P18-6. Personal finance: Divestitures
LG 3; Easy
P18-7. Ratio of exchange and EPS
LG 3; Intermediate
a. Number of additional shares needed 1.8 4,000 7,200
b. Number of additional shares needed 2.0 4,000 8,000
c. Number of additional shares needed 2.2 4,000 8,800
d. P/E calculations:
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P18-8. EPS and merger terms
LG 3; Challenge
P18-9. Ratio of exchange
LG 3; Intermediate
Case Ratio of Exchange Market Price Ratio of Exchange
A $ 30 ¸ $50 0.60 ($50 0.60) ¸ $25 1.20
P18-10. Expected EPS—merger decision
LG 3; Challenge
a. Graham & Sons—Premerger
Year Earnings EPS
2012 $200,000 $2.000
b. (1) New shares issued 100,000 0.6 60,000
Year Earnings/Shares EPS
2012 [($800,000 $200,000) ¸ 260,000] 0.6 $
2.308
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Chapter 18 Mergers, LBOs, Divestitures, and Business Failure 386
(2) New shares issued 100,000 0.8 80,000
Year Earnings/Shares EPS
2012 [($800,000 $200,000) ¸ 280,000] 0.8 $2.857
c.
2012 2013 2014 2015 2016 2017
2.00
2.20
2.40
2.60
2.80
3.00
3.20
3.40
3.60
YEAR
EPS($)
d. Graham & Sons’ shareholders are much better off at the 0.8 ratio of exchange. The management
P18-11. EPS and postmerger price
LG 3; Challenge
a. Market price ratio of exchange: ($45 1.25) ¸ $50 1.125
b. Henry Company EPS $225,000 ¸ 90,000 $2.50
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Chapter 18 Mergers, LBOs, Divestitures, and Business Failure 387
P18-12. Holding company
LG 4; Challenge
a. Total assets controlled: $35,000 ¸ ($500,000 $900,000) 2.5%
P18-13. Voluntary settlements
LG 5; Basic
P18-14. Voluntary settlements
LG 5; Basic
a. Extension
P18-15. Voluntary settlements—payments
LG 5; Intermediate
a. $75,000 now; composition
P18-16. Personal finance: Bankruptcy legislation—wage-earner plan
LG 5; Easy
a. Outstanding debt
$28,000
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Chapter 18 Mergers, LBOs, Divestitures, and Business Failure 388
P18-17. Ethics problem
LG 5, 6; Intermediate
These employees and suppliers may believe that the company’s problems are only temporary and that
Case
Case studies are available on www.myfinancelab.com.
Deciding Whether to Acquire or Liquidate Procras Corporation
In this case, the student is asked to analyze two alternatives, acquiring a bankrupt firm or liquidating it, to see
which makes more sense for Rome Industries.
b. Postmerger EPS:
Chapter 18 Mergers, LBOs, Divestitures, and Business Failure 389
Claims of general creditors:
Creditor Claims Amount Settlement at 50%*
Chapter 18 Mergers, LBOs, Divestitures, and Business Failure 390
Corporate restructurings are the focus of this chapter’s look at special topics in financial management. The
financial structure of the firm is not static and instead undergoes a constant evolution for a variety of reasons. This
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