FM11 Ch 25 Test Bank

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CHAPTER 25MERGERS, LBOs, DIVESTITURES, AND HOLDING COMPANIES

(Difficulty E ! E"sy, M ! M#$iu%, "&$ T ! T'u )*

T+u# -"ls# Easy:

Synergistic merger Answer: a Diff: E

1 . In a synergistic merger, the post-merger value exceeds the sum of theseparate companies' pre-merger values.

a. Trueb. False

Sources of synergy Answer: a Diff: E

2

. ynergistic merger effects can arise from a number of different sourcesincluding operating economies of scale, financial economies, andincreased managerial efficiency.

a. Trueb. False

Spin-off Answer: b Diff: E

! . " spin-off is a type of divestiture in #hich the assets of a divisionare sold to another firm.

a. Trueb. False

Holding companies Answer: b Diff: E

$ . The t#o principal advantages of holding companies are %1& that theholding company can control a great deal of assets #ith limited e uityand %2& that the dividends received by the parent from the subsidiaryare not taxed if the parent holds at least () percent of thesubsidiary's stoc*.

a. Trueb. False

Defensive mergers Answer: b Diff: E

( . +ost defensive mergers occur as a result of managers' actions tomaximi e shareholder's #ealth.

a. Trueb. False

Chapter 25 - Page 1



Conglomerate merger Answer: b Diff: E

. " conglomerate merger occurs #hen t#o firms combine that have bothhori ontal and vertical business relationships.

a. Trueb. False

Merger analysis Answer: a Diff: E

. ince the basic rationale for any operating merger is synergy, inplanning such mergers, the development of accurate pro forma cash flo#sis the single most important aspect of the analysis.

a. Trueb. False

Merger terms Answer: a Diff: E

/ . 0ost-merger control and the negotiated price are t#o of the mostimportant issues in agreeing on the terms of a merger.

a. Trueb. False

Defensive tactics Answer: a Diff: E

. " company see*ing to fight off a hostile ta*eover might employ theservices of an investment ban*ing firm to develop a defensive strategy.

a. Trueb. False

Poison pill defense Answer: a Diff: E

1) . orro#ing funds on terms that #ould re uire immediate repayment of allfunds if the firm is ac uired or selling off valuable assets are t#omethods of defending against hostile ta*eovers. These strategies are*no#n as poison pill defenses.

a. Trueb. False

Chapter 25 - Page 2



oint venture Answer: a Diff: E

11 . " 3oint venture is one in #hich t#o, or sometimes more, independentcompanies agree to combine resources in order to achieve a specificob3ective, usually limited in scope.

a. Trueb. False

!everaged buyout Answer: a Diff: E

12 . 4everaged buyouts %4 5s&, populari ed in the 1 /)s, occur #hen a firm'smanagers decide to try and gain control of their publicly o#ned companyby buying out existing shareholders using large amounts of borro#edmoney.

a. Trueb. False

Mergers and interest rates Answer: b Diff: E

1! . +ergers are more li*ely to occur #hen interest rates are high becausetarget firms can expect to get a higher premium in the ac uisitionprice.

a. Trueb. False

Merger accounting Answer: b Diff: E

1$ . +ergers can be accounted for using either the purchase method ofaccounting or the pooling method of accounting.

a. Trueb. False

Merger accounting Answer: b Diff: E

1( . 6ood#ill created in a merger must be amorti ed over its expected life,usually $) years, for shareholder reporting purposes.

a. Trueb. False

Merger accounting Answer: a Diff: E

1 . "lthough good#ill created in a merger may not be amorti ed forshareholder reporting purposes, it may be amorti ed for Federal taxpurposes.

a. Trueb. False

Chapter 25 - Page 3



Medium:

Holding company advantages Answer: b Diff: M

1 . The three main advantages of holding companies are %1& control #ithfractional o#nership, %2& taxation benefits, and %!& isolation ofoperating ris*s.

