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

A divestiture that results in an operating unit becoming an independent company is a

The motive for divestiture is likely to be all of the following EXCEPT

A two-tier offer is a tender offer in which the terms offered are more attractive to those who tender shares early.

In a Chapter 7 liquidation bankruptcy proceeding, the order of priority of satisfying claims is secured creditors, unsecured creditors, and then equity holders.

In the broadest sense, activities involving expansion or contraction of a firm's operations or changes in its assets or ownership structure are called corporate maneuvering.

Normally, the acquiring firm pays a price that is a premium above the market price of the acquired firm. This means that the ratio of exchange in market price is

One of the responsibilities of the Debtor in Possession (DIP) is the liquidation of the firm's assets.

A consolidation is a corporation that has voting control of one or more other corporations.

A conglomerate merger is a merger combining firms in unrelated businesses.

The responsibilities of the debtor in possession include all of the following EXCEPT

A hostile merger is typically accomplished through

A white knight is a takeover defense in which a firm issues securities that give their holders certain rights that become effective when a takeover is attempted and that make the target firm less desirable to a hostile acquirer.

Most firms seeking merger partners will hire the services of

The owners of a holding company can control significantly larger amounts of assets than they could acquire through mergers.

Marketing Concepts, Inc. is considering the acquisition of Management Theories, Inc. at a cash price of $1.5 million. Management Theories, Inc. has short-term liabilities of $500,000. As a result of acquiring Management Theories, Inc., Marketing Concepts, Inc. would acquire the copyrights to a national best-seller which would provide an estimated cash flow of $300,000 for the next five years. The firm has a cost of capital of 20 percent. The approximate net present value of this acquisition is

Financial mergers involve merging firms in order to achieve various economies of scale by eliminating redundant functions, increasing market share, and improving raw material sourcing and finished product distribution.

A stock swap transaction is an acquisition method in which the acquiring firm exchanges its shares for shares of the target company according to a predetermined ratio.

________ is an arrangement whereby the firm's creditors receive full payment, although not immediately.

Jia's Oven Manufacturing is evaluating the acquisition of Cuisinaire Kitchen Appliance Co. Cuisinaire has a loss carryforward of $1.5 million which resulted from earlier operations. Jia's Oven can purchase Cuisinaire for $1.8 million and liquidate the assets for $1.3 million. Jia's Oven expects earnings before taxes in the five years following the acquisition to be as follows: (These earnings are assumed to fall within the annual limit legally allowed for application of the tax loss carryforward resulting from the proposed acquisition.) Jia's Oven is in the 40 percent tax bracket and has a cost of capital of 17 percent. (a) What is the tax advantage of the acquisition each year for Jia's Oven? (b) What is the maximum cash price Jia's Oven would be willing to pay for Cuisinaire? (c) Do you recommend the acquisition? Why or why not?

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