Exam 26: Mergers

rate used to discount projected merger cash flows should be the cost of capital of the new consolidated firm because it incorporates the actual capital structure of the new firm.

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.

Currently (2007), mergers can be accounted for using either the purchase method or the pooling method.

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.

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

of the main reasons why foreign firms are interested in buying U.Scompanies is to gain entrance to the U.Smarket A decline in the value of the dollar relative to most foreign currencies makes this competitive strategy especially attractive.

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

3 main advantages of holding companies are (1) control with fractional ownership, (2) taxation benefits, and (3) isolation of operating risks.

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 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.

Since the primary rationale for any operating merger is synergy, in planning such mergers, the development of accurate pro forma cash flows is the single most important action.

owners of Arthouse Inc., a national artist supplies chain, are contemplating purchasing Craftworks Inc, a smaller chain Arthouse'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 Craftworks is 16% Craftworks has 4 million shares outstanding and no debt Craftworks' current price is $16.25 What is the maximum price per share that Arthouse should offer?

Which of the following statements is most CORRECT?

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

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

two principal advantages of holding companies are (1) the holding company can control a great deal of assets with limited equity and (2) the dividends received by the parent from the subsidiary are not taxed if the parent holds at least 50% of the subsidiary's stock.

Which of the following are legal and acceptable reasons for the high level of merger activity in the U.Sduring the 1980s?

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.

Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the discount rate can only be determined after the merger is consummated.

Holland Auto Parts is considering a merger with Workman Car Parts Workman'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 Holland acquires Workman, 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 Workman's required rate of return on equity be after it is acquired?