1. Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total after tax annual cash flow by $4 million indefinitely. The current market value of Teller is $43 million, and that of Penn is $88 million. The appropriate discount rate for the incremental cash flows is 10 percent. Penn is trying to decide whether it should offer 40 percent of its stock or $69 million in cash to Teller’s shareholders. 
a.  What is the cost of each alternative? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, i.e. 1,234,567.) 
Cash cost  $ 
Equity cost  $ 

b.  What is the NPV of each alternative? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, i.e. 1,234,567.) 
NPV cash  $ 
NPV stock  $ 

c.  Which alternative should Penn choose?  
Stock
Cash


3. Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that both firms have no debt outstanding.  
Firm B  Firm T  
Shares outstanding  6,000  1,200  
Price per share  $  47  $  17  

Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $9,500. 
a.  If Firm T is willing to be acquired for $19 per share in cash, what is the NPV of the merger? (Do not round intermediate calculations.) 
NPV  $ 
b.  What will the price per share of the merged firm be assuming the conditions in (a)? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) 
Share price  $ 
c.  If Firm T is willing to be acquired for $19 per share in cash, what is the merger premium? (Do not round intermediate calculations.) 
Merger premium  $ 
d.  Suppose Firm T is agreeable to a merger by an exchange of stock. If B offers one of its share for every two of T ‘s shares, what will the price per share of the merged firm be? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) 
Price per share  $ 
e.  What is the NPV of the merger assuming the conditions in (d)? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) 
NPV  $ 
4. FairtoMidland Manufacturing, Inc., (FMM) has applied for a loan at True Credit Bank. Jon Fulkerson, the credit analyst at the bank, has gathered the following information from the company’s financial statements: 
Total assets  $77,000 
EBIT  7,000 
Net working capital  3,500 
Book value of equity  20,000 
Accumulated retained earnings  16,900 
Sales  93,000 

The stock price of FMM is $22 per share and there are 5,100 shares outstanding. What is the Zscore for this company? (Do not round intermediate calculations and round your final answer to 3 decimal places. (e.g., 32.161)) 
Zscore 
5. Consider the following premerger information about Firm A and Firm B: 
Firm A  Firm B  
Total earnings  $  2,100  $  800  
Shares outstanding  900  200  
Price per share  $  27  $  31  

Assume that Firm A acquires Firm B via an exchange of stock at a price of $33 for each share of B‘s stock. Both A and B have no debt outstanding. 
a.  What will the earnings per share, EPS, of Firm A be after the merger? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) 
EPS  $ 
b.  What will Firm A‘s price per share be after the merger if the market incorrectly analyzes this reported earnings growth (that is, the price–earnings ratio does not change)? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) 
Price per share  $ 
c.  What will the price–earnings ratio of the postmerger firm be if the market correctly analyzes the transaction? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) 
Priceearnings  times 
d1.  If there are no synergy gains, what will the share price of A be after the merger? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) 
Price per share  $ 
d2.  What will the price–earnings ratio be? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) 
Priceearnings  times 
d3.  What does your answer for the share price tell you about the amount A bid for B? Was it too high? too low? 
Too high
Too Low 

Assume that the following balance sheets are stated at book value. The fair market value of James’ fixed assets is equal to the book value. Jurion pays $19,000 for James and raises the needed funds through an issue of longterm debt. 
Jurion Co.  
Current assets  $  20,100  Current liabilities  $  6,850  
Net fixed assets  36,850  Longterm debt  11,260  
Equity  38,840  





Total  $  56,950  Total  $  56,950  






James, Inc.  
Current assets  $  4,060  Current liabilities  $  2,800  
Net fixed assets  9,880  Longterm debt  1,820  
Equity  9,320  





Total  $  13,940  Total  $  13,940  






Construct a postmerger balance sheet assuming that Jurion Co. purchases James, Inc., and the purchase method of accounting is used. (Do not round intermediate calculations.) 
Jurion Co., postmerger  
Current assets  $  Current liabilities  $  
Fixed assets  Longterm debt  
Goodwill  Equity  



Total  $  Total  $  
