FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 23: Mergers,Acquisitions,and Restructuring

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 21

Multiple Choice

Review LaterAdd Note

Review Later

Which of the following best describes a merger with true synergies?

A) In a merger with true synergies, the pre-merger value exceeds the sum of the separate companies' pre-merger values and the dollar cost of the firms' capital.
B) In a merger with true synergies, the post-merger value exceeds the sum of the separate companies' pre-merger values
C) In a merger with true synergies, the post-merger value exceeds the sum of the separate companies' pre-merger values plus a risk adjusted cash flow relative to the risk of the combined firm.
D) In a merger with true synergies, the post-merger value is less than the sum of the separate companies' pre-merger values.

E) All of the above
F) B) and D)

Correct Answer

verified

Show Answer

Question 22

Multiple Choice

Review LaterAdd Note

Review Later

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?

A) 7.4%
B) 8.9%
C) 9.3%
D) 9.7%

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

Correct Answer

verified

Show Answer

Question 23

Multiple Choice

Review LaterAdd Note

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 is the value of Dustvac's equity to Magiclean? (Round your answer to the closest thousand dollars.)

Which statement best describes mergers?

Leveraged buyouts (LBOs) occur when a firm's managers,generally backed by private equity groups,try to gain control of a publicly owned company by buying out the public shareholders using large amounts of borrowed money.

Under purchase accounting,the acquired assets must be written up or written down if the purchase price does not equal net asset value.

Which of the following is NOT a valid reason for a company to seek external growth through mergers?

Interest expense must be explicitly included in a merger incremental cash flow analysis.

Brau Auto,a national auto parts chain,is considering purchasing a smaller chain,South Georgia Parts (SGP) .Brau's analysts project that the merger will result in the following incremental free cash flows,tax shields,and horizon values:Assume that all cash flows occur at the end of the year.SGP is currently financed with 30% debt at a rate of 10%.The acquisition would be made immediately,and if it is undertaken,SGP would retain its current $15 million of debt and issue enough new debt to continue at the 30% target level.The interest rate would remain the same.SGP's pre-merger beta is 2.0,and its post-merger tax rate would be 34%.The risk-free rate is 8% and the market risk premium is 4%.What is the value of SGP to Brau? $\begin{array}{lcccc}\text { Year } & \underline { 1 }& \underline { 2 }& \underline { 3 }& \underline { 4 } \\\text { Free cash flow } & \$ 1 & \$ 3 & \$ 3 & \$ 7 \\\text { Unlevered horizon value } & & & & 75 \\\text { Tax shield } & 1 & 1 & 2 & 3 \\\text { Horizon value of tax shield } & & & & 32\end{array}$

Kelly Tubes is considering a merger with Reilly Tires.Reilly's market-determined value is $3.75 million,and Kelly's market value as a stand-alone company is $4.50 million.Both firms are all equity-financed.Kelly acquires Reilly for $4.25 million because it believes the combined firm value will increase to $9.25 million.What will be the synergy from this 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 Dustvac's pre-merger WACC?

Foreign firms are interested in buying Canadian companies to gain entrance to Canada.A decline in the value of the dollar relative to most foreign currencies makes this competitive strategy especially attractive.

Three procedures used to defend against hostile takeovers are borrowing funds on terms that would require immediate repayment of all funds if the firm is acquired,selling off valuable assets,and granting huge "golden parachutes" that open if the firm is acquired.These strategies are known as "poison pills."

The DAB Corp.has unfortunately accumulated net operating losses of $70 million and is likely to go bankrupt.The CLC Corp.has earnings of $200 million and is in the 36% marginal tax bracket.CLC is considering buying DAB and liquidating the company and retaining a few of the assets.What is the minimum value of DAB to CLC?

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 of the following are the most important issues in merger negotiations?

PEI Ltd.is considering acquiring Sask Corp.by offering one share of its common stock for .56 shares of Sask Corp.Currently,the market price of Quebec Corp.is $38.What is the cash bidding price proposed for this deal (rounded up) ?

Currently,mergers in Canada can be accounted for using either the purchase method or the pooling method.

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.

Merger activity is likely to heat up when interest rates are high because target firms can expect to receive an especially high premium over the pre-announcement stock price.