Chapter 23
Corporate Restructuring
5. a. Distribution of the Proceeds from the Liquidation of Failures Galore,
Inc.:
Total liquidation proceeds $5,950,000
(1) Bankruptcy administration expenses $ 550,000
Funds available for general
Settlement percentage for general = and unsecured creditors
and unsecured creditors Total claims of general and
unsecured creditors
Settlement, 40% Settlement,40%
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Corporate Restructuring
of claim (before of claim (after
Total subordination subordination
Claim Claim adjustments) adjustments)
Accounts payable $2,000,000 $ 800,000 $
800,000
Bank notes payable 2,000,000 800,000
1,600,000
$3,400,000
Funds available for preferred and common stockholders $-0-
b. Distribution of the Proceeds from the Liquidation of Failures Galore,
Inc.:
Total liquidation proceeds $7,650,000
(1) Bankruptcy administration expenses $ 550,000
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Corporate Restructuring
Funds available for claims of general and
Funds available for general
Settlement percentage for general = and unsecured creditors
and unsecured creditors Total claims of general and
unsecured creditors
Settlement, 60% Settlement, 60%
of claim (before of claim (after
Total subordination subordination
Claim Claim adjustment) adjustment)
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Chapter 23
Corporate Restructuring
Funds available for preferred and common stockholders $-0-
6. a. Distribution of the Proceeds from the Liquidation of Go-For–Broke
Company:
Total liquidation proceeds $16,600,000
(1) Bankruptcy administration charges $643,750
(4) Payment to mortgage bondholders
Funds available for claims of general and
Funds available for general
Settlement percentage for general = and unsecured creditors
and unsecured creditors Total claims of general and
unsecured creditors
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Chapter 23
Corporate Restructuring
Total Settlement
Claim Claim 55% of Cla im Percentage
Accounts payable $12,145,000 $6,679,750
55%
55%
*$4,775,000 – $3,045,000 = $1,730,000
b.
Settlement Settlement
55% of 55% of
Total claim (before claim (after
Claim Claim adjustment) adjustment) Percentage
Accounts
payable $12,145,000 $6,679,500 $6,679,750 55%
Notes
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Chapter 23
Corporate Restructuring
Funds available for common stockholders $-0-
7. EPSc = (EAT1 + EAT2 + EAT1,2)/([NS1 + NS2(ER)]
8. a. EPSc = (EAT1 + EAT2 + EAT1,2)/([NS1 + NS2(ER)]
= ($100 + $20 + $0)/[50 + 20($18/$40)] = $2.034
9. a. EPSc = (EAT1 + EAT2 + EAT1,2)/([NS1 + NS2(ER)]
= ($100 + $20 + $4)/[50 + 20($18/$40)] = $2.102
10. PV0 = $1.5 million (PVIFA0.16, 10)
+ $0.7 million (PVIFA0.16,5) (PVIF0.16,10)
11.
Terminal value in year 3 = [Year 3 cash Eow x (1 + g)] / (k – g)
This terminal value represents the present value of al expected net cash
Eows beyond year 3 as of the end of year 3. The value of the target Grm is
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Chapter 23
Corporate Restructuring
equal to the present value of the annual cash Eows in years 1 through 3 plus
the terminal value at the end of year 3, all discounted at the cost of capital of
10%.
Target Grm value = ($550,000) / (1 + .10)1 + $650,000 / (1 + .10)2
12. Total Firm Value $11,367,769
13.
Year 1 Year 2 Year 3 Year 4 Year 5
Salesa$1,300,000 $1,690,000 $2,197,000 $2,856,100 $3,712,930
Operating
a Sales are assumed to grow at 30 percent annually until year 5
b Operating expenses are estimated to equal 60 percent of sales
c Depreciation expense is as given in the problem.
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Chapter 23
Corporate Restructuring
Taxes (40%) 168,000 210,400 281,520 376,976 504,068.8
Earnings after
Taxes (EAT) 252,000 315,600 422,280 565,464 756,103.2
Add back
to the
acquiring Grm
d Retentions for capital expenditures and net working capital are projected as given in the problem.
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Chapter 23
Corporate Restructuring
Terminal value in year 5 = [Year 5 cash Eow x (1 + g)] / k – g
The terminal value represents the present value of all net cash Eows beyond
year 5 as of the end of year 5. The value of the target Grm is equal to the
present value of the annual cash Eows in years 1 to 5 plus the terminal value
at the end of year 5, all discounted at the cost of capital of 12%.
Target Grm value = $127,000 / (1 + .12)1 + $240,600 / (1 + .12)2
14. No recommended solution.
15. No recommended solution
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Chapter 23
Corporate Restructuring
SOLUTION TO INTEGRATIVE CASE PROBLEM:
MERGERS AND ACQUISITIONS
1. Exchange ratio based on common stock price:
Exchange ratio = (15/50) = 0.3 shares Admiral for each share of
Favorite
Exchange ratio based on earnings per share:
Favorite.
3. P/E ratio (Admiral): (50/5.64) = 8.865
4. Some of the other factors that should be considered are
• Favorite’s debt capacity, management, markets and marketing
strategy, production costs,
Gnancial controls, growth rate, underlying value of assets,
e.g., land.
• Any economies of scale resulting from the merger.
shares issued
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Corporate Restructuring
6. The merger will be tax-free if the common stock of Favorite is exchanged
7. Given the admittedly limited information from the case, a fair exchange
ratio (in a stock-for-stock exchange) seems to be in the range 0.30–0.43. At
less than equivalent market value for their stock. At exchange ratios greater
than about 0.43, Admiral incurs an initial dilution in EPS. This seems
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