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

A congeneric merger is a merger in which a firm acquires a supplier or a customer.

An attractive candidate for acquisition through leveraged buyout usually has a relatively high level of debt and a low level of "bankable" assets.

The overriding goal for merging is the maximization of the owners' wealth as reflected in the acquirer's share price.

The creation of a high-debt, private corporation with improved cash flow and value is the goal in

If the P/E paid for a target company is equal to the P/E of the acquiring company, the effect on the earnings per share of the acquiring company will be

Hayley Medical, Inc. is evaluating the acquisition of Health-o-Matic, Inc., which had a loss carryforward of $3.75 million, resulting from earlier operations. Hayley Medical can purchase Health-o-Matic for $4.5 million and liquidate the assets for $3.25 million. Hayley Medical expects earnings before taxes in the three years following the acquisition to be as follows: (These earnings are assumed to fall within the annual limit legally allowed for application of a tax loss carryforward resulting from the proposed acquisition.) Hayley Medical has a 40 percent tax rate and a cost of capital of 15 percent. The approximate maximum cash price Hayley Medical would be willing to pay for Health-o-Matic is

A horizontal merger is a merger in which one firm acquires another firm in the same general industry but neither in the same line of business nor a supplier or customer.

Under recapitalization, debts are generally exchanged for equity or the maturities of existing debts are extended.

A financial merger is a merger transaction undertaken to achieve economies of scale.

It is not unusual for acquirers in LBOs to be members of the firm's existing management team.

A spin-off is a form of divestiture in which an operating unit becomes an independent company by issuing shares in it on a pro rata basis to the parent company's shareholders.

The earnings per share of the merged firm are generally above the premerger earnings per share of one firm and below the premerger earnings per share of the other, after making the necessary adjustment for the ratio of exchange.

An attractive candidate for acquisition through a leveraged buyout should possess all of the following characteristics EXCEPT

Aiyah, Inc. recently has had financial difficulty and is being liquidated by the Federal Bankruptcy Court. The firm has a liquidation value of $1,000,000 $400,000 from the fixed assets that served as collateral for the mortgage bonds and $600,000 from all other assets (all prior claims have been satisfied). The firm's current capital structure is as follows: The common stockholders will receive ________ in the liquidation.

A major impetus fueling financial mergers during the 1980s was

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

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

A major disadvantage of holding companies is the increased risk resulting from the leverage effect.

When a firm undertakes a merger to improve its sources and supply of raw materials, this is an example of a

Chapter 7 of the Bankruptcy Reform Act of 1978 outlines the procedures for reorganizing a failed (or failing) firm, whether its petition is filed voluntarily or involuntarily.