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Chapter 5: Q1DQ. (page 647)
Name three industries in which mergers have been prominent
Answer
Airlines, telecommunications, and banking
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Assume the following financial data for the Noble Corporation and Barnes
Enterprises:
Noble
Corporation
Barnes
Enterprises
Total earnings ......................................................... \(1,820,000 \)5,620,000
Number of shares of stock outstanding ................. 650,000 2,810,000
Earnings per share ................................................. \(2.80 \)2.00
Price-earnings ratio (P/E) ....................................... 203 283
Market price per share............................................ \(56 \)56
a.If all the shares of the Noble Corporation are exchanged for those of Barnes
Enterprises on a share-for-share basis, what will postmerger earnings per share
be for Barnes Enterprises? Use an approach similar to that in Table 20-3.
b.Explain why the earnings per share of Barnes Enterprises changed.
c.Can we necessarily assume that Barnes Enterprises is better off after the
merger?
The Hollings Corporation is considering a two-step buyout of the Norton Corporation. The latter firm has 2.5 million shares outstanding and its stock price is currently \(40 per share. In the two-step buyout, Hollings will offer to buy 51 percent of Norton’s shares outstanding for \)62 per share in cash and the balance in a second offer of 840,000 convertible preferred stock shares. Each share of preferred stock would be valued at 40 percent over the current value of Norton’s common stock. Mr. Green, a newcomer to the management team at Hollings, suggests that only one offer for all Norton’s shares be made at $59.25 per share. Compare the total costs of the two alternatives. Which is better in terms of minimizing costs?
The Clark Corporation desires to expand. It is considering a cash purchase of Kent Enterprises for \(3 million. Kent has a \)700,000 tax loss carryforward that could be used immediately by the Clark Corporation, which is paying taxes at the rate of 30 percent. Kent will provide $420,000 per year in cash flow (aftertax income plus depreciation) for the next 20 years. If the Clark Corporation has a cost of capital of 13 percent, should the merger be undertaken?
An investor in the United States bought one-year Brazilian security valued at 195,000 Brazilian reals. The U.S. dollar equivalent was 100,000. The Brazilian security earned 16 percent during the year, but the Brazilian real depreciated 5 cents against the U.S. dollar during the period (\(0.51 to \)0.46). after transferring the funds back to the United States, what was the investor’s return on her \(100,000? Determine the total ending value of the Brazilian investment in Brazilian reals and then translate this Brazilian value to U.S. dollars. Then compute the return on the \)100,000.
J & J Enterprises is considering a cash acquisition of Patterson Steel Company for \(4,500,000. Patterson will provide the following pattern of cash inflows and synergistic benefits for the next 20 years. There is no tax loss carryforward.
Years 1–5 6–15 16–20 Cash inflow (aftertax) ...................... \)490,000 \(650,000 \)850,000 Synergistic benefits (aftertax) ......... 45,000 65,000 75,000
The cost of capital for the acquiring firm is 12 percent. Compute the net present value. Should the merger be undertaken? (If you have difficulty with deferred time value of money problems, consult Chapter 9.)
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