The financial manager of Company X is evaluating Company Y as apossible acquisition. Company Y is expected to produce annualearnings before interest and taxes P485,000. Depreciation write-offson Company Y's assets are Pl20,000 annually. Both companies havea 34% marginal tax rate. If the merger takes place, Company X willassume P1,425,000 of Company Y's long-term liabilities. CompanyX's weighted average cost of capital is 9.25% and Company Y'sweighted average cost of capital is 14.75%. The acquisition will beevaluated as a perpetuity. If Company X acquires Company Y forPI,125,000 in cash, then the estimated change in the combinedwealth of Company X's shareholders will be nearestP433,729 increase.b.10.a.P1,558,729 increase.P379,830 decrease.d.с.P2,207,838 increase.The following information refers to Questions No. 11 and 12:Ebony Corporation has negotiated the acquisition of Ivory Company in anexchange of shares. Under the terms of the merger, the exchange ratio will be2.30. Other important pre-merger information for both companies is givenbelow:Expected salesShares outstandingExpected EPS without mergerP/E ratioEbonyCorporationP65,000,0002,500,000IvoryCompanyP10,000,000250,000P2.00P1.56812Assuming no synergy, the estimated post-merger earnings per sharefor Ebony Corporation is nearestP1.76.11.a.b.PI.78.PI.56.d.с.P1.43.Based on the information given above, the percentage acquisitionpremium is nearest22.6%.12.a.b.19.6%.C.79.4%.d.52.0%.

The cost of capital refers to the required rate of return that a company must earn on its…

Answered: 10. The financial manager of Company X…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter26: Mergers And Corporate Control

Section: Chapter Questions

Problem 2P

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The financial manager of Company X is evaluating Company Y as a possible acquisition. Company Y is expected to produce annual earnings before interest and taxes P485,000. Depreciation write-off's on Company Y's assets are P120,000 annually. Both companies have a 34% marginal tax rate. If the merger takes place, Company X will assume P1,425,000 of Company Y's long-term liabilities. Company X's weighted average cost of capital is 9.25% and Company Y's weighted average cost of capital is 14.75%. The acquisition will be evaluated as a perpetuity. If Company X acquires Company Y for PI,125,000 in cash, then the estimated change in the combined wealth of Company X's shareholders will be nearest P433,729 increase. b. 10. a. P1,558,729 increase. P379,830 decrease. d. C. P2,207,838 increase.
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