Week 5 Notes
Week 5 Notes Fin 4310
Popular in Managerial Finance
Popular in Finance
BUSN 1301 - 006
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This 3 page Class Notes was uploaded by Laura Notetaker on Friday September 25, 2015. The Class Notes belongs to Fin 4310 at University of Texas at El Paso taught by Dr. Oscar Varela in Summer 2015. Since its upload, it has received 28 views. For similar materials see Managerial Finance in Finance at University of Texas at El Paso.
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Date Created: 09/25/15
Week 5 Notes Merging with another rm and acquiring another rm is a capital budget project There facets that include the method of payment Cash Stock A consolidation occurs when 2 companies combine and form a new company with a new name A merger occurs when one company buys another company with the acquiring rm retaining its name Reasons for merger and acquisitions Synergy Combination of the acquiring and target rm produces a value that is greater than the sum of the part the sum value of the two rms without a combination Diversi cation The combination creates a portfolio of rms that diversify the risk of the rms that are combining Managerial ego or empire building Selfinterest Breakup value of the acquired rm and the purchasing assets below their replacement cost Purchase assets below replacement cost Synergy Happens when the merged or consolidated rms are worth more together compared to the worth of their individual parts Having higher cash ows may be due because Higher operating revenues Caused because there is more market power distributing or marketing products and a better infrastructure dealing with product delivery or customer satisfaction Lower operating expenses More ef cient operations no need for 2 management teams economies of scale attracting more skilled human capital at a cheaper cost Lower nancing costs Lower risk entity reduce interest expenses higher value for cash ows because they are discounted ess Tax advantages Tax reductions To calculate the net present value of a combination 1 Value of the target less the purchase price for the target 2 Synergy from the merger less the premium paid for the target Week 5 Notes Example 2 reorganization Old New Senior Debt 2000000 1000000 Debentures 6000000 2000000 Subordinated Debentures 3000000 333333 Common Stockholder s 9000000 6666667 Equity Total Liabilities and Net 20000000 10000000 Worth Debt to equity ratio is 50 New concern value is 10000000 Debt is 3333333 Equity is 6666667 1 Pay off senior debt 2000000 gt you will use the 1000000 from the senior debt and 1000000 from the new debentures 2 Pay the debentures 6000000 gt you will use the 1000000 of the remaining debentures use the 333333 of the subordinated debentures and 4666667 from the common stockholder s equity 3 Pay the subordinated debentures 3000000 gt you will use the remaining 2000000 from common stockholder s equity This will not be fully satis ed 4 The common stockholder s equity will not be satis ed Week 5 Notes Example 2 Liquidation Accounts Payable 6000000 Notes Payable 4000000 Accrued Wages 3000000 Accrued Taxes 7000000 Secured bond 10000000 Debenture 15000000 Subordinated Debenture 5000000 lillrrent ts 1 Fisredts Pied Estete Hid sedired bends i issill beused td edllet die EEZLH39E bdr iii Legal Fees 1 Hi 39i i ii Used with meseddred bend Pierre nind P rdeeeds xiii quotl Firm herilm 1 rated fees Merger and acquisitions If a buys B and pay 25 per share of B It is a stock for stock exchange What is the exchange rate of stocks 253750 06667 06666 x 5 million 3333333 shares of A 25 million 10 million 35000000 10 million 33 miion 13000000 Shares 35 million 13 million 2625 EPS A experiences an increase in their EPS from 250 to 2625 B experiences an decrease in their EPS from 200 to 175 2625 x 06667
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