excel solution is very comprehensive together with explanations to arrive at the answers to the questions.

Purchase this Solution
Free BrainMass Quizzes
Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations

IPOs

This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)

Team Development Strategies

This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.

Academic Reading and Writing: Critical Thinking

Importance of Critical Thinking

Understanding Management

This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.

View More Free Quizzes
Related BrainMass Solutions

  • Accounting: Ratio analysis for XYZ ltd.

    Complete the following: You, the consultant, have been hired by XYZ to assist in the analysis of the financial statements and provide a recommendation as to whether XYZ should invest or not invest in this company.

  • Maximizing Earnings Per Share in an Acquisition

    Currently neither company has debt, and each has 1,000,000 shares of stock outstanding.

  • depreciation expense

    ABC Corporation owned 900,000 shares of XYZ Corporation stock.

  • Financial Appraisal for ABC plc

    131390 Financial Appraisal for ABC plc ABC plc is considering launching a takeover bid for XYZ plc. The two companies are in the industry and have identical cost of equity capital, which is 12% after tax.

  • Value of an Investment After a Stock Split

    Company ABC board of directors declared a 15-for-2 stock split. Company XYZ owned 100 shares of Company ABC before the split. What is the approximate value of Company XYZ investment in Company ABC immediately after the split?

  • Stocks and Bond Questions

    205733 4 problems: Stocks & Bonds for ABC Co, XYZ Co and Large Co Problem 1 On January 1, 2002, the ABC Corpoartion purchased a six-year, 12% bond having a maturity value of $300,000.

  • Acquiring Shares and Paying Dividend: Company ABC Journal Entries

    529026 Acquiring Shares & Paying Dividend: Company ABC Journal Entries On 1/1/2012 Company ABC acquires 20,000 shares of company XYZ at cash price of $10 per share. Company XYZ has 300,000 shares issued and outstanding.

  • International Financial Reporting Standards (Coding)

    Lawsuit settlement (no lawsuit has been filed and no manifestation of intent has been expressed) XYZ Company typically records revenue under US GAAP when both parties (XYZ Company and the customer) have signed a master agreement.

  • Stock Sale - ABC Corp. Acquiring an Interest in XYZ Inc.

    ABC sold the shares of XYZ for $65,000 cash. What entry will ABC make to record the sale? Please see the attached word file. If you add 15% of $6000 and 15% of $30,000 to the additional $50,000, the amount of your investment is $56,000.

View More Related Solutions