a. Trueb. False

"nternational mergers Answer: a Diff: M

1/ . 5ne of the main reasons #hy foreign firms are interested in buying 7. .companies is to gain entrance to the 7. . mar*et. " decline in thevalue of the dollar relative to most foreign currencies ma*es thiscompetitive strategy more feasible.

a. Trueb. False

Merger cas# flows Answer: b Diff: M

1 . 8iscounted cash flo# methods are not appropriate for evaluating mergersbecause the cash flo#s are uncertain and the discount rate can only bedetermined after the merger is consummated.

a. Trueb. False

$elevant merger cas# flows Answer: a Diff: M

2) . In a financial merger, the relevant post merger cash flo#s are simplythe sum of the expected cash flo#s of the t#o companies measured as if

they #ere to be operated independently.

a. Trueb. False

%inancial merger Answer: a Diff: M

21 . 9oca-9ola's ac uisition of 9olumbia 0ictures and its announcement thatit #ould operate its ne# subsidiary separately could be described asprimarily a financial merger.

a. Trueb. False

Chapter 25 - Page 4



&wo-tier offer Answer: b Diff: M

22 . " t#o-tier merger offer is one in #hich the ac uiring company offers topurchase the target company in a t#o-part transaction. 9ash is paid tosome stoc*holders, bonds are issued to others, but the total values ofeach part of the transaction are e ual.

a. Trueb. False

'ertical merger Answer: a Diff: M

2! . If a petrochemical firm merged #ith an oil producer #hich had assetsincluding oil reserves, a refinery, and a drilling subsidiary, this#ould be an example of a vertical merger.

a. Trueb. False

Congeneric merger Answer: a Diff: M

2$ . " congeneric merger is one #here the merging firms operate in relatedbusinesses but do not necessarily produce the same products or have aproducer-supplier relationship.

a. Trueb. False

Merger motivation Answer: a Diff: M

2( . The purchase of assets at belo# their replacement cost and taxconsiderations are t#o factors that have st imulated mergershistorically.

a. Trueb. False

Merger motivation Answer: b Diff: M

2 . The primary motivation for most mergers is to ac uire more assets so asto increase sales and mar*et share.

a. Trueb. False

Managerial control Answer: b Diff: M

2 . ince managers' central goal is to maximi e stoc* price, managerialcontrol issues do not interfere #ith mergers that #ould benefit thetarget firm's stoc*holders.

a. Trueb. False

Chapter 25 - Page 5



Managerial opposition Answer: b Diff: M

2/ . ince managers' central goal is to maximi e stoc* price, any mergeroffer #hich provides stoc*holders #ith significant gains over thecurrent stoc* price #ill not be opposed by incumbent management.

a. Trueb. False

Merger discount rate Answer: b Diff: M

2 . The discount rate used to discount pro3ected merger cash flo#s should bethe cost of capital of the ne# consolidated firm because it incorporatesthe actual capital structure of the ne# firm.

a. Trueb. False

Synergistic gain Answer: b Diff: M

!) . The distribution of the synergistic gain bet#een the stoc*holders of t#omerged firms is determined by their respective mar*et values before theymerged.

a. Trueb. False

Merger analysis Answer: a Diff: M

!1 . 5nly if a target firm's value is greater to the ac uiring firm than thetarget's mar*et value as a separate entity #ill the merger befinancially 3ustified.

a. True

b. False

Merger analysis Answer: b Diff: M

!2 . If the capital structure is stable and free cash flo#s are gro#ing at aconstant rate at the hori on, then the hori on value is calculated bydiscounting the free cash flo#s plus the expected future tax shields atthe #eighted average cost of capital.

a. Trueb. False

Merger analysis Answer: a Diff: M

!! . The present value of the free cash flo#s discounted at the unleveredcost of e uity is the value of the firm:s operations if it had no debt.

a. Trueb. False

Chapter 25 - Page 6



Multi.l# C)'ic# C'&c#.tu"l

Easy:

Merger tactics Answer: e Diff: E

!$ . Firms use defensive tactics to fight off undesired mergers. Thesetactics include

a. ;aising antitrust issues.b. Ta*ing poison pills.c. 6etting a #hite *night to bid for the firm.d. ;epurchasing their o#n stoc*.e. "ll of the above.

