Reference no: EM131342116
When a firm has cash flow problems, there are potential negative feedback effects. For example, the firm may need to cut capital expenditures and research and development activities that are necessary to remain competitive in its industry.
Your firm, Goldmine Incorporated, is considering the purchase of a technology firm called Techworks. The reason that your firm is considering this purchase is that when Goldmine has a bad year, Techworks tends to have a good year. Thus, Goldmine will not have cash flow problems in its bad years because Techworks would produce high cash flows in those years.
Specifically, one of three states can occur every year (in perpetuity). Here are the cash flows produced by each firm within each state:
In addition, assume that the Goldmine cash flow in State A will be $30M lower because of the negative feedback effects resulting from the cash flow problems. If Goldmine purchases Techworks, then Goldmine will not incur this $30M cost in State A.
Assume that the annual expected return on Goldmine assets is 8 percent and the expected return on Techworks assets is 10 percent. Both firms are all-equity and will operate in perpetuity. Each firm has 20M shares outstanding.
a) First assume that no merger announcement has been made yet. What is the price per share of each firm?
Goldmine announces that it will purchase all of the shares in Techworks and pay a premium of 20 percent on the Techworks share price that you calculated in part (a). This will be a stock-for-stock merger. That is, Goldmine will issue shares in its own firm and exchange them for shares in Techworks (the exchange will be based on the value of Goldcorp shares from (a) relative to the value of Techworks shares with the 20 percent premium).
b) What percentage of Goldcorp will have to be sold in order to acquire all of the shares in Techworks?
c) What is the value of the combined firm?
d) Is the merger a good idea? For this, you will have to compare the value created from the merger to its cost.
e) What is the share price of Goldcorp after it purchases Techworks? Compare this to the price per share calculated for Goldcorp in part (a).
|
The real estate for capital budgeting purposes
: If a firm has the option of selling some raw land to another firm or utilizing it to build a new factory, then if the firm chose to build the factory how should it handle the lost opportunity to sell the real estate for capital budgeting purposes?
|
|
Company should use a firm commitment offering
: Larissa Warren and Dan Ervin have been discussing the future of East Coast Yachts. The company has been experiencing fast growth, and the future looks like clear sailing. After deliberation, Larissa and Dan have decided that the company should use a ..
|
|
Preferred stock-debt and market
: You are given the following information concerning Parrothead Enterprises: Debt: 10,800 7.3 percent coupon bonds outstanding, with 22 years to maturity and a quoted price of 108.5. Market: An expected return of 10.2 percent, a risk-free rate of 5.15 ..
|
|
What is the net cost of call premium
: Dairy Corp. has a $20 million bond obligation outstanding and a coupon rate of 8%. Dairy Corp. has the ability to buy back the debt at 7% above par and issue new debt at 6.5%, so it is considering refunding this bond. Assume the underwriting cost for..
|
|
What is the value of the combined firm
: When a firm has cash flow problems, there are potential negative feedback effects. For example, the firm may need to cut capital expenditures and research and development activities that are necessary to remain competitive in its industry. What perce..
|
|
What is the npv of your investment
: Waysafe Inc. consists of two grocery stores. The first store is fairly valued at $60M and the second store, valued at $50M, could be torn down and then the land could be sold for $75M. You announce your intention to purchase this firm using cash. Sha..
|
|
Which fund has a higher systematic risk
: You have collected 6 years of monthly data on return of funds ABC and XYZ as well as on S&P/TSX composite index and the government short-term bills (risk-free). Which fund has a higher systematic risk? Why? Which fund has a higher residual risk? Why?..
|
|
Calculate strickler cash conversion cycle
: The Wei Corporation expects next year's net income to be $15 million. The firm's debt ratio is currently 40%. Wei has $12 million of profitable investment opportunities, and it wishes to maintain its existing debt ratio. Calculate Strickler’s cash co..
|
|
What measurement instruments will you use
: RES-600-2500: What are the data collection strategies you will use in your research proposal? What measurement instruments will you use? What sampling methods will you use?
|