Complete the following problems from the textbook and submit your answers:
P16.1 Valuing Synergies – Oracle Acquisition of PeopleSoft: Oracle Corporation acquires another business software applications vendor, PeopleSoft, Inc., for approximately $10.3 billion. Oracle expects to achieve various synergies, and its strategy is to continue to support existing versions of PeopleSoft software solutions, create Oracle to replace all of PeopleSoft’s software, and then migrate PeopleSoft customers to Oracle software. Assume that as a result of the merger, the company expects annual selling and administrative costs to decreased by $750 million, annual research and development costs to decrease by $300 million, and annual general and administrative costs to decrease by $200 million. Also, assume that Oracle will be able to migrate about 80% of PeopleSoft’s customers (roughly 10,000) and $3 billion in revenue but that it will lose the remaining 20%. Assume the company will incur $400 million in fees, expenses, and
integration-and synergy-related costs in the first year after the merger and none thereafter. Assume that the appropriate discount rate for discounting synergies is 12%; that the post-merger income tax rate is 40% on all income; that the revenues are expected to grow with inflation, which is expected to be 35 annually; and that variable costs are, on average, 55% of revenues.
Measure the value of the synergies, assuming that the cost synergies begin in the first year after the merger, remain constant for the following two years despite inflation, and then decline at a rate of 10% in perpetuity beginning in the fourth year after the merger. Also assume that the migration of the customers will take place immediately after the merger, and impact the Year 1 cash flows.
P17.9 Exchange Rate Exposure – A company is located in the U.S. (U.S. Sub) and owned by a company in the U.K. (U.K. Parent). U.S. Sub purchases its products from U.K. Parent in transactions denominated in pound sterling. The Year 1 expected cash revenue for U.S. Sub. is $22.5 million. The total cost of the of its products is pound sterling 9.1 million, and it has no other expenses. U.S. Sub has no capital expenditure requirements and is financed with only common equity. For simplicity, assume that no taxes will be levied on the income of U.S. Sub. Assume that the pound sterling discount rate for the pound sterling-denominated free cash flows is 14%, that U.S. Sub has zero expected growth rate in perpetuity, and that the current and expected future exchange rate is 0.5-pound sterling/$. Measure the value of the U.S. Sub in pound sterling.
Measure the value of the firm, assuming the pound sterling/$ exchange rate unexpectedly changed to 0.6.
Measure the value of the firm, assuming the pound sterling/$ exchange rate unexpectedly changed to 0.4.
Measure U.K. Parent’s exposure to the USD.
Measure the change in U.K. Parent’s exposure to the USD if its U.S. Sub purchased its products with transactions denominated in $ at a total cost of $18.2 million rather than from the U.K. Parent.
