Question I: Merger Analysis
World Enterprises is determined to report earnings per share of $2.67. It therefore
acquires the Axle Company:
There are no gains from the merger. In exchange for Axle shares, World Enterprises issues just
enough of its own shares to ensure its $2.67 earnings per share objective.
a. Complete the above table for the merged firm.
b. How many shares of World Enterprises are exchanged for each share of Axle?
c. What is the cost of the merger to World Enterprises?
d. What is the change in the total market value of those World Enterprises shares that were
outstanding before the merger?
Question II: Merger Offer Price
The owners of Arthouse Inc., a national artist supplies chain, are contemplating
purchasing Craftworks Inc, a smaller chain. Arthouse’s analysts project that the
merger will result in incremental free flows and interest tax savings with a
combined present value of $72.52 million, and they have determined that the
appropriate discount rate for valuing Craftworks is 16%. Craftworks has 4 million
shares outstanding and no debt. Craftworks’ current price is $16.25. What is the
maximum price per share that Arthouse should offer?
Question III: Justifying Mergers
Several reasons have been proposed to justify mergers. Among the more
prominent are (1) tax considerations, (2) risk reduction, (3) control, (4) purchase of
assets at belowreplacement
cost, (5) synergy, and (6) globalization. In general,
which of the reasons are economically justifiable? Which are not?
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