CorpFin Qs

following, default, expected, why, only

I know these may sound silly but please help me clarify the following points:

1. Under MM, increased used of debt is not associated with an increased expected default rate, right? Then why does it increase the cost of equity?

2. Do post-offer defenses increase acquisition cost or only pre-offer ones do?

3. When a high-growth firm acquires a low-growth firm, per-share profits are temporarily boosted, thus lowering future growth prospects on a per-share basis. Please explain this.

4. If after the merger, the cost of financing is lower, why would that decrease the share price?

5. ATCO's earnings last year was $2.25 per share and dividend was $.55 per share. The firm has a 25% target payout ratio and plans to bring the dividend up to the target payout ratio over three years. While next year's earnings are expected to increase 54%, why would next year's payout ratio actually decrease? Can you use common sense to answer this without calculation?

Thanks a lot!

BelalM

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发表于 2011-7-11 19:37 | 只看该作者

As you numbered it:
1. You are essentially increasing risk of equity stakeholders because you are allocating a larger amount of cash flow to debt holders, and therefore would require a higher return.
2. All defensive and anti-takeover mechanisms would deter an investor from acquiring a particular company and therefore would increase the cost of the transaction. Post-offer mechanisms would typically cost more than Pre-offer mechanisms.
3. EPS bootstrapping effect. Economic value does not increase, despite the accretion in EPS because operating cash flows do not fundamentally change unless synergies are realized by the firm.
4. Cost of equity is higher than cost of debt. As such, even if earnings yield is higher than the cost of debt, that does not particularly mean that the earnings yield is higher than the required return on equity.
5. Because of the smoothing effect on the dividend yield. You are actually tagging on the increase in dividends to the long-term (i.e., 3 years in this case) payout ratio target. Because of the increase in earnings, the payout ratio temporarily dips as it tries to catch up to the target over the time horizon being contemplated.

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thecfawannabe

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发表于 2011-7-11 19:37 | 只看该作者

Wow you guys are really good!
Thanks all for the explanations!

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