Control premium percentage, total transaction value

1. Bulldog Industries is offering, as consideration for merger target Blazerco, 1.5 shares of their stock for each share of Blazerco. There are 1 million shares of Blazerco outstanding, and its stock price was $50 before the merger offer. Bulldog's preoffer stock price was $40. What is the control premium percentage offered? Now suppose that when the merger is consummated six months later, Bulldog's stock price drops to $30. At that point, what is the control premium percentage and total transaction value?

2. You are the director of capital acquisitions for Crimson Software Company. One of the projects you are considering is the acquisition of Geekware, a private software company that produces software for finance professors. Dave Vanzandt, the owner of Geekware, is amenable to the idea of selling his enterprise to Crimson, but he has certain conditions that must be met before selling. The primary condition set forth is a nonnegotiable, all-cash purchase price of $20 million. Your project analysis team estimates that the purchase of Geekware will generate the following marginal cash flow:

Year Cash Flow

1 $1,000,000

2 3,000,000

3 5,000,000

4 7,500,000

5 7,500,000
Of the $20 million in cash needed for the purchase, $5 million is available from retained earnings, with a required return of 12 percent, and the remaining $15 million will come from a new debt issue yielding 8 percent. Crimson's tax rate is 40 percent. Should you recommend acquiring Geekware to your CEO?

3. Firm A plans to acquire Firm B. The acquisition would result in incremental cash flows for Firm A of $10 million in each of the first five years. Firm A expects to divest Firm B at the end of the fifth year for $100 million. The ? for Firm A is 1.1, which is expected to remain unchanged after the acquisition. The risk-free rate, Rf, is 7 percent, and the expected market rate of return, Rm, is 15 percent. Firm A is financed by 80 percent equity and 20 percent debt, and this leverage will also remain unchanged after the acquisition. Firm A pays interest of 10 percent on its debt, which will also remain unchanged after the acquisition.

a. Disregarding taxes, what is the maximum price that Firm A should pay for Firm B?

b. Firm A has a stock price of $30 per share and 10 million shares outstanding. If Firm B shareholders are to be paid the maximum price determined in part (a) via a new stock issue, how many new shares will be issued, and what will be the postmerger stock price?