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Chapter 5: Q3DQ. (page 647)
Why might the portfolio effect of a merger provide a higher valuation for the participating firms?
Answer
Merger results in risk reduction for the participating companies, and also maintains the rate of return, it results in higher valuation to the participating companies.
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How is goodwill now treated in a merger?
What procedures would you recommend for a multinational company in studying exposure to political risk? What actual strategies can be used to guard against such risk?
Explain how exports and imports tend to influence the value of a currency
Al Simpson helped start Excel Systems several years ago. At the time, he purchased116,000 shares of stock at \(1 per share. Now he has the opportunity to sell his interest in the company to Folsom Corp. for \)50 a share in cash. His capital gains tax rate would be 15 percent.
a. If he sells his interest, what will be the value for before-tax profit, taxes, and aftertax profit?
b. Assume, instead of cash, he accepts Folsom Corp. stock valued at \(50 per share. He pays no tax at that time. He holds the stock for five years and then sells it for \)82.50 (the stock pays no cash dividends). What will be the value for before-tax profit, taxes, and aftertax profit five years from now? His capital gains tax is once again 15 percent.
c. Using a 9 percent discount rate, calculate the aftertax profit. That is, discount back the answer in part b for five years and compare it to the answer in part a.
Assume the following financial data for Rembrandt Paint Co. and Picasso Art Supplies:
Rembrandt
Paint Co.
Picasso Art
Supplies
Total earnings ........................................................... \(1,200,000 \)3,600,000
Number of shares of stock outstanding ................... 600,000 2,400,000
Earnings per share ................................................... \(2.00 \)1.50
Price-earnings ratio (P/E) ......................................... 243 323
Market price per share.............................................. \(48 \)48
a.If all the shares of Rembrandt Paint Co. are exchanged for those of Picasso
Art Supplies on a share-for-share basis, what will post merger earnings
per share be for Picasso Art Supplies? Use an approach similar to that in
Table 20-3.
b.Explain why the earnings per share of Picasso Art Supplies changed.
c.Can we necessarily assume that Picasso Art Supplies is better off after the
merger?
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