CFA二级复习冲刺-公司金融

CapitalBudgeting

CapitalBudgeting

CashFlowProjections

ProjectAnalysisandEvaluation

OtherIncomeMeasuresandValuationModels

FlowProjections

■

CashFlowProjections

BasicCapitalBudgetingApproach

NPV〃一

11

InitialOutlay

AnnualAfter-taxOperatingCashFlow

TerminalYearAfter-taxNon-operatingCashFlow

Practice1

Giventhefollowinginformation,whatistheinitialcashoutflow?

Purchasepriceofthenewmachine

ShippingandInstallationcharge

Salepriceofoldmachine

Bookvalueofoldmachine

Inventoryincreasesifinstalled

Accountspayableincreaseifinstalled

TaxrateonCapitalGains

A)-$7,000.

B)-$10,000.

C)-$3,000.

Practice1

Answer:A

-$10,000forpurchasepriceplusshippingandhandlingcosts

+6,000fromcashsaleofoldmachine

-1,000forcapitalgainstaxesonoldmachine(6,000-2,000)*.25

-2,000cashoutflowforchangeinNetWorkingCapital(-3,000

lnv+1,000AP)

=-$7,000

ProjectAnalysisandEvaluation

ProjectAnalysisandEvaluation

LeastCommonMultipleofLivesApproach(最小公倍数法)

EquivalentAnnualAnnuityApproach(等效年金法)

Capitalrationing

EvaluateProjectswithRealOption

Stand-AloneMethods(AssumeTotalRisk)

SensitivityAnalysis

ScenarioAnalysis

MonteCarloSimulationAnalysis

MarketRiskMethods(AssumeOnlySystematicRisk)

luateCapitalProjects

■

EvaluateMutuallyExclusiveProjectswithUnequalLives

LeastCommonMultipleofLivesApproach(最小公倍数法)

•e.g.For2-yearprojectSand3-yearprojectL,replicate

theirCFsina6-yearhorizon.

Ch；TOO60(-100*90)60(100+90)6090

ProjectS1]I.I"-I一1I.

/O123456

CF,-1408070(-140+60)807060

PrqjcclLH----------------1----------------1----------------1----------------1----------------1----------------1-------------

rO123456

EquivalentAnnualAnnuityApproach(等效年金法)

Asimpletwo-stepprocedure:1)findNPV;2)findPMT

ProjectAnalysisandEvaluation

EvaluateProjectswithRealOption

Typesofrealoptions

TimingOptions

SizingOptions

FlexibilityOptions

FundamentalOptions

Evaluateapproaches

Simpleadd:NPV(nooption)-Costofoptions+valueofoptions

Morecomplicated:decisiontreesoroptionpricingmodels

Practice1

Jayco,Inc.isevaluatingtwomutuallyexclusiveinvestmentprojects.

Assumebothprojectscanberepeatedindefinitely.PrinterAhasa

netpresentvalue(NPV)of$20,000overathree-yearlifeand

PrinterBhasaNPVof$25,000overafive-yearlife.Theproject

typesareequallyriskyandthefirm'scostofcapitalis12%.Whatis

theequivalentannualannuity(EAA)ofProjectAandB?

ProjectAProjectB

A)$8,327$6,935

B)$8,327$5,326

C)$7,592$6,935

Practice1

Answer:A

PrinterA:PV=20,000,N=3,I=12,FV0,ComputePMT=8,327

PrinterB:PV=25,000,N=5,1=12,FV0,ComputePMT=6,935.

(Note:takethehighestEAA,PrinterAithisexample)

Practice2

TakamuraMotorsisevaluatinganewpieceofequipmentthatwill

automaticallyinstallpowerwindowsincarscomingoffthe

productionline.Theequipmentcostis$3.5million,andthefirm

estimatesthatthepresentvalueoftheannualcostsavingsfrom

installingtheequipmentis$2.8million.Theproductionmanageris

alsoconsideringpurchasingamodulethatwillallowtheequipment

tobeusedforTakamura'sSUVproduction.Theadditionalmodule

representsarealoptionwithacostof$1.1milliondollars.The

productionmanagerestimatesthataddingthemodulewouldgive

Takamuracostsavingsofanadditional$2.0million.

Practice2

Whatistheprofitabilityoftheprojectbeforeandafter

consideringtherealoption?

