Question 3 Your firm, Goldmine Incorporated, is considering the purchase of a technology firm called Techworks. The purc
Posted: Wed Apr 27, 2022 10:47 am
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:
A. B C
Probilty 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.
a) Assume that no merger announcement has been made. What are
the share prices for Goldmine and Techworks? (You can ignore the
GoldTech cash flows for this question.)
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).
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:
A. B C
Probilty 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.
a) Assume that no merger announcement has been made. What are
the share prices for Goldmine and Techworks? (You can ignore the
GoldTech cash flows for this question.)
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).