Schweser Mock 2-question 8/9-Post acquisition total asset calculation in corporate finance and FRA cases

CFA Level II
#1

I am confused as why the 90 is added back

Here is the thing further confuses me in acquisition, say when in Corporate Finance when we calculate a case when company A buys company b with 20 mil cash, total combined asset value should add that 20 mil on when we calculate stock value to decide win and loss for each side (Say schewser mock 2 morning session question 9 and 10)

why is that the case and when we calculate asset in acquisition method in FRA we take out this 20 mil, we only count the post merger B/S of the parent company right? how does this calculation work and what does BS look like in both case ?

also,would the calculation be different if we are using stock exchange? so we only combine total asset and calculate the total share outstanding and there is no cash to be added right

Why do we add the cash paid to calculate the post merger stock value???

#2

From what I understand if you acquire 80% of another company by cash the cash goes out to the departing shareholders that is why you reduce cash from your B/S. In stock offering the shareholders are given shares in your company no effect on cash on no.of outstanding shares go up.

#3

see schweser mock 2 question 9 and 10, when they calculate the stock price after cash acquisition the cash is added to total asset value to calculate stock price, why

#4

I don’t know what is exact situation in these questions but there are two main different kinds of acquisition.

Scenario 1

Company A is selling asset (division, subsidiary, etc) to company B, then received cash of this asset sale will appear in asset position of company A.

Scenario 2

Company B buys entire company A for cash so cash offer is directed to shareholders of company A.

In Scenario 1, sharholders of A may (and probably will) ask for extra dividend payment after earnings of selling asset to company B.

#5

no the question is like this A brought B with 80 million dollar, how much will the post acquisition stock be if number of shares outstanding after acquisition is 8 million, to calculate the stock price you use post acquisition value of the entity *+80*(???) divide by 8

WHY WE ADD THE 80 ON for asset? I mean i know it is cash , but why in FRA we exclude that from BS(investment)

#6

Maybe should be hidden detail in question about this value of 80.

Value AB (post acquisition) = Value A (Pre) + Value B (Pre) - Cash paid + Sinergy.

In FRA you have a goodwill instead.

#7

here is the tricky part it says the company is prepared to offer to buy the target by directly issuing the share holder a total of 3 million share, so this is a stock purchase, the note says it is a stock merger so it must include the money in cash that was paid by the acquierer, looking at Schweser sample on notes, it is the case i just am confused how that fit into the equation

Value AB (post acquisition) = Value A (Pre) + Value B (Pre) - Cash paid + Sinergy.

there is no cash paid, things are done in stock, we know the total combined value of the post acquisition firm and total gain…

#8

OK, so there is an exchange conversion ratio. Multiply stock conversion ratio by target shares number to get new issued stock number.

Add new shares issuance to existing acquirer’s shares number to get total number of stocks of new company (AB).

Multiply total number of post merger shares (AB) with post acqusition combined company shares price to get new company value.

Otherwise, in Schweser is stated same equation for pure stock offer (without cash transaction) but C (Cash paid)=0.00.

#9

ye, so summary, most times

cash purchase: V1+V2+S-C, stock is parent company stock

Stock purchase: V1+V2+S, stock increase as you issue new stock to buy

I think the mock question was being purposely a jerkish question

#10

Watch out on details in question, sometimes there is not unique formula than you are expected to apply some kind of data mining based on your overall knowledge.