BeforeAfter

A)-$700,000$200,000

B)$1,300,000$200,000

C)-$700,000$1,800,000

Practice2

Answer:A

Theprofitabilityoftheprojectbeforeconsideringtherealoptionis

thedifferencebetweenthecostsavingsandthecostofthe

equipment,or2.8-3.5=-$700,000.

Theprofitabilityoftheprojectafterconsideringtherealoption=

NPV(basedonprojectalone)-costofoption+valueofoption.

Thecostoftheoptionis$1.1million,whilethevalueoftheoption

is$2.0million.Profitabilityafteroption=-0.7-1.1+2.0=$200,000.

IncomeMeasuresandValuationModels

■

OtherIncomeMeasuresandValuationModels

EconomicIncome

EconomicProfit

Residualincome

ClaimsValuation

EconomicIncome

EconomicIncome=Cashflow+Changeinmarketvalue

orEconomicincome=Cashflow-Economicdepreciation

Difference

BeginningMarketValue-BeginningBookValue-

Depreciation

EndingBookValue

Alreadydeducted

Interest

interestexpensetodebt

Expense

holders

MarketValuepPVofFutureCashFlow

IncomeMeasuresandValuationModels

■

EconomicProfit

EP=NOPAT-$WACC

NOPAT=netoperatingprofitaftertax=EBIT(1-taxrate)

$WACC=WACCXCapital

Marketvalueadded(MVA)isNPVbasedoneconomicprofit

MVAVt

V\1WACC

Focusonreturntoallinvestors

Residualincome

RIfNI-r^-I

Nlt=netincomeduringperiodt

rQt_fequitychargeforperiodt

=requiredreturnonequityXbeginningbookvalueofequity

Rlt

NPV

1

re

Focusonreturntoequityholders

Practice1

FirehouseCompanyisinvestingina$300millionprojectthatis

beingdepreciatedonastraight-linebasistozerooveratwo-year

lifewithnosalvagevalue.Theprojectwillgenerateoperating

earningsof$130millioneachyearforthetwoyears.The

Firehouse'sweightedaveragecostofcapitalandrequiredrateof

returnfortheprojectis10%.Firehouse'staxrateis30%.Whatis

Firehouse'seconomicprofitforyears1and2?

Year1Year2

A)-$20-$20

B)$42$22

C)$61$76

Practice1

Answer:C

Notethatthisquestionisaskingabouteconomicprofit,not

economicincome.

Economicprofit=NOPAT-$WACC=EBIT(l-T)-$WACC

NOPAT=EBIT(1-TaxRate)=$130(1-0.3)=$91

$WACCYear1=0.10*$300=$30

$WACCYear2=0.10*$150=$15

Economicprofit(Year1)=$91-$30=$61

Economicprofit(Year2)=$91-$15=$76

Practice2

FirehouseCompanyisinvestingina$300millionprojectthatis

beingdepreciatedonastraight-linebasisoveratwo-yearlifewith

nosalvagevalue.Theprojectwillgenerateoperatingearningsof

$130millioneachyearforthetwoyears.Therequiredrateof

returnfortheprojectis10%andFirehouse'staxrateis30%.What

isFirehouse'seconomicincomeforyears1and2?

Year1Year2

A)$61$76

B)-$20-$20

C)$42$22

Practice2

Answer;C

First；determinetheafter-taxcashflowforYears1and2as:

operatingincome(1-T)+depreciation=$130(1-0.30)+150=$241

Next,determinethecurrentmarketvalueas:(241/1.102)+(241/

1.101)=$418;marketvalueafteryear1=(241/1.101)=$219

Year1

BeginningMarketValue$418

EndingMarketValue$219

ChangeinMarketValue-199-219

After-taxcashflow$241$241

Economicincome$42$22

CapitalStri

taiStructure

CapitalStructure

ModiglianiandMillerTheory

StaticTrade-offTheory

iglianiandMillerTheory

ModiglianiandMillerTheory&Trade-offTheory

ModiglianiandMillerAssumptions

MMPropositionI&II(withouttaxes)

MMPropositionI&II(withtaxes)

ImpactfromVariousCosts

CostsofFinancialDistress

Agencycosts

CostsofAsymmetricInformation

OptimalCapitalStructure

iglianiandMillerTheory

MMTheory-PropositionI&II(withouttaxes)

MMPropositionI(withouttaxes):CapitalStructureIrrelevance.

V

Levered-Vunlevered

Changingthecapitalstructuredoesnotaffectvalue.

