What's the best answer here, and why?
Company A acquires Company B for an Equity Purchase Price of $500, and it issues $250 of Common Stock and $250 of Debt to fund this deal. Company B’s Assets (all of which are “operational”) are worth $350, and it has no Liabilities. Of the purchase premium, $100 is allocated to Goodwill, and $50 is allocated to Other Intangible Assets. In the first year following the deal, Company A generates a total of $100 in Net Income, and it issues $50 in Common Dividends to its Common Shareholders and $50 in Preferred Dividends to its Preferred Stockholders.
How do Company A’s Current Equity Value and Current Enterprise Value change from beginning to end?
a. Current Equity Value is up by $250, and Current Enterprise Value is up by $500.
b. Current Equity Value is up by $300, and Current Enterprise Value is up by $500.
c. Current Equity Value is up by $500, and Current Enterprise Value is up by $350.
d. Current Equity Value is up by $250, and Current Enterprise Value is up by $350.
Assuming fair value of B is 400 given 50 of PPA is non-goodwill. Assuming no synergies
After deal, EV increases by 400, EqV increases by (400-250 debt issued) = 150
One year on but before dividends paid, EV still up 400 (assuming no growth in earnings…), EqV up an additional 100 (net income) so EqV has increased by 250 since pre deal
When divis paid (I.e. ex-div) EqV falls by 100 so EqV is 150 higher than pre deal.
But based on your answers it looks like you need to assume that fair value + synergies of B = 500 in which case you end up with EV up 500,EqV up 250…
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