Mergers & Acquisition: Combination Analysis PLEASE READ THE INSTRUCTIONS: It is common in Mergers & Acquisitions to create pro forma combined financial st

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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
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.
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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