Hi, can you help me with this one please
A buys B at a 20% premium. The transaction is 50% equity-financed.
What is the enterprise value, PCV and net debt of the combined company?
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Assuming the 20% premium is on EqV and not TEV, then: 50 * 1.2 = 60 to pay out the equity holders. Assuming that acquirer (A) will have to purchase the target's (B) debt: 60 + 50 = 110 total price to pay, half through debt and half through equity.
Mechanics:
55 in Debt pays off the entire debt of the target with 5 left.
60 (5 debt + 55 equity) pays off the entire equity plus premium. The premium is 10 above market value. Hence, the total firm makeup:
EqV: 100 + 50 - 10 (premium) - 5 (debt to pay off equity) = 135
(Net) Debt: 40+55 = 95
EV = 230
The TEV decreases by the premium.
Is it merely a coincidence that you can simply add up both companies EV and subtract the 20% premium (50*.2=10) and arrive at the new EV
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