Info

Net fixed assets

2,700

Equity

3,200

Total

$4,000

Total

$4,000

Incorporating Goodwill In the previous problem, construct the balance sheet for the new corporation assuming that the transaction is treated as a purchase for accounting purposes. The market value of All Gold Mining's fixed assets is $2,800; the market values for current and other assets are the same as the book values. Assume that Silver Enterprises issues $8,400 in new long-term debt to finance the acquisition.

Cash versus Stock Payment Eastman Corp. is analyzing the possible acquisition of Kodiak Company. Both firms have no debt. Eastman believes the acquisition will increase its total aftertax annual cash flows by $2.6 million indefinitely. The current market value of Kodiak is $102 million, and that of Eastman is $140 million. The appropriate discount rate for the incremental cash flows is 12 percent. Eastman is trying to decide whether it should offer 40 percent of its stock or $110 million in cash to Kodiak's shareholders.

a. What is the cost of each alternative?

b. What is the NPV of each alternative?

c. Which alternative should Eastman choose?

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VIII. Topics in Corporate Finance

25. Mergers and Acquisitions

© The McGraw-Hill Companies, 2002

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