Hi,
I have been fooled by this question in the past. I just wanted your opinion on my solutions. Imagine Company A acquires Company B:
- How much would the EV of Company A increase?
- What change would occur on the B/S of company A due to this acquisitiion?
Data:
Company B:
Assets = $160
Liabilities = $40
SH Equity = $120
Company A purchases Company B for $140 with $40 in cash, $60 in Debt, and $40 with new common stock.
Solution:
1. EV of Company A would increase by $180. Debt = +100, SH. Equity = +40, Cash = -40.
2. Both sides of the balance sheet of Company A would increase by $140. (Assets = +120, Goodwill = +20, Liabilities = +100, SH. Equity = +40)
Thanks !
2 is right. How did you get to your answer for #1?
You would focus on the change in relevant line items on B/S. Debt +100, SH Eq = +40, Cash = -40. Change in EV = +100+40-(-40) = +180.
You are assuming that B's liabilities are all debt, am I right? Cos' if they are non-debt liabilities, then you shouldn't be adding Debt +100 should you
Enterprise value is unrelated to book values/accounting figures. The value of Company A post acquisition is equal to:
The fair value of Company A (pre-acquisition) + Fair value of Company B (pre-acquisition) + Synergies - Transaction expenses.
Assuming the purchase price was not dilutive, the value is Company A + $140.
Sort of agree with you. However, it appeared that the VP that quizzed me on #1 just wanted to see how the change in B/S line items could potentially impact EV.
Change in BS line items wouldn't impact EV. Changes in EV will impact BS line items.
I'm pretty brand spanking new to this stuff, but slowly learning. Can anyone walk me through the Goodwill and Shareholder equity calculation please? I want to make sure I'm seeing it the right way.
The book value shareholders equity is the simple Assets - Liabilities = Shareholders Equity (160 - 40 = 120). In the simplest terms, Goodwill is the value of the purchase price over the book value shareholders equity, thus in this case the purchase price is 140 and shareholders equity is 120 thus 140 - 120 = 20
The full solution for part II looks like:
Assets: +160 Acquired Assets +20 Goodwill -40 Cash (used to fund transaction) Total = 140
Liabilities and Shareholders Equity: +40 Acquired Liabilities +60 Debt (used to fund transaction) +40 Additional Stock Issued (used to fund transaction) Total = 140
.
bump - soooo, for (i), is the correct answer $140 or $180?
it should be $180. EV (merged) = EV (Acquirer)+ EV (target) + Premium. For a given purchase price, the EV (merged) firm wouldn't change with method of financing ie. cash/debt/stock.
Premium = $20 EV (target) = Liabilities + Sh. Equity = 40 + 120 = $160 So, EV (merged) increased by 20+160 = $180.
Note: we are assuming that there is no difference between book and market values for debt and equity here. In principle, EV is a market-based concept and has no connection to book value.
Acquisitions by Balance Sheet? (Originally Posted: 09/13/2010)
What does it when companies say, "we made acquisitions through balance sheet"?
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