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Merger and Acquisition Valuation and Analysis

An analysis of merger and acquisition valuation techniques and strategies used in corporate finance.

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    Merger and Acquisition Valuation and Analysis, page 1Merger and Acquisition Valuation and AnalysisProblem 21-1ValuationHarrison Corporation is interested in acquiring Van Buren Corporation. Assume that the risk-free rate of interest is 5% and the market risk premium is 5%.Van Buren currentlyexpects to pay a year-end dividend of $2.20 a share (D1= $2.20). VanBuren's dividend is expected to grow at a constant rate of 4% a year, and its beta is 0.8.What is the current price of Van Buren's stock? Round your answer to the nearest cent.$________2.eBookeBookeBookeBookeBookeBookProblem 21-2Merger valuationHarrison Corporation is interested in acquiring Van Buren Corporation. Assume that the risk-free rate of interest is 4% and the market risk premium is 6%.Harrison estimates that if it acquires Van Buren, the year-end dividend will remain at $2.45 ashare, but synergies will enable the dividend to grow at a constant rate of 10% a year(instead of the current 4%). Harrison also plans to increase the debt ratio of what would beits Van Buren subsidiary-the effect of this would be to raise Van Buren's beta to 1.4. What isthe per-share value of Van Buren to Harrison Corporation? Round your answer to the nearest

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    Merger and Acquisition Valuation and Analysis, page 2

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    Merger and Acquisition Valuation and Analysis, page 3cent.$________3.eBookeBookeBookeBookeBookeBookProblem 21-3Merger bidHarrison Corporation is interested in acquiring Van Buren Corporation. Assume that the risk-free rate of interest is 6% and the market risk premium is 4%.Van Buren currently expects to pay a year-end dividend of $2.70 a share (D1= $2.70). VanBuren's dividend is expected to grow at a constant rate of 4% a year, and its beta is 0.7.Harrison estimates that if it acquires Van Buren, the year-end dividend will remain at $2.70 ashare, but synergies will enable the dividend to grow at a constant rate of 10% a year(instead of the current 4%). Harrison also plans to increase the debt ratio of what would beits Van Buren subsidiary-the effect of this would be to raise Van Buren's beta to 1.3.If Harrison were to acquire Van Buren, what would be the range of possible prices that itcould bid for each share of Van Buren common stock?Round your answers to the nearest cent.a. Low bound $________b. High bound $________

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    Merger and Acquisition Valuation and Analysis, page 44.eBookeBookeBookeBookeBookeBookProblem 21-4Merger analysisApilado Appliance Corporation is considering a merger with the Vaccaro Vacuum Company.Vaccaro is a publicly traded company, and its current beta is 1.15. Vaccaro has been barelyprofitable, so it has paid an average of only 25% in taxes during the last several years. Inaddition, it uses little debt, having a debt ratio of just 30%.If the acquisition were made, Apilado would operate Vaccaro as a separate, wholly ownedsubsidiary. Apilado would pay taxes on a consolidated basis, and the tax rate would thereforeincrease to 40%. Apilado also would increase the debt capitalization in the Vaccaro subsidiaryto 45% of assets, which would increase its beta to 1.75. Apilado's acquisition departmentestimates that Vaccaro, if acquired, would produce the following net cash flows to Apilado'sshareholders (in millions of dollars):YearNet Cash Flows1$1.302$1.503$1.754$2.005 and beyondConstant growth at 6%These cashflows include all acquisition effects. Apilado's cost of equity is 14%, its beta is 1.0,

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