# Fri night lame party question (Corp Fin)

When bootstrapping, the acquiring firm: A) increases current earnings per share (EPS) and increases the total number of shares outstanding. B) decreases current earnings per share (EPS) and decreases the total number of shares outstanding. C) increases current earnings per share (EPS) and decreases the total number of shares outstanding. D) decreases current earnings per share (EPS) and increases the total number of shares outstanding.

Its Friday night and I am studying too. My choice: C Follow up: Bootstrapping is only possible when: A) Target company’s P/E is greater than the acquiring company’s P/E B) Acquiring company’s P/E is greater than the target company’s P/E C) Target company’s P/B is greater than the acquiring company’s P/B D) Acquiring company’s P/B is greater than the target company’s P/B

C

No idea, I just opened corp fin first page 2 minutes ago. I’ll toast to a friday night study party tho. Please post explanations with answers for my benefit.

A and B

I know the answer to Niblita75’s has something to do with P/E. I’m feeling like ‘A’

For Slouiscar’s Q, answer is C For Niblita’s 75, answer is B - the acquiring co’s PE must be greater for bootstrapping to work.

clama Wrote: ------------------------------------------------------- > For Slouiscar’s Q, answer is C > For Niblita’s 75, answer is B - the acquiring co’s > PE must be greater for bootstrapping to work. I support clama.

We are all such lousy dates.

1. A 2. B For question 1; If bootstrapping requires the acquiring firm to issue new shares, should the total number of shares outstanding not increase? Just a lil confused why people are choosing C. Maybe I’m mistaken, please explain if you can.

Why would anyone think that 1 is A? (??) The whole point of acquiring a company in a stock transaction is that new shares will be issued.

The acquiring companies shares are “more expensive” so they don’t need to issue as many shares to to purchase all of the targets outstanding shares. ex. If A aquires B Company A: NI = \$20,000,000 Shares Outstanding= 10,000,000 EPS = \$2.00 Current Market Price = \$20 Market Cap = \$200,000,000 P/E = 10 Company B NI = \$20,000,000 Shares Outstanding = 10,000,000 EPS = \$2.00 Current Market Price= \$15 Market Cap = \$150,000,000 P/E = 7.50 Total combined shares of the two companies alone equals 20,000,000. Company A only has to issue (150,000,000/20) = 7,500,000 new shares to buy the company. So the new total shares outstanding will be 17,500,000 of the combined company instead of the original 20,000,000. EPS will increase because you have a reduced share count. Both companies have \$20,000,000 in net income. Combined, NI will be \$40,000,000 and outstanding shares will be 17,500,000. EPS = \$2.29

The total number of shares for both companies combined will definitely be lower than the sum of the individual companies’ shares outstanding (20,000,000). From the perspective of the acquiring company, however, 7,500,000 additional shares will be issued for the new company. I guess it depends which way one is considering the question, but the wording seems to be phrased from the acquiring firm’s perspective.

plyon Wrote: ------------------------------------------------------- > We are all such lousy dates. lol, i’ve been a lousy date pretty much since I started this program It’s all about making sacrifices these days.

for the record I am still a great date. slouiscar Wrote: ------------------------------------------------------- > When bootstrapping, the acquiring firm: The acquiring firm issues shares and umm their outstanding shares increase… "Your answer: A was incorrect. The correct answer was C) increases current earnings per share (EPS) and decreases the total number of shares outstanding. The technique of bootstrapping decreases the total shares outstanding of the combined firm (relative to the two separate entities) while the earnings of the two firms is added together, thus increasing EPS for the acquiring firm. " you ask me about the acquiring firm… and then you drop this “total shares outstanding of the combined firm (relative to the two separate entities)” nonsense on me and hit me with a -1? damn friday night, stay at home, geeks get that right and ruin the curve. **Edit: good job

See, that’s BS. If they want to know about the combined firm vs two separate entities they should ask for that in the question.

Answer to slouiscar’s questions should be ‘C’ and I think ‘B’ for Niblita75’s question… McLeod81, so what if I play with these numbers as follows… Company A: Shares Outstanding= 10,000,000 Current Market Price = \$20 Market Cap = \$200,000,000 Company B: Shares Outstanding = 10,000,000 Current Market Price= \$50 Market Cap = \$500,000,000 So now if company A (market cap of 200m) wants to acquire company B with a market capitalization of 500 million. Company A will have to issue 500m / (10m + 10m) = 25m So post-merger, there will be a total NOSO = 10m + 25m = 35m, which is greater than the total NOSO pre-merger (10m + 10m) = 20m Please let me know if I should be going to bed and is such a kind of merger possible in real world, where a jelly-fish engulfs the whale?

It seems like that would work. If they merged the stock price would still be \$20 and the EPS would rise if P/E for A > P/E for B. If EPS A = 1 EPS B = 3 then P/E for A = 20 P/E for B = 16.67 Mkt Cap = 700m / 35m shares = \$20/sh EPS after merger: 40m / 35m = 1.142 which is > the original EPS for A In the “Pac Man” defense, a small company can attempt to take over a larger company (to defend itself from takeover) but this would be rare. Company A would probably have to issue some serious junk bonds in order to pull that one off.

nice… ‘Pac Man’ defense … sounds interesting!!

So its A and C right ? Will someone give us the final word on this ? Where’s Joey?