FIN 461 Exam 2 Study Guide | Questions and Answers

FIN 461 Exam 2 Study Guide | Questions and Answers
IRR - -0 = (purchase price) + (Exit Equity) / (1 + IRR)^years

-Unlevering Beta - -(Levered Beta) / (1 + (1-Tax Rate)(D/E) )

-Relevering Beta - -(Unlevered Beta) * (1 + (1-Tax Rate)(D/E))

-How to get to FDSO using Treasury Method (for insider owned options) - -Find cash from
options exercised
Shares repurchased = Cash / Purchase price
New shares = Options Exercised - repurchased
FDSO = BSO + New Shares

-FDSO using net settlement method (for convertible bonds) - -Conversion Ratio =
notational value / conversion price
Conversion ratio * offer price = total value of convert
- notational par value (conversion price * conversion ratio)
= Excess over par value (settled with stock)
New shares = excess / share price
FDSO = Basic shares + FDSO from treasury method + shares from this method

-Accretion/Dilution with shares exchanged - -Offer Value = FDSO * offer price
Shares Exchanged = offer value / acquirer share price
Post deal shares outstanding = acquirer previous shares + shares exchanged

W/O Deal EPS: = acquirer eps / shares
W/Deal EPS = (combined EPS + synergies) / post deal shares outstanding

-Factors that lead to dilution - -- target company has negative income
- Target P/E > Acquirer P/E
- Transaction results in a significant amount of intangible assets to amortize
- Increased interest expense
- decreased interest income
- low (negative) synergies

-Which methodology do companies pick to calculate FDSO? - -They have to see if they are
able to pay the upfront cash from the net share method.

If they use if converted they are going to dilute the company much more than with the net
shares method.

Net share should have negative impact on reported earnings.