QUESTION 3 a) Firm M is the bidding firm and Firm N is the target firm. Their fi

Question

QUESTION 3 a) Firm M is the bidding firm and Firm N is the target firm. Their financial data is as follows Firm M Firm N Particulars Total Earnings (E) No. of shares outstanding (S) 5 Million EPS P/E Ratio Market Price/share US15 Million US10 Million 5 Million US2 4 US$4 US$3 US$12 i. Calculate the weighted average P/E for the combined firm MN. (1 mark) ii. Calculate the maximum number of shares firm M will be willing to offer to the stockholders of firm N at the P/E calculated in (i) above. What will be the minimum number of shares acceptable to the stockholders of firm N at the same P/E level? (3 3 marks) ii. Name three defense mechanism available for the target firms for thwarting unwanted takeovers (3 marks) b) Write short notes on the following forms of corporate restructuring (5 marks each) i. Spin-off I. Equity carve-out

Explanation / Answer

i) Combined firm MN financials will be as shown:

Total Earnings : $25 Mln

Number of shares outstanding: 10 million

EPS: (3+2)/2 = 2.5

MPS = $12 (Logic: if two companies merge then, higher market price share company gives extra shares to them and make their N's MPS as 12 in this case by making a combination of 3:1 share combination)

so, P/E = MPS /EPS = 12 /2.5 = 4.8

ii) At P/E of 4.8, number of shares firm M will be willing to offer stockholders of firm M are:

P/E = MPS/EPS => 4.8 = 12/X => X= 2.5

2.5 = Earnings / X => 10/2.5 = 4

at P/E of 3 , X = 3..3 (which are acceptable by shareholders of N)

iii)

a) Raising the debt: If targer companies raise a new debt on their books, which makes acquirer to acquire the target company.

b) White Knight: It is a startegy from a target company to merge with a competitor and increase market capitalization which makes it difficult for acquirer

c) Acquiring the acquirer: By an LBO we can express our views of acquiring the acquirer which makes us to avoid to get acquired.

B)

i) Spin Off: If a company a line of business due to its declined operational performance or if it reached its maturuty or obselete technology is called a Spinoff, it is called divesture.Some companies revenue streams are still impacted by these spinoffed businesses. It is shown as a different stream of revenues in this business.

ii) Equity Carve-out: In this type, business is divested and made as a seperate entity which creates a new organization and create an IPO for this new organization, which pumps in more cash for the organization.

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.