As treasurer of Leisure Products, Inc., you are investigating the possible acqui
ID: 2646688 • Letter: A
Question
As treasurer of Leisure Products, Inc., you are investigating the possible acquisition of Plastitoys. You have the following basic data:
40
Growth of 6% in earnings and dividends, under new management growth will increase to 8% per year.
A. What is the gain from aquisition?
What is the cost of the acquisition if Leisure Products pays $45 in cash for each share of Plastitoys
What is the cost of the acquisition if Leisure Products offers one share of Leisure Products for every two shares of Plastitoys?
As treasurer of Leisure Products, Inc., you are investigating the possible acquisition of Plastitoys. You have the following basic data:
Explanation / Answer
Dear Student,
Use Gordons Growth Model formula for plastitoys for valuation
2.8/(r-0.06)=40
r=13%
Under New management, the value of the combination, would be the value of Leisure products (X) before merger + the value of Plastitoys(Y) after the merger
PV(XY)=(1,200,000*110)+(8,00,000(2.8/(0.13-0.08)))=$1,76,800,000
Now Gain =PV(XY)-[PV(x)+pv(y)]
1,76,800,000-1,32,000,000-32,000,000...................working for PV(y)=(800,000*40)
Gain from acquition =$12,800,000
PArt B
Cash Acquition
Value paid per share=$45
therefore
Cost=Cash Paid-PV(Y)
Cost = (800,000*45)-3,20,00,000
Cost of Acquition =36,000,000-32,000,000
Cost=$4,000,000
Part C
Acquition by equity method
As Acquition is planned with stock, take merger effect into consideration,after merger there will be (1,200,000+(800,000/2)=1,600,000 shares
Value Post merger per share=1,76,800,000/1,600,000=110.50
therefore
Cost =((400,000*110.5)-(800,000*40))
=(44,200,000-32,000,000)
Cost of Acquition =$12,200,000
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