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Exam 24: Mergers, Acquisitions, and Restructuring

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Question 21

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

A) True
B) False

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Question 22

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

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Question 23

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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.

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.

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.

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.

Which of the following actions can help managers defend against a hostile takeover?

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

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

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

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

The distribution of synergistic gains between the stockholders of 2 merged firms is almost always based strictly on their respective market values before the announcement of the merger.

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.

Most defensive mergers occur as a result of managers' actions to maximize shareholders' wealth.

The primary reason managers give for most mergers is to acquire more assets so as to increase sales and market share.

The purchase of assets at below their replacement cost and tax considerations are two factors that motivate 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 of the following statements best describes LBOs?