LTD Inc is considering a takeover of XYZ Inc. You have gathered the following in
ID: 2615293 • Letter: L
Question
LTD Inc is considering a takeover of XYZ Inc. You have gathered the following information regarding the two companies.
LTD Inc
XYZ Inc
Price per share
40
15
Shares outstanding
1,000,000
500,000
Earnings
2,000,000
300,000
1. LTD Inc is planning on taking over XYZ Inc by doing a share exchange. LTD Inc will exchange one of its shares for every 2 shares of XYZ 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 XYZ Inc?
3.If the NPV of the acquisition to LTD Inc. is equal to zero, then LTD Inc would exchange a total of _________ shares for the shares of XYZ Inc.
LTD Inc
XYZ Inc
Price per share
40
15
Shares outstanding
1,000,000
500,000
Earnings
2,000,000
300,000
Explanation / Answer
Question 1
Market Capitalisation (after taking over) = Market Capitalisation of LTD Inc + Market Capitalisation of XYZ Inc+Synergy Gain
= 40,000,000 + 7,500,000 + 2,000,000
= $49,500,000
Shares outstanding after taking over = 1,000,000 + 500,000 / 2 *1
= 1,000,000 + 250,000
= 1,250,000
Price per share after taking over = Market Capitalisation after taking over/Shares outstanding after taking over
= 49,500,000 / 1,250,000
= $39.60
Question 2
i) Theoretical post merger price = $39.60 (see above)
ii) Purchase Consideration = shares issued to XYZ Inc * Theoretical post merger price
= 250,000 * 39.60
= 9,900,000
iii) Market capitalisation of XYZ Inc = 7,500,000
iv) Premium Paid (ii - iii) = 9,900,000 - 7,500,000
= 2,400,000
Question 3
Let 'n' be the total number of shares issued by LTD Inc.
(40,000,000+7,500,000+2,000,000) / (1,000,000+n) * n = 2,000,000 (see note below)
49,500,000/ (1,000,000+n) = 2,000,000/n
49,500,000n = (1,000,000+n)*2,000,000
495n = 20,000,000 + 20n
475n = 20,000,000
n = 42,105 (approximately)
note: Since the NPV of the acquisition to LTD Inc. is equal to zero,
Synergy Gain = Estimated real value of XYZ Inc.(Purchase consideration)
LTD Inc (Acquiring Company) XYZ Inc (Target Company) i) Price per share 40 15 ii) Shares outstanding 1,000,000 500,000 iii) Earnings 2,000,000 300,000 iv) Earnings per share (iii/ii) 2.00 0.60 v) Market capitalisation (i*ii) 40,000,000 7,500,000Related Questions
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