this is mistake I made need someone to improve gradeTo calculate the recovery ratios, we need the market value of equity of the reorganized firm. To this end, we need to discount the FCFs in Tab 3 using the WACC formula. (-20) The WACC formula for the reorganized firm must reflect the capital structure of the reorganized firm, rather than the old, distressed, firm. Some security classes have recovery rates that are below 100%. Generally, that means that these security classes have a strong incentive not to accept the proposal. The only way they would be willing to accept less than 100% is if they are fairly certain they can not get more from other alternatives such as: liquidation, Chapter 11 (bankruptcy), or sell itself (whole or in part). With the data we have you could look into the liquidation option and selling-itself option (creating a valuation multiple from the comparables). For the Chapter 11 option you could envision a similar proposal to the out-of-court one, except it will only need 2/3 approval rate as opposed to 100%. (-5) Part II In the absence of synergies, the merged firm will have a market cap equal to the current market cap of the two firms: $5.6×19.9 + $0.33X20.8 = $118.3. Based on the proposed exchange ratios, the merged firm will have shares outstanding of 19.9×1 + 20.8×0.1 = 21.98. Thus, the new share price of the merged firm is $5.38. At this price, there will be a wealth transfer from Gelato R Us (5.38×1 – 5.6 < 0) to Gelato Blues (5.38×0.1 – 0.33 > 0). (-5) To value the synergies from cost and revenues savings, we generally use a WACC formula that reflects the capital structure of the new firm (which is going to be the same with Gelato R US current capital structure). In particular, the equity beta of the new firm should be similar to the equity beta of Gelato R US. (-5) To value the deal costs (one-time charges), we generally use the yield of the treasury bond with a matching maturity (5 years) if available, or next maturity up, namely 10-year treasury. (-5) To see if the deal creates value for the firms, we need to figure out the equity value of the new firm. The deal increases the value of the assets of the new firm (relative to asset values of the firms prior to the deal) by the value of synergies net of deal costs. From this amount, we calculate the increase in equity for the new firm by subtracting the new debt that would be supported by the increase in assets in the new firm from the increase in assets in the new firm. The new debt can be calculated by multiplying the debt-capitalization ratio of Gelator R US with the increase in assets calculated above. Once we have the increase in equity for the new firm, we added to the market capitalization of the two firms prior to the deal to obtain the market equity of the new firm. We divide this amount by the shares outstanding to get the share price of the new firm. To see if the deal creates value, we compare this new share price with the legacy share price, after factoring in the exchange ratio. (-7)”