MMPropositionII(withouttaxes):HigherFinancialLeverage

RaisestheCostofEquity.

e人ro

Thecostofequityisalinearfunctionofthecompany's

debt/equityratio.

iglianiandMillerTheory

MMTheory-PropositionI&II(withtaxes)

MMPropositionI(withtaxes):

VLevered=V(jnlevered+tD

(t=marginaltaxrate,D=debtvalue)

MMPropositionII(withtaxes):

7ro(尸o〃)00(A

Company'soptimalcapitalstructureisalldebt(100%Debt).

WACCforthecompanywithdebtmustbelowerthanthatfor

theall-equitycompany.(rwaCc<r0)

iglianiandMillerTheory

OptimalCapitalStructure

Statictrade-offtheoryofcapitalstructure

VfVtD-PV(Costsoffinancialdistress)

MarketValueoftheFirm

Maximum

Valueoflinn

PVofCosts

ofFinancial

・・・・・

一—二-

i*Vof1merest

1ValueofLeveredFirm

laxShields

Valueof

Unlevered

Firm

Dynamictarget

OptinwlDcbvl^quityRatio

Debt/Equit>'

iglianiandMillerTheory

OptimalCapitalStructure

Statictrade-offtheoryofcapitalstructure

；

rwAcc=(D/V)r(-t)+(E/V)re

OptimalDcbt/EquityRatio

Debt/Equity

iglianiandMillerTheory

OptimalCapitalStructure

Reasonsonactualcapitalstructurefluctuatefromitstarget

Managementmayexploitshort-termopportunitiesinoneor

anotherfinancingsource;

Market-valuefluctuationscontinuouslyaffectthecompany's

capitalstructure;

Itmaybeimpracticalandexpensive(becauseofflotation

costs)foracompanytocontinuouslymaintainitstarget

structure.

Practice1

Whichofthefollowingstatementsmostcorrectlycharacterizes

MMproposition2?(withouttax)

A)Firmswillseektousedebtfinancinguptothepointthatthe

valueofthetaxshieldbenefitisoutweighedbythecostsof

financialdistress.

B)Increasingtheuseofrelativelylowercostdebtcausesthe

requiredreturnonequitytoincreasesuchthattheoverallcost

ofcapitalisunchanged.

C)Regardlessofhowthefirmisfinanced,theoverallvalueof

thefirmandaggregatevalueoftheclaimsissuedtofinanceit

remainthesame.

Practice1

Answer:B

MMproposition2statesthatincreasingtheuseofrelatively

lowercostdebtcausestherequiredreturnonequityto

increasesuchthattheoverallcostofcapitalisunchanged.

Practice2

Comment1:Ifweremovetheassumptionofnotaxesfrom

ModiglianiandMiller'stheoryregardingcapitalstructure,andifthe

firmholdssomeproportionofdebt,increasesinthecorporatetax

ratewillincreasethevalueofthefirm.

Comment2:Ifwealsoincludethecostsoffinancialdistressin

ModiglianiandMiller'sassumptions,theoptimalcapitalstructure

willnotcontainanydebtfinancing.

Withrespecttothesetwocomments:

A)botharecorrect.

B)bothareincorrect.

C)onlyoneiscorrect.

Practice2

Answer:C

Thefirstcommentiscorrect.Thetaxdeductibilityofinterest

paymentsprovidesataxshieldthataddsvaluetothefirm.The

higherthetaxrate,thegreaterthevalueofthetaxshieldandthe

valueofthefirm,allelseequal.

Thesecondcommentisincorrect.Ifthecostsoffinancialdistress

arealsoincludedinMM'sassumptions,wegetthestatic-tradeoff

theory,wherethefirmwillhavedebtinitscapitalstructureupto

thepointwherethemarginalcostoffinancialdistressexceedsthe

marginalvalueprovidedbythetaxshield.

