Exam 18: Mergers, Lbos, Divestitures, and Business Failure

Acquisitions are especially attractive when the acquired firm's stock price is high, because fewer shares must be exchanged to acquire the firm.

If the P/E paid is greater than the P/E of the acquiring company, the effect on the earnings per share of the acquired company will be

The primary advantage of a holding company, that permit(s) the firm to control a large amount of assets with a relatively small dollar investment is known as

Like business bankruptcy and business failure, divestiture is most often undertaken to relieve pressure by creditors such as bondholders and banks due to the firm's relatively high debt levels.

Primary motives for merging include growth or diversification, synergy, fund raising, increased managerial skill or technology, tax considerations, increased ownership liquidity, and acquiring new upper-level management personnel.

The companies controlled by a holding company are normally referred to as its subsidiaries.

Firms' motives to merge include growth or diversification, synergy, fundraising, tax considerations, and defense against takeover.

Greater control over the acquisition of new materials or the distribution of finished goods is an economic benefit of horizontal merger.

All of the following are advantages of holding companies EXCEPT

Popular takeover defense methods include white knights, poison pills, greenmail, financial sabotage, and shark repellents.

A merger involving the purchase of a specific product line, rather than the whole company is

A reorganization plan must meet all of the following criteria EXCEPT

ZhenYee Electronics, Inc. is considering the acquisition of Datamatic, Inc. at a cash price of $5,000,000. Datamatic, Inc. has short-term liabilities of $1,500,000. As a result of acquiring Datamatic, Inc., ZhenYee Electronics would also acquire rights to one major patent which would provide an estimated cash inflow of $1,800,000 per year for the next eight years. The firm has a cost of capital of 12 percent. Would you recommend the cash acquisition?

A financial merger is undertaken to increase

The use of a large amount of debt to finance the acquisition of other firms is a

Tangshan Mining is attempting to acquire Zhengsen Mining. Selected financial data is presented for both companies in the table below: Tangshan Mining has sufficient authorized but unissued shares to carry out the proposed merger. (a) Calculate the EPS of Tangshan Mining and Zhengsen Mining before the merger. (b) If the ratio of exchange is 1.8, what will be the earnings per share of the merged company? (c) Repeat part (a) if the ratio of exchange is 2.0. (d) Repeat part (a) if the ratio of exchange is 2.2 (e) discuss the principal illustrated by your answers to parts (a) through (d)

In defending against a hostile takeover, the strategy that involves the target firm creating securities that give their holders certain rights that become effective when a takeover is attempted is called the ________ strategy.

Business failure may be caused by all of the following EXCEPT

Julie's Tanning Systems has an estimated liquidation value (after all prior claims have been satisfied) of $3,000,000; $1,500,000 from fixed assets and $1,500,000 from current assets. The firm's value as a going concern is $4,000,000. The firm's current capital structure is as follows: *Secured by fixed assets. Prepare a table indicating the amount, if any, to be distributed to each claimant, in the event of liquidation.

Tangshan Mining is considering the acquisition of Zhengsen Mining at a cash price of $6,000,000. The primary motivation for Tangshan's purchase of Zhengsen is for a special piece of drilling equipment that it believes will generate after-tax cash flows if $2,000,000 per year during the next 5 years. Zhengsen Mining has liabilities of $9,000,000 and Tangshan estimates that it can sell the remaining assets $6,500,000. Tangshan will use a 15 percent cost of capital for evaluating the acquisition. Based on this information, what is the net value of the special drilling equipment?