DEVRY FIN 516 Week 6 Homework

1
DEVRY FIN 516 Week 6 Homework

• Check this A tutorial guideline at
•  
• http//www.assignmentcloud.com/fin-516-new/fin-516
  -week-6-homework
• For more classes visit
• http//www.assignmentcloud.com
• FIN 516 Week 6 Homework
• Problem 28-9 on Acquisition Analysis Based on
  Chapter 28 Mergers and Acquisitions
• Your company has earnings per share of 4. It has
  1 million shares outstanding, each of which has a
  price of 40. You are thinking of buying
  TargetCo, which has earnings per share of 2, 1
  million shares outstanding, and a price per share
  of 25. You will pay for TargetCo by issuing new
  shares. There are no expected synergies from the
  transaction.
• a) If you pay no premium to buy TargetCo, what
  will your earnings per share be after the merger?
• b) Suppose you offer an exchange ratio such that,
  at current preannouncement share prices for both
  firms, the offer represents a 20 premium to buy
  TargetCo. What will your earnings per share be
  after the merger?
• c) What explains the change in earnings per share
  in part a)? Are your shareholders any better or
  worse off?

2
d) What will your price-earnings ratio be after
the merger (if you pay no premium)? How does this
compare to your P/E ratio before the merger? How
does this compare to TargetCos premerger P/E
ratio? Problem 16-8 on Managerial Decision
Based on Chapter 16 Financial Distress,
Managerial Incentives, and InformationAs in
Problem 1, Gladstone Corporation is about to
launch a new product. Depending on the success of
the new product, Gladstone may have one of four
values next year 150 million, 135 million, 95
million, or 80 million. These outcomes are all
equally likely, and this risk is diversifiable.
Suppose the risk-free interest rate is 5 and
that, in the event of default, 25 of the value
of Gladstones assets will be lost to bankruptcy
costs. (Ignore all other market imperfections,
such as taxes.)a) What is the initial value of
Gladstones equity without leverage?Now suppose
Gladstone has zero-coupon debt with a 100
million face value due next year.b) What is the
initial value of Gladstones debt?c) What is the
yield-to-maturity of the debt? What is its
expected return?d) What is the initial value of
Gladstones equity? What is Gladstones total
value with leverage?Suppose Gladstone has 10
million shares outstanding and no debt at the
start of the year.e) If Gladstone does not issue
debt, what is its share price?f) If Gladstone
issues debt of 100 million due next year and
uses the proceeds to repurchase shares, what will
its share price be? Why does your answer differ
from that in part e)? Problem 16-9 on Financial
Distress Based on Chapter 16 Financial Distress,
Managerial Incentives, and InformationKohwe
Corporation plans to issue equity to raise 50
million to finance a new investment. After making
the investment, Kohwe expects to earn free cash
flows of 10 million each year. Kohwe currently
has 5 million shares outstanding, and it has no
other assets or opportunities.
3

• Suppose the appropriate discount rate for Kohwes
  future free cash flows is 8, and the only
  capital market imperfections are corporate taxes
  and financial distress costs.
• a) What is the NPV of Kohwes investment?
• b) What is Kohwes share price today?
• Suppose Kohwe borrows the 50 million instead.
  The firm will pay interest only on this loan each
  year, and it will maintain an outstanding balance
  of 50 million on the loan. Suppose that Kohwes
  corporate tax rate is 40, and expected free cash
  flows are still 10 million each year.
• c) What is Kohwes share price today if the
  investment is financed with debt?
• Now suppose that with leverage, Kohwes expected
  free cash flows will decline to 9 million per
  year due to reduced sales and other financial
  distress costs. Assume that the appropriate
  discount rate for Kohwes future free cash flows
  is still 8.
• e) What is Kohwes share price today given the
  financial distress costs of leverage?
•