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Exam 23: Mergers,Acquisitions,and Restructuring

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Question 1

Multiple Choice

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Ontario Ltd.is considering acquiring BC Corp.by offering one share of its common stock for 0.95 shares of BC Corp.Currently,the market price of BC Corp.is $108.What is the cash bidding price proposed for this deal (rounded up) ?

A) $114
B) $95
C) $103
D) $163

E) A) and C)
F) B) and C)

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A

Question 2

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Since managers' central goal is to maximize stock price,managerial control issues do not interfere with mergers that would benefit the target firm's shareholders.

A) True
B) False

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Question 3

Multiple Choice

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Which of the following best describes why defensive mergers typically occur?

MaritimeTV Emporium, a national retailer of flat panel screens, is investigating an opportunity to purchase Maritime TV and Sound Inc. An acquisition is expected to lower overhead costs, improve distribution efficiencies, and improve ordering volumes from the major manufacturers. If those improvements (synergies) are implemented, TV Emporium financial staff estimate the following incremental net cash flows to be $5 million, $5.6 million, and $6.9 million for the first three years. Cash flows would grow at 3% thereafter. Maritime TV and Sound's tax rate is 30%. Its cost of equity is 10%. -Refer to Scenario: Maritime.What is the highest price TV Emporium pays for Maritime?

Canada Ltd.is considering acquiring Quebec Corp.by offering one share of its common stock for 1.01 shares of Quebec Corp.Currently,the market price of Quebec Corp.is $98.What is the cash bidding price proposed for this deal (rounded up) ?

What is NOT one of the defensive tactics firms use to fight off undesired mergers?

A conglomerate merger occurs when two firms with either a horizontal or a vertical business relationship combine.

If the capital structure is stable,and free cash flows are expected to be growing at a constant rate at the horizon date,then the horizon value is calculated by discounting the free cash flows plus the expected future tax shields at the weighted average cost of capital.

If a petrochemical firm that used oil as feedstock merged with an oil producer that had large oil reserves and a drilling subsidiary,this would be a vertical merger.

DustvacMagiclean Corporation is considering the acquisition of Dustvac Company. Dustvac has a capital structure consisting of $5 million (market value) of 11% bonds and $10 million (market value) of common stock. Dustvac's pre-merger beta is 1.36. Magiclean's beta is 1.02, and both it and Dustvac face a 40% tax rate. Magiclean's capital structure is 40% debt and 60% equity. The free cash flows from Dustvac are estimated to be $3.0 million for each of the next 4 years and a horizon value of $10.0 million in Year 4. Tax savings are estimated to be $1 million for each of the next 4 years and a horizon value of $5 million in Year 4. New debt would be issued to finance the acquisition and retire the old debt, and this new debt would have an interest rate of 8%. Currently, the risk-free rate is 6.0% and the market risk premium is 4.0%. -Refer to Scenario: Dustvac.What discount rate should you use to discount Dustvac's free cash flows and interest tax savings?

MCorp,with a book value of $20 million and a market value of $30 million,has merged with NCorp,with a book value of $6 million and a market value of $8 million at a price of $9 million.Under the purchase method,what will be the total assets on the book of the new merged firm?

In a financial merger,the relevant post-merger cash flows are simply the sum of the expected cash flows of the two companies,measured as if they were operated independently.

Firm X is considering acquiring Firm Y by offering one share of its common stock for 0.8728 shares of Firm Y.Currently,the market price of Firm X is $48.What is the cash bidding price proposed for this deal?

A company seeking to fight off a hostile takeover might employ the services of an investment banking firm to develop a defensive strategy.

The income statement of the post-merger firm will be the same regardless of the accounting method used.

What is NOT a reason for a divestiture?

The distribution of synergistic gains between the stockholders of two merged firms is almost always based strictly on their respective market values before the announcement of the merger.

The present value of the free cash flows discounted at the unlevered cost of equity is the value of the firm's operations if it had no debt.

Blazer Inc.is thinking of acquiring Laker Company.Blazer expects Laker's NOPAT to be $9 million the first year,with no net new investment in operating capital and no interest expense.For the second year,Laker is expected to have NOPAT of $25 million and interest expense of $5 million.Also,in the second year only,Laker will need $10 million of net new investment in operating capital.Laker's marginal tax rate is 40%.After the second year,the free cash flows and the tax shields from Laker to Blazer will both grow at a constant rate of 4%.Blazer has determined that Laker's cost of equity is 17.5%,and Laker currently has no debt outstanding.Assuming that all cash flows occur at the end of the year,Blazer must pay $45 million to acquire Laker.What it the NPV of the proposed acquisition? Note that you must first calculate the value to Blazer of Laker's equity.

Two firms merge and no synergies occur.Which statement best explains this unlikely result?