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Chapter 5: Q5DQ (page 679)
Differentiate between the spot exchange rate and the forward exchange rate.
The spot exchange rate is the current price, and the forward exchange rate is the instrument's price at some point in the future.
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Assume that Western Exploration Corp. is considering the acquisition of Ogden Drilling Company. The latter has a \(470,000 tax loss carryforward. Projected earnings for the Western Exploration Corp. are as follows: 20X1 20X2 20X3 Total Values Before-tax income ................................. \)185,000 \(250,000 \)370,000 \(805,000 Taxes (35%) ........................................... 64,750 87,500 129,500 281,750 Income available to stockholders .......... \)120,250 \(162,500 \)240,500 $523,250. How much will the total taxes of Western Exploration Corp. be reduced as a result of the tax loss carryforward? b. How much will the total income available to stockholders be for the three years if the acquisition occurs? Use the same format as that in the text.
Assume the following financial data for Rembrandt Paint Co. and Picasso Art Supplies:
Rembrandt
Paint Co.
Picasso Art
Supplies
Total earnings ........................................................... \(1,200,000 \)3,600,000
Number of shares of stock outstanding ................... 600,000 2,400,000
Earnings per share ................................................... \(2.00 \)1.50
Price-earnings ratio (P/E) ......................................... 243 323
Market price per share.............................................. \(48 \)48
a.If all the shares of Rembrandt Paint Co. are exchanged for those of Picasso
Art Supplies on a share-for-share basis, what will post merger earnings
per share be for Picasso Art Supplies? Use an approach similar to that in
Table 20-3.
b.Explain why the earnings per share of Picasso Art Supplies changed.
c.Can we necessarily assume that Picasso Art Supplies is better off after the
merger?
Assume the Knight Corporation is considering the acquisition of Day Inc. The expected earnings per share for the Knight Corporation will be \(4.00 with or without the merger. However, the standard deviation of the earnings will go from \)2.40 to $1.60 with the merger because the two firms are negatively correlated.
a.Compute the coefficient of variation for the Knight Corporation before and after the merger (consult Chapter 13 to review statistical concepts if necessary).
b.Discuss the possible impact on Knight鈥檚 postmerger P/E ratio, assuming investors are risk-averse.
The Jeter Corporation is considering acquiring the A-Rod Corporation.
The data for the two companies are as follows:
A-Rod Corp. Jeter Corp.
Total earnings ......................................................... \(1,000,000 \)4,000,000
Number of shares of stock outstanding ................. 400,000 2,000,000
Earnings per share ................................................. \(2.50 \)2.00
Price-earnings ratio (P/E) ....................................... 12 15
Market price per share ........................................... \(30 \)30
a.The Jeter Corp. is going to give A-Rod Corp. a 60 percent premium over
A-Rod鈥檚 current market value. What price will it pay?
b.At the price computed in part a,what is the total market value of A-Rod
Corp.? (Use the number of A-Rod Corp. shares times price.)
c.At the price computed in part a,what is the P/E ratio Jeter Corp. is assigning
A-Rod Corp?
d.How many shares must Jeter Corp. issue to buy the A-Rod Corp. at the
total value computed in part b?(Keep in mind that Jeter Corp.鈥檚 price per
share is $30.)
e.Given the answer to part d,how many shares will Jeter Corp. have after the
merger?
f.Add together the total earnings of both corporations and divide by the
total shares computed in part e.What are the new postmerger earnings per
share?
g.Why has Jeter Corp.鈥檚 earnings per share gone down?
h.How can Jeter Corp. hope to overcome this dilution?
What is a letter of credit?
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