Mergers Answer: e Diff: E

!( . <hich of the follo#ing are given as reasons for the high level of mergeractivity in the 7. . during the 1 /)s=

a. ynergistic benefits arising from mergers.b. ;eduction in competition resulting from mergers.c. "ttempts to stabili e earnings by diversifying.d. "ll of the above.e. oth a and c above.

Defensive strategies Answer: d Diff: E

! . <hich of the follo#ing actions assist managers in defending against ahostile ta*eover=

a. >stablishing a poison pill provision.b. 6ranting lucrative golden parachutes to senior managers.c. >stablishing a super-ma3ority provision in the company:s byla#s #hich

raises the percentage of the board of directors that must approve anac uisition from () percent to ( percent.

d. "ll of the ans#ers above are correct.e. ?one of the ans#ers above is correct.

Chapter 25 - Page 7



Miscellaneous concepts Answer: c Diff: E

! . <hich of the follo#ing statements is most correct=

a. " conglomerate merger is #here a firm combines #ith another firm inthe same industry.

b. ;egulations in the 7nited tates prohibit ac uiring firms from usingcommon stoc* to purchase another firm.

c. 8efensive mergers are designed to ma*e a company less vulnerable to ata*eover.

d. "ns#ers a and b are correct.e. "ll of the ans#ers above are correct.

Medium:

Merger motivation Answer: d Diff: M

!/ . <hich of the follo#ing statements is most correct=

a. Tax considerations often play a part in mergers. If one firm hasexcess cash, purchasing another firm exposes the purchasing firm toadditional taxes. Thus, firms #ith excess cash rarely underta*emergers.

b. The smaller the synergistic benefits of a particular merger, thegreater the incentive to bargain in negotiations, and the higher theprobability that the merger #ill be completed.

c. ince mergers are fre uently financed by debt more than e uity,financial economies #hich imply a lo#er cost of debt or greater debtcapacity are rarely a relevant rationale for mergers.

d. +anagers #ho purchase other firms often assert that the ne# combinedfirm #ill en3oy benefits from diversification such as more stableearnings. @o#ever, since shareholders are free to diversify theiro#n holdings at lo#er cost, such a rationale is generally not a validmotive for publicly held firms.

e. "ll of the ans#ers above are correct.

Chapter 25 - Page 8



!evel of merger activity Answer: c Diff: M

! . <hich of the follo#ing statements is most correct=

a. The high value of the 7. . dollar relative to Aapanese and >uropeancurrencies in the 1 /)s, made 7. . companies comparativelyinexpensive to foreign buyers, spurring many mergers.

b. 8uring the 1 /)s, the ;eagan and ush administrations tried to fostergreater competition and they #ere adamant about preventing the lossof competitionB thus, most large mergers #ere disallo#ed.

c. The expansion of the 3un* bond mar*et made debt more freely availablefor large ac uisitions and 4 5s in the 1 /)s, and thus, it resultedin an increased level of merger activity.

d. Increased nationali ation of business and a desire to scale do#n andfocus on producing in one's home country virtually haltedinternational mergers in the 1 /)s.

e. "ns#ers a and b are correct.

Merger analysis Answer: e Diff: M

$) . <hich of the follo#ing statements is most correct=

a. " firm ac uiring another firm in a hori ontal merger #ill not haveits re uired rate of return affected because the t#o firms #ill havesimilar betas.

b. Financial theory says that the choice of ho# to pay for a merger isreally irrelevant because, although it may affect the firm's capitalstructure, it #ill not affect the firm's overall re uired rate ofreturn.

c. The basic rationale for any financial merger is synergy and thus,development of pro-forma cash flo#s is the single most important partof the analysis.

d. In most mergers, the benefits of synergy and the price premium theac uirer pays over mar*et price are summed and then divided e uallybet#een the shareholders of the ac uiring and target firms.

e. The primary rationale for any operating merger is synergy, but it isalso possible that mergers can include aspects of both operating andfinancial mergers.