DividendsandSh

Repurchases^Hnal

Z\o\

DividendsandShareRepurchases：Analysis

DividendsandShareRepurchases:Analysis

DividendPolicyandCompanyValue:Theory

FactorsAffectingDividendPolicy

PayoutPolicies

AnalysisofDividendSafety

EffectsofShareRepurchase

DividendPolicyandCompanyValue：Theory

DividendPolicyandCompanyValue:Theory

Dividendpolicydoesnotmatter(MM)

Itdoesmatter:bird-in-handargument&taxargument

Othertheoreticalissues

Informationsignaling

Clienteleeffect

Agencycosts

DividendPolicyandCompanyValue：Theory

Informationsignaling

Dividenddeclarationresolvesinformationasymmetry

initiationsorincreasesconveypositiveinformation

omissionsorreductionsconveynegativeinformation

Companiesthatconsistentlyincreasetheirdividendshave:

dominantornichepositionsintheirindustry

globaloperations

relativelyhighreturnsonassets

relativelylowdebtratios

DividendPolicyandCompanyValue：Theory

Clienteleeffect

P”,PxDfjtimpliesthreerelationships:

IfTgTCGtheshare'spriceshoulddropbytheamountofthe

dividendwhenthesharegoesex-dividend.

IfTCGtheshare'spriceshoulddropbylessthanthe

amountofthedividendwhenthesharegoesex-dividend.

IfT6TCGtheshare'spriceshoulddropbymorethanthe

amountofthedividendwhenthesharegoesex-dividend.

Practice1

Whichofthefollowingstatementsaboutdividendpolicyand

capitalstructureismostaccurate?

A)Apersonwhobelievesintheclienteleeffectandaproponentof

the"bird-in-hand"theorywouldhavesimilarviewsondividend

payoutpolicy.

B)Investorsviewastockrepurchaseasapositivesignalandastock

issueasanegativesignal.

C)MonteCarlosimulationisusedtoestimatemarketrisks;

scenarioanalysismeasuresstand-alonerisk.

Practice1

Answer:B

Investorsviewastockrepurchaseasapositivesignalandastock

issueasanegativesignal.Arepurchasemaymeanthat

managementbelievesthestockisundervalued.

Theclienteleeffectsuggeststhatdifferentgroupsofinvestorswant

differentdividendlevels(oftenbasedontaxstatus),andthrough

thelawofsupplyanddemand,investorswillselectcompaniesthat

meettheirneeds.

rsAffectingDividendPolicy

-------■

Investmentopportunities

Expectedvolatilityoffutureearnings

Financialflexibility

Taxconsiderations

Flotationcosts

Contractualandlegalrestrictions

rsAffectingDividendPolicy

------■

Taxconsiderations

Doubletaxationsystem

Dividend=NIpretax*Payout%(1-tcorporate)(l-tindividualondividend)

)tjndividual

Effectivetaxrate=tCOrporate+(l-tcorporateondividend

Dividendimputationtaxsystem

Dividend=NIpretax*Payout%(l-tindividualondividend)

Split-ratetaxsystem

Dividend=NIpretax*Payout%*(Incorporateondividend)(1"

Practice1

InternationalPulp,aSwiss-basedpapercompany,hasannualpretax

earnings(inSwissfrancs)ofSF600.Thecorporatetaxrateon

retainedearningsis55%,andthecorporatetaxratethatappliesto

earningspaidoutasdividendsis30%.Furthermore,International

Pulppaysout30%ofitsearningsasdividends,andtheindividual

taxratethatappliestodividendsis40%.

Whatistheeffectivetaxrateoncorporateearningspaidoutas

dividends?

A)70%.

B)48%.

C)58%

Practice1

Answer:A

Thisisanexampleofasplit-ratecorporatetaxsystem.The

calculationoftheeffectivetaxrateonaSwissfrancof

corporateincomedistributedasdividendsisbasedonthe

corporatetaxratefordistributedincome.

Theeffectivetaxrateonincomedistributedasdividends=

30%+[(1-30%)X40%]=58%.

PayoutPolicies

PayoutPolicies

TypesofDividendPolicies

StableDividendPolicy

ConstantDividendPayoutRatioPolicy

ResidualDividendPolicy

DividendV.S.ShareRepurchase

GlobalTrendsinPayoutPolicy

PayoutPoliciesandAnalysisofDividendSafety

DividendPayoutPolicies

StableDividendPolicy

•Mostcommon,basedonlong-termforecastofearnings

•Expecteddividend=Previousdividend+(Expectedearningsx

Targetpayoutratio-Previousdividend)xAdjustmentfactor)

•Exampleofstabledividendpolicy

CompanyAhadearningsof$2.00ashareandpaidadividedof

$0.40.Forthecurrentyear,thecompanyanticipatesearningsof

$2.80.Ithasa30%targetpayoutratioandusesa5yearperiodto

adjustthedividend.Computetheexpecteddividendforthecurrent

year.

