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Financial Analysis and Valuation of Mergers and Acquisitions: Case Studies and Capital Budgeting

A study of mergers and acquisitions with a focus on financial analysis, valuation, and capital budgeting strategies through case studies.

Daniel Kim
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Financial Analysis and Valuation of Mergers and Acquisitions: CaseStudies and Capital BudgetingProblem 21-1ValuationHarrison Corporation is interested in acquiring Van Buren Corporation. Assume that the risk-freerate of interest is 5% and themarket risk premium is 5%.Van Buren currently expects to pay a year-end dividend of $2.20 a share (D1= $2.20). VanBuren's dividend is expected to grow at a constant rate of 4% a year, and its beta is 0.8. Whatis the current price of Van Buren's stock? Round your answer to the nearest cent.$________Return on stock(rx)= risk free rate + (market risk premium)*(beta)= 5% +5%*0.8= 5% +4%= 9%Expected growth Rate(gx)= 4%Next year value of Dividend(D1)= $2.20P0=D1/ (rx–gx)=2.20/(0.09-0.04)2.20/0.0544Current price of Van Buren’s stock price is $44.00Problem 21-2Merger valuationHarrison Corporation is interested in acquiring Van Buren Corporation. Assume that therisk-freerate 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 $2.45 ashare, but synergies will enable the dividend to grow at a constant rate of 10% a year (insteadof the current 4%). Harrison also plans to increase the debt ratio of what would be its VanBuren subsidiary-the effect of this would be to raise Van Buren's beta to 1.4. What is the per-share value of Van Buren to Harrison Corporation? Round your answer to the nearest cent.$________Return on stock (rx) = risk free rate + (market risk premium)*(beta)=4% +6%*1.4= 4% +8.4%= 12.4%Expected growth Rate (gx) =10%Next year value of Dividend(D1)= $2.45P0= D1/(rx–gx)= 2.45/(0.124-0.1)2.45/0.024$102.08

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