Corporate Finance Exam Case Solution
Question 5
Part A
Stock price= $15
Outstanding shares = 10 million
Market capitalization = stock price * outstanding shares = 150 million
Value increase by 50% = 150 * (1+50%) = 225 million
Stock price = $20
Outstanding shares = 10 million
Value of company = 225*50% = 112.5
Price of share = 112.5/10 = 11.25
By Assuming that I get 50% control of Associated Steel, the price of the non-tendered shares is $11.25 / share which is calculated by dividing the value of company by the number of shares outstanding. After acquiring 50% control of the company, the value of the company would be increased by 50%, which means that there is a significant increase in market capitalization from $150 million to $225 million and 50% of new value of company is calculated to be $112.5 million. Thus, the share price is 11.25 dollar per share.
Part B
Offer price = $20
Post Lbo price = $11.25
Current price = $15
Regarding the tender offer, the shareholders will tender their shares since the post LBO price is lower than the current price. The post LBO price is $11.25/ share whereas the current price is $15/ share due to which the shareholders would not be willing to tender their shares for the price which is significantly lower than the current price, it is because the post LBO price would to benefit the shareholder.
Part C
50% control of associated steel = market capitalization * 50% = 75 million
Gain from transaction = $75 million.
The gain from the Leverage Buyout transaction would be $75 million which is calculated by deducting the value of the company increased by 50% from the market capitalization of the company which is $150 million. Thus, the gain would be $75 million from the LBO transaction.
PART B SHORT ANSWER QUESTIONS
Question 1:
Take-overs usually happen when an organization or company makes a fruitful bid to take control or acquire another organization or company. There are multiple reasons for the takeover. One of the reasons can be the long term value. Take-over is a requirement for ensuring respectable corporate governance.Intimidating seizures of a company or takeovers is a corporate governance strategy or mechanism for reducing management slack and resourcefulness.
Question 2:
Disadvantages are listed below:
- When reducing risk, it is also cutting down the investors possible rewards. Reducing risk means reducing profits.
- It is a very difficult strategy to follow
- Requires greater account requirements (e.g. capital) when trading.
- It costs money. Must be purchased from a third party.
- It is adetailed trading approach.Successful hedging needs good trading skills and knowledge....................
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