Majan Group is considering the acquisition of Mazvon Company in which Mazoon Company would receive OMR 66.50 for each share of its common stock. The Majan Giroup does not expect any change in its price/earnings multiple after the merger. Majan Group is considering either undertaking the acquisition either through a stock for stock transaction, an all-cash transaction or in a stock and cash transaction. Majan Group intends to borrow the cash involved in the transaction in an interest only loan at an annual rate of 6% with the principal to be repaid as a in 15 years. If the stock and cash transaction is to be considered, Majan Group will pay a purchase price of one share of its stock plus a cash amount equal the difference between the offer share price and the target's share price. The marginal tax rate of Majan Group is 40%. Majan Group Mazoon Company Earnings available for OMR 184,450 OMR 38,150 common stock Number of shares of 81,900 24,500 common stock outstanding Market price per share OMR 63.25 OMR 49.25 Using the information provided above on these two firms and showing your work, calculate the following: answer the following questions: What is the purchase price premium in this acquisition? (hint: as a percentage a. of the target's price) b. merger ngures, what type of transaction should Majan Group consider? (show all your work) Using the post-merger share price and post-merger EPS compared to the pre-

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter22: Mergers And Corporate Control

Section: Chapter Questions

Problem 5P

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Question

Majan Group is considering the acquisition of Mazvon Company in which Mazoon Company
would receive OMR 66.50 for each share of its common stock. The Majan Giroup does not
expect any change in its price/earnings multiple after the merger. Majan Group is considering
either undertaking the acquisition either through a stock for stock transaction, an all-cash
transaction or in a stock and cash transaction. Majan Group intends to borrow the cash involved
in the transaction in an interest only loan at an annual rate of 6% with the principal to be repaid
as a in 15 years. If the stock and cash transaction is to be considered, Majan Group will pay a
purchase price of one share of its stock plus a cash amount equal the difference between the offer
share price and the target's share price. The marginal tax rate of Majan Group is 40%.
Majan Group
Mazoon Company
Earnings available for
OMR 184,450
OMR 38,150
common stock
Number of shares of
81,900
24,500
common stock
outstanding
Market price per share OMR 63.25
OMR 49.25
Using the information provided above on these two firms and showing your work, calculate the
following: answer the following questions:
What is the purchase price premium in this acquisition? (hint: as a percentage
a.
of the target's price)
b.
merger ngures, what type of transaction should Majan Group consider? (show all your
work)
Using the post-merger share price and post-merger EPS compared to the pre-

Expert Solution

INTRODUCTION

PURCHASE PREMIUM:

Purchase price premium is the difference between the acquisition charge paid for a target company in ground of merger or acquisition in the assessed market value.

The purchase premium is also referred as the excess amount paid for the agreeable fair value of all definite assets paid by an acquiring company.

It is treated as a goodwill and is sustained on the acquirer’s balance sheet after the merger or acquisition period as an intangible asset.

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