CFA Practice Question

There are 86 practice questions for this study session.

CFA Practice Question

Assume firm A is considering to acquire firm B. Financial information for the two firms both prior to and after the merger are shown below.

For bootstrapping to work, the stock price of the acquirer A must be higher than:
A. $20
B. $25
C. $30
Explanation: If the pre-merger stock price is $25, it must issue 1,000,000/25 = 40,000 shares. The total shares outstanding for the combined entity will be 140,000 (100,000 + 40,000). The new EPS will be (150,000 + 50,000) / 140,000 = 1.43, which is less than the pre-merger EPS. So the price has to be higher than $25.

User Contributed Comments 7

User Comment
dimanyc The rule is: for the bootstrapping to work the Acquirer's PE must be higher than the target's. Target's PE is 20, so the acquirer's price must be higher than 30 (which in essence none of the answers corresponds to)
heinzlive I agree, that's why i thought C were the right answer because the share price need not to be higher than 30$. Another explication: the number of shares to give to B of A to get an EPS >= 1,5 is 33.333. In relation to the company value of B of 1 Mio gives the price of 30$.
HenryQ Suppose x is the price of A. A needs 20/x to exchange for one share of B. In order for the merged co. has EPS >=1.5, (150,000+50,000)/(20/x * 50,000 + 100,000)>=1.5. Solve for x we get x>=30.
epiziL2 I figure, that the EPS of the acquiring company is 1.5 while the target is 1. In this case, I assume the acquirer share will be priced more than the target.

So it could be 1.5x20(target price)=30. So its goal is to have price above 30
krisscfa for bootstrapping the EPS of the combined company shud be more than the EPS of the acquirer company
GJCFA Surely if x > 30 then it must be >20 and >25.
sogah good idea epiziL2
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