FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 24: Mergers, Acquisitions, and Restructuring

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 31

True/False

Review LaterAdd Note

Review Later

The purchase of assets at below their replacement cost and tax considerations are two factors that motivate mergers.

A) True
B) False

Correct Answer

verified

Show Answer

Question 32

True/False

Review LaterAdd Note

Review Later

By examining stock prices around merger announcement dates, event studies provide inconclusive results that mergers benefit only targets, not acquirers.

A) True
B) False

Correct Answer

verified

Show Answer

Question 33

Multiple Choice

Review LaterAdd Note

Which statement best describes mergers?

Kelly Tubes is considering a merger with Reilly Tires. Reilly's market-determined beta is 0.9, and the firm currently is financed with 20% debt, at an interest rate of 8%, and its tax rate is 25%. If Kelly acquires Reilly, it will increase the debt to 60%, at an interest rate of 9%, and the tax rate will increase to 35%. The risk-free rate is 6% and the market risk premium is 4%. What will Reilly's required rate of return on equity be after it is acquired?

Scenario Maritime TV 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 manufactures. If those improvements (synergies) are implemented, TV Emporium financial staff estimates 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?

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 appropriate discount rate to be used when calculating the NPV of a target company is the cost of equity of the target company.

In a carve-out, a majority interest in a corporate subsidiary is sold to new shareholders, so the parent gains new equity financing yet retains control.

A shareholder rights plan allowing existing shareholders to buy or sell shares at very attractive prices provides the acquirer an inexpensive way for takeovers.

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.

The value of synergy can be estimated by the equation

Which statement best describes mergers?

Scenario Dustvac Magiclean 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?

In a merger with true synergies, the post-merger value exceeds the sum of the separate companies' pre-merger values.

Which statement best describes accounting for mergers?

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?

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

Coca-Cola's acquisition of Columbia Pictures and its announcement that it would operate its new subsidiary separately could be described as primarily a financial merger.

Which statement best describes mergers?

Post-merger control and the negotiated price paid by the acquirer are two of the most important issues in agreeing on the terms of a merger.