PayoutPoliciesandAnalysisofDividendSafety

DividendPayoutPolicies

SolutionfortheexampleofStableDividendPolicy

•Expecteddividend=Previousdividend+(Expected

earningsXTargetpayoutratio-Previousdividend)X

Adjustmentfactor)

=$0.4+[($2.8x0.3-$0.4)x(1/5)]

=$0,488

•Althoughearningsareexpectedtoincreaseby40%,the

increaseinthedividendwouldbe22%.

PavoutPoliciesandAnalvsisofDividendSafety

DividendPayoutPolicies

ConstantDividendPayoutRatioPolicy

•Adividendpayoutratiodecidedonbythecompanyis

appliedtocurrentearningstocalculatethedividend.

•Infrequentlyused,fluctuatewithshort-termearnings.

ResidualDividendPolicy

•Rarelyusedbecauseittypicallyresultsinhighlyvolatile

dividendpayments.

•Dividend=Earnings-(CapitalspendingneedsxEquity%)

融资需求E/(D+E)

AnalysisofDividendSafety

AnalysisofDividendSafety

,dividends

Dividendpayoutratio=--------------

Dividendcoverageratio=

FCFE

FCFEcoverageratio=

dividends+sharerepurchases

Highcoverageratiomayindicatesafetybutnotalways

Warningsignalsfordividendcut:

Negativeexternalstockmarketindicators

Extremelyhighdividendyields

Practice1

Dividendsafetyismostlikelyevidencedby:

A)IncreaseindividendandFCFEcoverageratios

B)IncreaseindividendcoverageratiobutnotbyFCFEcoverage

ratio.

C)IncreaseinFCFEcoverageratiobutnotbedividendcoverage

ratio

Answer:A

BothdividendandFCFEcoverageratiosareindicatorsofdividend

safety.FCFEcoverageissimplymorecomprehensivemeasureand

takesintoaccountallcashdistributedtoshareholders.

EffectsofShareRepurchase

Conceptofsharerepurchase

Sharerepurchase:atransactioninwhichacompanybuysback

itsownshares.

•Canbeviewedasanalternativetocashdividends.

Treasuryshares/stocks:sharesthathavebeenissuedand

subsequentlyrepurchased.

•Notconsideredfordividends,voting,orcomputingEPS.

EffectsofShareRepurchase

Sharerepurchasemethods

Buyintheopenmarket

•Buyatmarketpriceintheopenmarket.

•Flexibilityintimingandamount.

Tenderoffer

•Fixedpricetenderoffer:buyafixednumberofsharesata

fixedprice,typicallyatapremiumtomarket.

•Dutchauction:useauctiontodeterminethelowestprice.

Directnegotiation

•Typicallyatapremiumtomarket.

sofShareRepurchase

EffectonEPS

Repurchasedwithexcesscash(financedinternally)

•Balancesheet

Asset(cash)andequitywilldecline;leverage(debt

ratio)willincrease.

Incomestatement

EPSwillincrease(onlyifthefundusedto

repurchasedonotearntheircostofcapital).

sofShareRepurchase

EffectonEPS(Cont'd)

Repurchasedwithdebt(financedexternally)

•Balancesheet

Debtincreaseandequitydecline,leverage(debtratio)will

increase(evenmorethanrepurchasebyexcesscash).

Incomestatement

Ifearningyield>after-taxcostofdebt,EPSwillincrease.

Ifearningyield<after-taxcostofdebt,EPSwilldecrease.

sofShareRepurchase

EffectonBVPS

Sharerepurchasewillresultbookvaluepershare(BVPS):

Decrease,iftherepurchaseprice>theoriginalBVPS.

Remainthesame,iftherepurchaseprice=theoriginal

BVPS.

Increase,iftherepurchaseprice<theoriginalBVPS.

DividendsVs.ShareRepurchase

DividendsVs.Sharerepurchase

Assumingthetaxtreatmentofthesetwomethodsis

thesame,asharerepurchasehasthesameimpacton

shareholderwealthasacashdividendpaymentofan

equalamount.

