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Chapter 6
Mergers and International Finance
Required readings:
Ehrhardt, M.C. Brigham, E. F. (2011), Financial Management: Theory
and Practice, 13th Ed., South-Western Cengage Learning. (Chapter
17,18,21,22& 23)
Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan (2013),
Fundamentals of Corporate Finance, 10th ed. McGraw-Hill. (Chapter 21)
Topics to be covered
2
Synergy
To increase the value of the combined enterprise.
mergers.
For example, a profitable firm in the highest tax
bracket could acquire a firm with large
accumulated tax losses.
These losses could then be turned into immediate
FCF t
V Unlevered t 1 (1 r sU ) t
TS t
V Tax shield
t1 (1 r sU ) t
r sL r sU ( r sU r d )( D / S )
r sU W s r sL W d rd
Cont’d………
13
t 1 (1 r sL ) t
Cont’d……….
17
Illustration
Fine Inc. evaluates a potential acquisition of Bayer
to estimate.
Cont’d……..
22
9%.
The projections assume that growth in the post-
$110.1 millions
There are no non-operating assets, so the value of
equity to Fine if Bayer is acquired is equal to the
value of operations less the value of Bayer’s debt:
$110.1 − $27 = $83.1 million
Cont’d………
26
cost of equity.
r sU W s r sL W d r d
= 0.6983(13%) + 0.3017(9%)
= 11.793%
r sU g r sU g
6.80(1.06)
0 . 11793 0 . 06
$ 124 . 4 million
TS 2016 TS (1 g )
HV TS,2015 2015
r sU g r sU g
1.56(1.06)
0 . 11793 0 . 06
$ 28 . 7 million
Cont’d………
28
$21.4 millions
Cont’d……..
30
FCFEN (1 g) 7.01(1.06)
HV $106.9 million
FCFE, 2015 rsL - g 0.13 - 0.06
The horizon value is different from the APV and
corporate valuation horizon values.
The FCFE horizon value is only for equity,
critically important.
Both parties would want to get the best deal possible.
to $83.1 million.
Cont’d………
36
Financial Distress
A condition where a firm’s operating cash flows are
salvage.
The proceeds, net of transactions costs, are
Questions!
Thank you!