Question 3 Your firm, Goldmine Incorporated, is considering the purchase of a technology firm called Techworks. The purc

[answerhappygod]

Question 3
Your firm, Goldmine Incorporated, is considering the purchase of
a technology firm called Techworks. The purchase would result in a
merged firm named GoldTech. Goldmine is considering this purchase
because operating synergies with Techworks would result in total
cash flows that are greater than the sum of the cash flows from the
two companies if they operated separately
The following table outlines the possible cash flows produced by
Goldmine and Techworks each year if they operated as solo
businesses, and the possible cash flows produced by Goldmine and
Techworks if they combined forces under the GoldTech name:
State A
State B
State C
Probability
30%
40%
30%
Goldmine Cash Flow
$20M
$60M
$100M
Techworks Cash Flow
$50M
$40M
$30M
GoldTech Cash Flow
$80M
$115M
$150M
The expected return on Goldmine cash flows is 10 percent, and
the expected return on Techworks cash flows is 16 percent. If the
firms combined forces as GoldTech, then the expected return on
GoldTech cash flows would be 11.5%. Both firms are all-equity and
will operate in perpetuity. Each firm has 10M shares
outstanding.
Goldmine announces it will purchase
all of the shares of Techworks and pay a premium of 25% on the
Techworks share price that you calculated in part (a). This will be
a stock-for-stock merger. That is, Goldmine will issue shares in
its own firm and exchange them for shares in Techworks. The
exchange will be based on the Goldmine share price and value of
Techworks with the 25% premium. Assume that the Goldmine share
price does not change following the announcement.
b) What percentage of Goldmine has to
be sold in order to acquire all of the shares in Techworks?
c) Is the merger a good idea? (Compare
the value created from the merger to its cost.)
d) What is the share price of GoldTech
after the merger is completed? (Keep in mind that the number of
shares outstanding for GoldTech will now equal the original 10M
shares from Goldmine plus the shares issued in part (b).) Compare
the new share price for GoldTech to the share price calculated for
Goldmine in part (a).