The Jordan Corporation is a manufacturer of heavy-duty trucks. Because of a low internal profitability rate and lack of favorable investment opportunities in the existing line of business, Jordan is considering merger to achieve more favorable growth and profitability opportunities. It has made an extensive search of a large number of corporations and has narrowed the candidates to two firms.
The Konrad Corporation is a manufacturer of materials handling equipment and is strong in research and marketing. It has had higher internal profitability than the other firm being considered and has substantial investment opportunities.
The Loomis Company is a manufacturer of food and candies. It has a better profitability record than Konrad. Data on all three firms are given in Table Q20.3. Additional information on market parameters includes a risk-free rate of 6% and an expected return on the market, E(R„,), of 11%. Each firm pays a 10% interest rate on its debt. The tax rate, of each is 40%. Ten years is estimated for the duration of supernormal growth.
a) Prepare the accounting balance sheets for the three firms.
b) If each company earns the before-tax r on total assets in the current year, what is the net operating income for each company
c) Given the indicated price/earnings ratios, what is the market price of the common stock for each company?
d) What will be the immediate effects on the earnings per share of Jordan if it acquires Konrad or Loomis at their current market prices by the exchange of stock based on the current market prices of each of the companies?
e) Compare Jordan's new beta and required return on equity if it merges with Konrad with the same parameters that would result from its merger with Loomis.
f) Calculate the new required cost of capital for a Jordan-Konrad combination and for a Jordan-Loomis combination, respectively.
g) Compare the increase in value of Jordan as a result of a merger at market values with the cost of acquiring either Konrad or Loomis if the combined firms have the following financial parameters:
