Old Exam Question #1 ABC Inc is considering a takeover of DEF Inc. You have gath

Question

Old Exam Question #1 ABC Inc is considering a takeover of DEF Inc. You have gathered the following information regarding the two companies. ABC ?nc 20 2,000,000 4,000,000 DEF ?nc 10 1,000,000 1,000,000 Price Earnings (P/E) Ratio Shares outstanding Earnings Assuming that ABC Inc offers to pay $12 per share in cash, for each share of DEF Inc and assuming that the synergies are $1,000,000 in total (NOT annually). What is the NPV of the transaction for ABC Inc? 1. What will be the Price per share after the transaction is completed What will be the price/earnings ratio after the transaction is completed, assuming the market correctly analyzes the transaction? 2. 3. 35

Explanation / Answer

1) NPV = Value of DEF + Synergy - Investment = 10 x 1m + 1m - 12 x 1m = -$1,000,000

2) New Value of ABC = Old Value of ABC + NPV = 20 x 4m - 1m = 79m

New Price per share of ABC = 79m / 2m = $39.5m

3) P/E = Price / Earnings 39.5 / 2 = 19.75

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