1. Evaluate the impact of the following proposed mergers upon the post-merger earnings per share of the combined organization:
a. An acquiring bank reports that the current price of its stock is $25 per share and the bank earns $6 per share for its stockholders; the acquired bank's stock is selling for $18 per share and that bank is earning $5 per share. The acquiring institution has issued 200,000 shares of common stock, whereas the acquired institution has 50,000 shares of stock outstanding. Stock will be exchanged in this merger transaction exactly at its current market price. Most recently, the acquiring bank turned in net earnings of $1,200,000 and the acquiring banking firm reported net earnings of $250,000. Following this merger, combined earnings of $1,600,000 are expected.
b. Suppose everything is the same as described in part a; however, the acquired bank's shares sell for $36.00 per share rather than $18.00. How does this affect the post-merger EPS?
2. Under the following scenarios, calculate the merger premium and the exchange ratio:
a. The acquired financial firm's stock is selling in the market today at $14 per share, while the acquiring institution's stock is trading at $20 per share. The acquiring firm's stockholders have agreed to extend to shareholders of the target firm a bonus of $5 per share. The acquiring firm has 30,000 shares of common stock outstanding, and the acquiring institution has 50,000 common equity shares. Combined earnings after the merger are expected to remain at their pre-merger level of $1,625,000 (where the acquiring firm earned $1,000,000 and the acquired institution $625,000). What is the post-merger EPS?
b. The acquiring financial-service provider reports that its common stock is selling in today's market at $30 per share. In contrast, the acquired institution's equity shares are trading at $20 per share. To make the merger succeed, the acquired firm's shareholders will be given a bonus of $20 per share. The acquiring institution has 120,000 shares of common stock issued and outstanding, while the acquired firm has issued 40, 000 equity shares. The acquiring firm reported pre-merger annual earnings of $850,000, and the acquired institution earned $150,000. After the merger, earnings are expected to decline to $900,000. Is there any evidence of dilution of ownership or earnings in either merger transaction?
3. Johanna International Mercantile Corporation has made a $15 million investment in a stamping mill located in northern Germany and fears a substantial decline in the euro's spot price from $1.56 to $1.50, lowering the value of the firm's capital investment. Johanna's principal U.S. bank advises the firm to use an appropriate option contract to help reduce Johanna's risk of loss. What currency option contract would you recommend? Explain why the contract you selected would help to reduce the firm's currency risk.
4. Ebi International Bank of Japan hold U.S. dollar-denominated assets of $475 million and dollar-denominated liabilities of $469 million, has purchased U.S. dollars in the currency markets amounting to $75 million, and sold U.S. dollars totaling $50 million. What is Ebi's net exposure to risk from fluctuations in the U.S. dollar relative to the bank's domestic currency? Under what circumstances could Ebi lose if dollar prices change relative the yen?
5. Suppose that Canterbury Bank has a net long position in U.S. dollars of $12 million, dollar-denominated liabilities of $125 million, U.S. dollar purchases of $300 million, and dollar sales of $220 million. What is the current value of the bank's dollar-denominated assets? Suppose the U.S. dollar's exchange value rises against the pound. Is Canterbury likely to gain or lose? Why?