CorporatePerforman

Governance,andR'

CorporatePerformance,Governance,andBusinessEthics

CorporatePerformance,Governance,and

BusinessEthics

StakeholdersandCorporatePerformance

AgencyTheory

RootsofUnethicalBehavior

StakeholdersandCorporatePerformance

StakeholdersandCorporatePerformance

Internal

External

ContributionsStakeholders

StakeholdersContributions

CustomersStockhoders

SuppliersThem

CreditorsCompanyManagers

GovernmentsBoardmembers

Unions

LocalcommunitiesInducements

Inducements

Generalpublic

EthicsandStrategy

PhilosophicalApproachestoEthics

FriedmanDoctrine

•onlyonesocialresponsibilityofbusiness:increaseprofits

Utilitarian

•greatestgoodforthegreatestnumberofpeople

KantianEthics

•peoplehavedignityandneedtoberespectedassuch

RightsTheories

•humanbeingshavefundamentalrightsandprivileges

JusticeTheories(justicedecidedundera"veilofignorance")

r

CorporateGovernance

CorporateGovernance

ObjectivesandGuidingPrinciples

FormsofBusinessandConflictsofInterest

AgencyRelationships

Environmental,Social,andGovernanceRiskExposure

ValuationImplicationsPosedbyWeakSystems

FormsofBusinessandConflictsofInterest

FormsofBusinessandConflictsofInterest

CharacteristicSoleProprietorshipPartnershipCorporation

OwnershipSoleownerMultipleownersUnlimitedownership

LegallequireinentsFew;entityeasilyFew;entityeasilyNunieroiislegal

andregulationfbnuedfbnnedrequiiements

LegaldistinctionNoneNoneLegalseparation

betweenownerandbetweenownersand

businessbusiness

LiabilityUnlimitedUnlimitedbutLimited

sharedamong

partners

AbilitytoraisecapitalVeiylimitedLimitedNearlyunliniited

TransferabilityofNon-tiansleiableNon-tiansfeiableEasilytiaiisferable

ownership(exceptbysaleofentire

business)

OwnerexpertiseinEssentialEssentialUmiecessaiy

business

AgencyRelationships

AgencyRelationships

Areasofprimaryconcern:

Managersvs.shareholders

Directorsvs.shareholders

BoardofDirectors

Responsibility

QualificationandcorecompetenciesofBODs

Practice1

WhichofthefollowingscenariosisNOTanexampleofa

principal-agentproblem?

A)Aseniormanageralsoservesasadirectorontheboardof

anothercompany.

B)Topmanagementisawardedlargeamountsofexecutive

stockoptions.

C)Aboardmemberalsoservesasaconsultanttothe

company.

Practice1

Answer:A

Aseniormanagermayserveontheboardofanother

companysolongastherearenoothercircumstancesthat

maycompromiseobjectivity.Forexample,problemsariseif

theboardsoftwocompaniesareinterlinkedbywayof

managersofCompanyAservingontheboardofCompany

B,andmanagersofCompanyBservingontheboardof

CompanyA.

MergersandAQI

MergersandAcquisitions

MergersandAcquisitions

M&ADefinitionandClassifications

Motivations

TransactionCharacteristics

TakeoversandRegulation

MergerAnalysis

M&ADefinitionandClassifications

M&ADefinitionandClassifications

Acquisition

Merger

StatutoryMerger

SubsidiaryMerger

Consolidation

Horizontalmerger

Verticalmerger

Conglomeratemerger

M&AMotivations

M&AMotivations

Synergy

Internally(organicgrowth)orexternalgrowth

Increasingmarketpower

Acquiringuniquecapabilitiesandresources

Diversification

Bootstrappingearnings

Managers'personalincentives

Taxconsiderations

Unlockinghiddenvalue

Cross-bordermotivations

M&AMotivations

Bootstrappingearnings

Whenacompany'searningsincreaseasaconsequence

ofthemergertransactionitself(ratherthanreal

benefits),asanillusionofsynergiesorgrowth

NewEPS斤Totalearning/Totalnumberofshares

=(EarningA+EarningT)/(#ShareA+MVT/SA)

[ample1：BootstrappingEarnings

WeaversannouncedtoacquireKnitters,calculatenewEPS

Weavers

Weavers,Inc.

PostMerger

Price$60.00$60.00

EPS$4.00$3.00

P/E1510

#Shares100,000125,000

Earnings$400,000$150,000$550,000

Market$6,000,000$1,500,000$7,500,000

Cap

Practice1

UsethefollowingdatatocalculatetheEPSofthecombinedfirm

followingthemerger.TopekaIndustrieshasEPSof$4.00,amarket

priceof$90per