Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
CHAPTER 26
MERGERS AND ACQUISITIONS
Answers to Concepts Review and Critical Thinking Questions
1. In the purchase method, assets are recorded at market value, and goodwill is created to account for the
subsequent conversion into a privately held company, financed primarily with debt.
3. Diversification doesn’t create value in and of itself because diversification reduces unsystematic, not
CHAPTER 26 - 2
6. One of the primary advantages of a taxable merger is the write-up in the basis of the target firm’s
9. In a cash offer, it almost surely does not make sense. In a stock offer, management may feel that one
Solutions to Questions and Problems
NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple
steps. Due to space and readability constraints, when these intermediate steps are included in this solutions
manual, rounding may appear to have occurred. However, the final answer for each problem is found
without rounding during any step in the problem.
Basic
CHAPTER 26 - 3
2. a. Since neither company has any debt, using the pooling method, the asset value of the combined
3. In the pooling method, all accounts of both companies are added together to total the accounts in the
4. Since the acquisition is funded by long-term debt, the post-merger balance sheet will have long-term
CHAPTER 26 - 4
5. In the pooling method, all accounts of both companies are added together to total the accounts in the
6. Since the acquisition is funded by long-term debt, the post-merger balance sheet will have long-term
b. The NPV of each offer is the value of the target firm to the acquiring firm minus the cost of
8. a. The EPS of the combined company will be the sum of the earnings of both companies divided
b. The value of Jolie to Pitt must be the market value of the company since the NPV of the
CHAPTER 26 - 6
9. a. The NPV of the merger is the market value of the target firm, plus the value of the synergy, minus
CHAPTER 26 - 7
Intermediate
10. The share offer is better for the target firm shareholders since they receive only $21 per share in the
11. The cost of the acquisition is:
CHAPTER 26 - 8
b. The PE of the acquiring firm is:
d. The new share price will be the combined market value of the two existing companies divided
12. Beginning with the fact that the NPV of a merger is the value of the target minus the cost, we get:
CHAPTER 26 - 9
d. The NPV is the value of the acquisition minus the cost, so the NPV of each alternative is:
14. a. The number of shares after the acquisition will be the current number of shares outstanding for
b. Let equal the fraction of ownership for the target shareholders in the new firm. We can set the
CHAPTER 26 - 10
Challenge
15. a. To find the value of the target to the acquirer, we need to find the share price with the new growth
b. The gain to the acquiring firm will be the value of the target firm to the acquiring firm minus the
CHAPTER 26 - 11
e. The market value of the acquiring firm is the earnings per share times the price-
earnings ratio times the number of shares outstanding, so:
g. Using the new growth rate in the dividend growth model, along with the dividend and required
