Good day Could you assist me with the following questions So

Good day,

Could you assist me with the following questions.

Some of the motives for mergers lead to benefits to society, some to benefits to shareholders, some to benefits to the management of the acquirer. Others result in benefits to more than one group. You have been identified by the Board to perform valuation of the company and you have decided that mergers and acquisition is the best way of creating value for your company. Evaluate a company that you are familiar with as a target for a merger and provide factors that will ensure successful merger. This should be practical taking into consideration the following points . . . e . Valuation of your own company Valuation of the combined company (after the merger) Target price of the merger Value of the company (price per share) Is the merger worth it? You are expected to produce a report addressing the issues raised above.

Solution

Solution

Scenario

Exchange ratio = 2:1

1) Parameters of my company :-

Market value per share = $50 per share

Total common stock outstanding = 50000 shares

Profit = $200000

Profit per share = ($200000/50000 shares) = $4

Price earning ratio = 12.5

2) Parameters of merging company

Market value of company = $10

Total common stock outstanding = 10000 shares

Total profit of company = $45000

Profit per share = ($45000/10000 shares) = $4.5

1) Valuation of my company

Valuatioon = Market value per share * Number of shares

Valuation = $50 * 50000

Valuation = $25,00,000

2) Valuation of combined company

a) Total shares issued = 10000 shares * 2 = 20000 shares

Total shares after merger = (50000 + 45000) = 95000 shares

b) Total Profit = $200000 + $45000 = $245000

Earning per share after per share = ($245000/70000) = $3.5

Market value per share = $3.5 * 12.5 = $43.75

Market value of combined firm = ($43.75*95000 shares) = $41,56,250

3) Target price of merger

Target price of merger = exchange ratio * price per share

Target price = 1/2 * $4.5 = $2.25 per share

4) Value of company

already calculated in point 2

Price per share = $3.5

5) Is the merger worth it

No, Price before merger = $5

Price after merger = $3.5

There is loss with no expected synergy and price per share is reduced