Bingle Systems earned $780 million last year and paid out 20 percent of earnings in dividends.

a.   By how much did the company's retained earnings increase?

b.   With 100 million shares outstanding and stock price of $80, what was the dividend yield? (Hint: First compute dividends per share.) 

Baymont Enterprises is considering a cash acquisition of Bull, Inc. for $20,000,000. Bull, Inc. will provide the following pattern of cash inflows and synergistic benefits for the next 15 years. There is no tax loss carryforward.

 

Years

 

        1–5                    6–15     

Cash inflow (aftertax)........................       $2,740,000          $3,400,000 

Synergistic benefits (aftertax)............            250,000               360,000     

The cost of capital for the acquiring firm is 12 percent. Should the merger be undertaken?
(If you have difficulty with deferred time value of money problems, consult Chapter 9.)

 The Bright Corporation is considering acquiring the Lincoln Corporation. The data for two companies are as follows:

 

	Lincoln Corp.	Bright Corp.
Total earnings.................................................	$500,000	$2,000,000
Number of shares of stock outstanding.........	200,000	1,000,000
Earnings per share..........................................	$2.50	$2.00
Price-earnings ratio (P/E)...............................	16	20
Market price per share....................................	$40	$40

a.   The Bright Corp. is going to give Lincoln Corp. a 50 percent premium over Lincoln Corp.'s current market value. What price will it pay?

b.   At the price computed in part a, what is the total market value of Lincoln Corp.?

c.   How many shares must Bright Corp. issue to buy the Lincoln Corp. at the total value computed in part b? (Keep in mind Bright Corp.'s price per share is $40.)

d.   Given the answer to part d, how many shares will Bright Corp. have after the merger?

e.   Add together the total earnings of both corporations and divide by the total shares computed in part e. What are the new post-merger earnings per share?

g.   Why has Bright Corp.'s earnings per share gone down?

h.   How can Bright Corp. hope to overcome this dilution?

 

 

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