Finance Assignment Help 56
1. Read the HP-Compaq case and answer the following questions:
i) Calculate the present value of projected synergies from the merger. Use the information in Exhibit 9 for your calculations.
ii) The terms of the merger call for a tax-free exchange of 0.6325 shares of HP for each share of Compaq. Use your estimate of synergies in part (a) to calculate the implied premium being paid by HP to acquire Compaq. Use the stock prices and the number of shares outstanding of HP and Compaq on September 3, 2001, the day before the merger was announced, to perform this calculation.
iii) Set up a hedged merger arbitrage strategy to take advantage of the spread between the price of CPQ on September 4, 2001 and the offer price for each share of CPQ implied by the terms of the merger. What is the expected gross annualized return if the merger was completed on March 3, 2002. CPQ and HP were expected to pay dividends per share of 3 cents and 8 cents respectively, in September, December and March. Transaction costs to buy and sell shares is expected to be 5 cents a share.
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iiii) Calc Premium VANS is a privately owned manufacturer of light trailers that are sold to rental companies and individuals. Its sole owner, Mr. Benjamin Webster is presently considering a purchase offer from Prentice Works. The offer for the equity of VANS is as follows:
i) A cash payment for $5 million due at closing.
ii) A 7.5% annual coupon five-year subordinated note issued by Prentice Works, for $7 million with principal payable at maturity.
v) An earnout agreement stipulating a payment to take effect at the end of the third year equal to one-half times third year EBITDA.
Prentice Works will assume VANS’s present net debt of $14.8 million. Furthermore, VANS will become a wholly owned subsidiary of Prentice and Mr. Webster will stay as its president with a three-year contract and competitive compensation, at the end of which he will retire.
The following additional information is available:
– Prentice Works’ outstanding subordinated notes are presently priced to yield 10%.
– Mr. Webster believed that he could make VANS’s EBITDA grow at 11% per year during the following three years. Current EBITDA is $6 million.
– Small companies with characteristics similar to VANS have a WACC of about 14%.
a. What is the value of the 7.5% $7 million note offered by Prentice Works?
b. What is the value of the earnout agreement?
c. How much is Prentice Works offering for the enterprise (debt plus equity) of VANS? What is the initial EBITDA multiple offered by Prentice?
While Mr. Webster will take into account his salary as president of the subsidiary as well as the tax consequences of the transaction, you should ignore these matters in answering the above questions.
3. Consider the following alternative earnout for VANS’s Mr. Webster. The other components of the consideration stay the same. The earnout would pay 2.5 times the excess of third-year EBITDA over $6 million. The riskless interest rate is r=5%, and the likely range of VANS’s EBITDA growth is [-40%, 110%] (Hint: estimate volatility at one-sixith of this range). What is the value of the earnout and how much would Prentice Work pay for the enterprise?
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