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Exam 24: Mergers, Acquisitions, and Restructuring

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Question 1

Multiple Choice

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What is the horizontal value of Maritime's operation as of year 3?

A) $101.53 million
B) $98.57 million
C) $86.66 million
D) $71.07 million

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

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Question 2

True/False

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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.

A) True
B) False

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Question 3

Multiple Choice

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Which of the following statements best describes mergers?

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

A spin-off is a type of divestiture in which the assets of a division are sold to another firm.

In a financial merger, the relevant post-merger cash flows are simply the sum of the expected cash flows of the 2 companies, measured as if they were operated independently.

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.

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.

Brau Auto, a national autoparts 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?

Two firms merge and no synergies occur. Which of the following statements best describes the result?

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.

A taxable merger offer is one where the acquiring company offers to purchase the target company with cash. However, the same deal is not taxable if the merger is paid by exchanging stocks. Such non- taxable bids should be by far more popular.

If the constant growth model is used to calculate the value of a target company, the terminal value is an insignificant cash flow analysis.

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

A congeneric merger is one where the merging firms operate in related businesses but do not necessarily produce the same products or have a producer-supplier relationship.

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

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

A joint venture is one in which two, or sometimes more, independent companies agree to combine resources in order to achieve a specific objective, usually limited in scope.

Which of the following is a valid, acceptable reason for a closely held firm proposing a merger activity?

Dunbar Hardware, a national hardware chain, is considering purchasing a smaller chain, Eastern Hardware. Dunbar's analysts project that the merger will result in incremental free flows and interest tax savings with a combined present value of $72.52 million, and they have determined that the appropriate discount rate for valuing Eastern is 16%. Eastern has 4 million shares outstanding and no debt. Eastern's current price is $16.25. What is the maximum price per share that Dunbar should offer?