It is common in Mergers & Acquisitions to create pro forma combined financial statements (and resulting key ratios) for a potent
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It is common in Mergers & Acquisitions to create pro forma combined financial statements (and resulting key ratios) for a potential merger or acquisition scenario. The ability to successfully complete a Combination Analysis is critical due to the importance of a firm’s EPS and targeted capital structure/credit rating. The format in the attached Excel file is specific to this assignment.
Download the attached Excel File and complete the prompts within.
For more information about this activity, please refer to the Combination Analysis Assignment Document.
Problem 2
| Answers required in all light red-shaded boxes. | ||||||||
| Problem 2 | ||||||||
| 80% Debt | ||||||||
| Pro-Forma | ||||||||
| Target | Buyer | NewCo | ||||||
| Book Value | Mkt Value | Book Value | Mkt Value | |||||
| 12/31/18 | 12/31/18 | 12/31/18 | 12/31/18 | 12/31/18 | ||||
| Current Assets | 50,000 | 40,000 | 500,000 | 400,000 | ||||
| PP&E | 2,000,000 | 4,000,000 | 9,000,000 | 8,000,000 | ||||
| Goodwill | – 0 | – 0 | – 0 | – 0 | ||||
| Other Assets | 200,000 | 300,000 | 800,000 | 750,000 | ||||
| Total Assets | 2,250,000 | 4,340,000 | 10,300,000 | 9,150,000 | – 0 | |||
| Accts Payable | 50,000 | 50,000 | 50,000 | 50,000 | ||||
| Long-Term Debt | 1,000,000 | 1,290,000 | 4,000,000 | 4,100,000 | ||||
| Equity | 1,200,000 | 3,000,000 | 6,250,000 | 5,000,000 | ||||
| Total Liabilities and Equity | 2,250,000 | 4,340,000 | 10,300,000 | 9,150,000 | – 0 | |||
| 2019E EPS | 1.00 | 3.00 | ||||||
| Shares Outst. | 100,000 | 75,000 | ||||||
| Price/Share | 40.00 | 40.00 | ||||||
| P/E Multiple | 40x | 13.33x | ||||||
| Debt/Capital | 45.5% | 39.0% | ||||||
| Interest Rate on Debt pre-tax | 8.0% | |||||||
| Percent Debt | 80.0% | |||||||
| Tax Rate for both | 25.0% | |||||||
| 1. Assume Buyer is acquiring Target, financed with 80% debt and 20% stock. The stock prices shown above | ||||||||
| are the prices involved (i.e., the buyer's stock at time of deal is $40 and they are paying $40/share for the target). | ||||||||
| The deal is closing on 12/31/18. Interest rate and tax rate assumptions are shown above. | ||||||||
| Shares outstanding and 2019 Estimated standalone EPS are given above. | ||||||||
| Calculate the 2019E EPS of the combined entity. Assume zero synergies. | ||||||||
| EPS | = | |||||||
| 2. What amount of pre-tax synergies are required to make the combined | ||||||||
| EPS break-even? If the deal is already break-even or accretive, you can answer "n/a." | ||||||||
| Pre-Tax to Breakeven = | ||||||||
| 3. Fill in the combined pro-forma Balance sheet at 12/31/18 for the new Buyer company | ||||||||
| Include the new number of Buyer shares outstanding after the close. | See Above Red Boxes within H9-H29 range | |||||||
| 4. Fill in the boxes for the cash portion per share and the exchange ratio of the deal (red boxes): | You would say this deal is structured as: | |||||||
| Cash, plus | ||||||||
| shares of Buyer per share of Target | ||||||||
| 5. What is the Pro Forma Debt/Capitalization Ratio for NewCo? | ||||||||
| 6. What percentage of NewCo does Buyer control? | ||||||||
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Individual Assignment – Combination Analysis Homework
Mergers and Acquisitions
I. Introduction (Objective of the Assignment) It is common in Mergers & Acquisitions to create pro forma combined financial statements (and resulting key ratios) for a potential merger or acquisition scenario. The output can vary, but the general exercise is referred to as a “Combination Analysis” (or sometimes a “Contribution Analysis”). The key takeaways from the Combination Analysis can include combined earnings per share (and whether the deal is accretive or not), synergies required to achieve breakeven earnings per share (if initially dilutive), and implied pro forma credit rating. The ability to successfully complete a Combination Analysis is critical due to the importance of a firm’s EPS and targeted capital structure/credit rating. You will complete an abbreviated Combination Analysis to demonstrate your understanding of the key formulas and financial statement relationships inherent in the M&A decision-making process. II. Assignment Requirements Complete the combination analysis and questions found in the Excel file located in your assignment instructions. Please refer to chapters 16, 17, and 21 for more information on Combination Analyses. III. Assignment Format You will find an Excel file in your assignment instructions. Please complete the activity and submit it.
IV. Rubric This is an individual assignment and accounts for 5% of your overall grade. You will be assessed according to the following rubric.
Criteria Superior High Quality
Average Below Average
Poor
Assignment Requirements – All calculations are completed correctly, excel worksheet is used to produce the pro forma financial statements, key ratios are identified and briefly noted.
50 – 46 pts
45 – 40 pts
39 – 35 pts.
34 – 30 pts.
29 – 0 pts.
- I. Introduction (Objective of the Assignment)
- II. Assignment Requirements
- III. Assignment Format
- IV. Rubric
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