Work Shown

1. Fly-By-Night Couriers is analyzing the possible acquisition of Flash-in-the-Pan Restaurants. Neither firm has debt. The forecasts of Fly-By-Night show that the purchase would increase its annual aftertax cash flow by $370,000 indefinitely. The current market value of Flash-in-the-Pan is $9 million. The current market value of Fly-By-Night is $23 million. The appropriate discount rate for the incremental cash flows is 8 percent. Fly-By-Night is trying to decide whether it would offer 35 percent of its stock or $13 million in cash to Flash-in-the-Pan.
a.
What is the synergy from the merger? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
Synergy value $
b.
What is the value of Flash-in-the-Pan to Fly-By-Night?
Value $
c.
What is the cost to Fly-By-Night of each alternative? (Do not round intermediate calculations.
Cost of cash $
Cost of stock $
d.
What is the NPV to Fly-By-Night of each alternative? (Do not round intermediate calculations.
NPV of cash $
NPV of stock $
e.
What alternative should Fly-By-Night use?
Stock offer
Cash offer
2
Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total aftertax annual cash flow by $2 million indefinitely. The current market value of Teller is $51 million, and that of Penn is $76 million. The appropriate discount rate for the incremental cash flows is 10 percent. Penn is trying to decide whether it should offer 45 percent of its stock or $66 million in cash to Teller’s shareholders.
a.
What is the cost of each alternative? (Do not round intermediate calculations.
Cash cost $
Equity cost $
b.
What is the NPV of each alternative?
NPV cash $
NPV stock $
c.
Which alternative should Penn choose?
Cash
Stock
3. Assume that both firms have no debt outstanding.
Firm B Firm T
Shares outstanding 6,400 2,300
Price per share $ 48 $ 20
Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $9,800. Firm T can be acquired for $22 per share in cash or by exchange of stock wherein B offers one of its share for every two of T’s share.
Are the shareholders of Firm T better off with the cash offer or the stock offer?
Share offer is better
Cash offer is better
At what exchange ratio of B shares to T shares would the shareholders in T be indifferent between the two offers?
4. Fair-to-Midland Manufacturing, Inc., (FMM) has applied for a loan at True Credit Bank. Jon Fulkerson, the credit analyst at the bank, has gathered the following information from the company’s financial statements:
Total assets $109,000
EBIT 8,600
Net working capital 5,100
Book value of equity 36,000
Accumulated retained earnings 18,500
Sales 109,000
The stock price of FMM is $38 per share and there are 6,700 shares outstanding. What is the Z-score for this company?
5
Assume that the following balance sheets are stated at book value.
Jurion Co.
Current assets $ 20,000 Current liabilities $ 5,300
Net fixed assets 33,200 Long-term debt 9,500
Equity 38,400
Total $ 53,200 Total $ 53,200
James, Inc.
Current assets $ 3,900 Current liabilities $ 2,300
Net fixed assets 9,100 Long-term debt 1,600
Equity 9,100
Total $ 13,000 Total $ 13,000
Suppose the fair market value of James’s fixed assets is $15,200 versus the $9,100 book value shown. Jurion pays $24,000 for James and raises the needed funds through an issue of long-term debt. Construct the postmerger balance sheet assuming that the purchase method of accounting is used. (Do not round intermediate calculations.)
Jurion Co., post-merger
Current assets $ Current liabilities $
Fixed assets Long-term debt
Goodwill Equity
Total $ Total $
6. Bentley Corp. and Rolls Manufacturing are considering a merger. The possible states of the economy and each company’s value in that state are shown here:
State Probability Bentley Rolls
Boom .70 $ 330,000 $ 300,000
Recession .30 $ 130,000 $ 100,000
Bentley currently has a bond issue outstanding with a face value of $145,000. Rolls is an all-equity company.
a.
What is the value of each company before the merger? (Do not round intermediate calculations.)
Value of Bentley $
Value of Rolls $
b.
What are the values of each company’s debt and equity before the merger? (Leave no cells blank – be certain to enter “0” wherever required.
Equity of Rolls $