Chapter 25 - Page 9



Aspects of mergers Answer: d Diff: M

$1 . <hich of the follo#ing statements is most correct=

a. Firms that get ac uired usually have a mar*et price belo# boo* valuebefore the merger offer is made. @o#ever, once the initial offer ismade, the price can rise above boo* value, but the purchase price,especially in large ac uisitions, #ill remain #ithin 2) percent ofboo* value.

b. <hen Texaco purchased 6etty 5il, many financial analysts felt thatthe deal made sense because it increased Texaco's mar*et share andexpanded its shrin*ing oil reserves. This merger exemplified thebelief among the natural resource companies that buying reservesthrough ac uisitions #as less costly than exploring and finding themin the field.

c. <hen +obil 5il 9ompany tried to ac uire 9onoco, another oil company,stoc*holders #ere concerned that the 7. . Austice 8epartment #ouldtry to bloc* this merger because it #ould lessen competition. Thus,antitrust considerations affected this proposed hori ontal merger.

d. "ns#ers b and c are correct.e. "ll of the statements above are false.

!()s Answer: e Diff: M

$2 . <hich of the follo#ing statements is most correct=

a. 4everaged buyouts %4 5s& are #here a firm issues e uity and uses theproceeds to ta*e a firm public.

b. In a typical 4 5, bondholders do #ell but shareholders reali e adecline in value.

c. Firms are unable to sell any assets in the first five years follo#inga leverage buyout.

d. "ll of the ans#ers above are correct.e. ?one of the ans#ers above is correct.

Miscellaneous concepts Answer: b Diff: M

$! . <hich of the follo#ing statements is most correct=

a. If a company #hich produces military e uipment merges #ith a company#hich manages a chain of motels, this is an example of a hori ontalmerger.

b. " defensive merger is #here the firm's managers merge #ith another

firm to avoid or lessen the possibility of being ac uired through ahostile ta*eover.

c. "c uiring firms send a signal that their stoc* is undervalued if theychoose to use stoc* to pay for the ac uisition.

d. ?one of the statements above is correct.e. "ns#ers a and c are correct.

Chapter 25 - Page 10



Merger analysis Answer: d Diff: M

$$ . <hich of the follo#ing statements about valuing a firm using the "0C ismost correct=

a. The hori on value is calculated by discounting the hori on futurefree cash flo#s and tax savings at the levered cost of e uity.

b. The hori on value is calculated by discounting the hori on futurefree cash flo#s at the levered cost of e uity.

c. The hori on value is calculated by discounting the hori on futurefree cash flo#s and tax savings at the <"99.

d. The hori on value is calculated by discounting the hori on:s futurefree cash flo#s at the <"99.

e. ?one of the statements above is correct.

Merger analysis Answer: c Diff: M

$( . <hich of the follo#ing statements about valuing a firm using the "0C ismost correct=

a. The value of operations is calculated by discounting the hori onvalue, the tax shields, and the free cash flo#s at the cost ofe uity.

b. The value of e uity is calculated by discounting the hori on value,the tax shields, and the free cash flo#s at the cost of e uity.

c. The value of operations is calculated by discounting the hori onvalue, the tax shields, and the free cash flo#s at the unlevered costof e uity.

d. The value of e uity is calculated by discounting the hori on valueand the free cash flo#s at the cost of e uity.

e. ?one of the statements above is correct.

Merger accounting Answer: b Diff: M

$ . <hich of the follo#ing statements about accounting for mergers is mostcorrect=

a. 6ood#ill is amorti ed for shareholder reporting.b. 6ood#ill is amorti ed for Federal tax purposes.c. 6ood#ill is no longer created in a merger.d. "ns#ers a and b are correct.e. ?one of the statements above is correct.




Multi.l# C)'ic# P+'/l#%s

Easy:

Ma*imum price per s#are Answer: d Diff: E

$ . "merican @ard#are, a national hard#are chain, is considering purchasing

a smaller chain, >astern @ard#are. "merican's analysts pro3ect that themerger #ill result in incremental free flo#s and interest tax savings#ith a combined present value of D 2.(2 million, and they havedetermined that the appropriate discount rate for valuing >astern is 1percent. >astern has $ million shares outstanding. >astern's currentprice is D1 .2(. <hat is the maximum price per share that "mericanshould offer=

a. D1 .2(b. D1 .c. D1 .$2d. D1/.1!e. D1 .))

"ntercompany dividends Answer: a Diff: E

$/ . " parent holding company sells shares in its subsidiary such that theparent no# o#ns only ( percent of the subsidiary and thus, the taxreturns of the parent and its subsidiary can't be consolidated. Theparent receives annual dividends from the subsidiary of D2,()),))). Ifthe parent's marginal tax rate is !$ percent and if the exclusion onintercompany dividends is ) percent, #hat is the effective tax rate onthe intercompany dividends and #hat are the net dividends received=

a. 1).2EB D2,2$(,)))b. 1).2EB D2,1!(,)))

c. 2!./EB D1, )(,)))d. 1).2EB D1, (),)))e. !$.)EB D1, (),)))




Discount rate Answer: c Diff: E

$ . Colunteer 0i a, a regional pi a chain, is considering purchasing asmaller chain, >astern 0i a, #hich is currently financed #ith 2)percent debt at a cost of /E. "merican's analysts pro3ect that themerger #ill result in incremental free cash flo#s and interest taxsavings of D2 million in ear 1, D$ million in ear 2, D( million in

ear !, and D11 million in ear $. %The ear $ cash flo# includes ahori on value of D1) million.& The ac uisition #ould be madeimmediately, if it is underta*en. >astern's pre-merger beta is estimatedto be 2.), and its post-merger tax rate #ould be !$ percent. The ris*-free rate is / percent, and the mar*et ris* premium is $ percent. <hatis the appropriate rate for discounting the free cash flo#s and theinterest tax savings=

a. 12.)Eb. 1!. Ec. 1$.$Ed. 1 .)Ee. 1 . E

Medium:

Post-merger return to e+uity Answer: e Diff: M

() . Trumble 5boes is considering a merger #ith Grieble Trombones. Grieble:smar*et determined beta is ). and it is currently financed at a debtlevel of 2)E, at an interest rate of /E. Grieble faces a 2(E tax rate.If Trumble ac uires Grieble, it #ill increase the debt level to )E, atan interest rate of percent, and the tax rate #ill increase to !(E.The ris* free rate is E and the mar*et ris* premium is $E. <hat #illGrieble:s re uired rate of return on e uity be after it is ac uired=

a. .$Eb. /. Ec. .!Ed. . Ee. . E




'alue of ac+uisition Answer: b Diff: M

(1 . 0it ;o# "uto, a national autoparts chain, is considering purchasing asmaller chain, outhern "uto. 0it ;o#'s analysts pro3ect that themerger #ill result in incremental free cash flo#s and interest tax

savings of D2 million in ear 1, D$ million in ear 2, D( million inear !, and D11 million in ear $. The ear $ cash flo# includes ahori on value of D1) million. "ssume all cash flo#s occur at the end ofthe year. outhern is currently financed #ith !)E debt at a rate of 1)E.The ac uisition #ould be made immediately, if it is underta*en and

outhern #ould retain its current D1( million in debt and issue ne# debtin order to continue targeting a !)E debt level. The interest rate #illremain the same. outhern's pre-merger beta is estimated to be 2.), andits post-merger tax rate #ould be !$ percent. The ris*-free rate is /percent, and the mar*et ris* premium is $ percent. <hat is the value of

outhern "uto:s e uity to 0it ;o# "uto=

a. D( .(2 million

b. D 1. millionc. D $. $ milliond. D . millione. D . $ million

,ACC for ac+uired firm Answer: d Diff: M

(2 . <ildcat ystems currently has 1 million shares outstanding #orth D1) pershare, and a capital structure that consists of !)E debt at a Einterest rate. <ildcat is considering purchasing illybob Industries,#hich has ()),))) shares outstanding #orth D( each and no debt.

illybob:s cost of e uity is 12 percent and <ildcat ystem:s cost ofe uity is 1(E. If, after the purchase, <ildcat recapitali es illybob

to have the same capital structure as <ildcat, #ith debt at the sameinterest rate, #hat #ill be illybob:s <"99= oth firms face a $)E taxrate.

a. 1).)Eb. 1). Ec. 12.)Ed. 12.1Ee. 1(.)E




Multiple part:

(The following information applies to the next four questions.)

+agiclean 9orporation is considering an ac uisition of 8ustvac 9ompany.8ustvac has a capital structure consisting of D( million %mar*et value& in 11E

bonds and D1) million %mar*et value& of common stoc*. 8ustvac's pre-mergerbeta is 1.! . +agiclean's beta is 1.)2 and both it and 8ustvac face a $)percent tax rate. +agiclean's capital structure is $) percent debt and )percent e uity. The free cash flo#s and interest tax savings from 8ustvac areestimated to be D$.) million for each of the next four years and a hori onvalue of D1(.) million in ear $. "dditionally, ne# debt #ould be issued tofinance the ac uisition and retire the old debt, and this ne# debt #ould havean interest rate of /E. 9urrently, the ris*-free rate is .) percent and themar*et ris* premium is $.) percent.

,ACC of target Answer: c Diff: M

(! . <hat 8ustvac:s pre-merger <"99=

a. .)2Eb. .()Ec. ./!Ed. 1).)1Ee. 11.2 E

Discount rate for value of operations Answer: c Diff: M

($ . <hat discount rate should you use to discount the free cash flo#s andinterest tax savings=

a. 1).)1E

b. 1).) Ec. 11.2 Ed. 11.$$Ee. 1!.$ E

'alue of e+uity Answer: b Diff: M

(( . <hat is the value of 8ustvac:s e uity to +agiclean= %;ound your ans#erto the closest thousand dollars.&

a. D1 ,)1 ,)))b. D1 ,1) ,)))c. D1 , 1 ,)))d. D22,1) ,)))e. D22, 1 ,)))




Tough:

Merger P' Answer: c Diff: &

( . la er rea*s, Inc. is considering an ac uisition of 4a*er ho#time9ompany. la er expects 4a*er:s ?50"T to be of D million the firstyear #ith all depreciation cash flo#s reinvested to replace e uipmentand ero interest expense. For the second year, 4a*er is expected tohave ?50"T of D2( million and interest expense of D( million. "lso, inthe second year only, 4a*er #ill re uire net reinvestment of anadditional D1) million to finance future gro#th. 4a*er's applicablemarginal tax rate is $) percent. "fter the second year, the free cashflo#s from 4a*er to la er #ill gro# at a constant rate of $ percent.The firm has determined that 4a*er:s cost of e uity is 1 .( percent andhas estimated that after the second year the #eighted average cost ofcapital #ill be 1$E. 4a*er currently has no debt outstanding. "ssumethat all cash flo#s are end-of-year and that the 4a*er ac uisition #illcost la er D$( million. 9alculate the value to la er of 4a*er:s e uityand determine the ?0C of the proposed ac uisition to la er.

a. D $(.) millionb. D /.2 millionc. D //.) milliond. D11!.2 millione. D1!!.) million




CHAPTER 25ANS0ERS AND SOLUTIONS




1 . Synergistic merger Answer: a Diff: E

2 . Sources of synergy Answer: a Diff: E

! . Spin-off Answer: b Diff: E

$ . Holding companies Answer: b Diff: E

( . