Old Exam Question #2 123 Inc is considering a takeover of 456 Inc. You have gath

Question

Old Exam Question #2 123 Inc is considering a takeover of 456 Inc. You have gathered the following information regarding the two companies. 456 Inc 15 500,000 300,000 123 Inc 40 Price per share Shares outstanding ,000,000 Earnings 2,000,000 1.123 Inc is planning on taking over 456 Inc by doing a share exchange. 123 Inc will exchange one of its shares for every 2 shares of 456 Inc. The synergies are $2,000,000 in total (NOT annually). What will be the price per share after the transaction is completed? 2.What is the total premium paid to 456 Inc? 3.If the NPV of the acquisition to 123 Inc. is equal to zero, then 123 shares for the shares of 456 Inc would exchange a total of Inc. 36

Explanation / Answer

1. Price = Value / # of shares

= (Value of 123 Inc + Value of 456 Inc + Synergies) / (Shares Outstanding of 123 Inc + Proportion of 123 Inc shares issued to 456 Inc Shareholders)

= [(40*1,000,000) + (15*500,000) + 2,000,000)] / [1,000,000 + (500,000/2)]

= (40M+7.5M+2M)/1.25M = $ 39.60

2. Premium paid = Price –original value = (250K*39.60) – 7.5M = $2.4M

3. Exchange = [(original value of 456 Inc + synergies) / share price of 123 Inc] = (7.5M+2M)/40 = 237,500

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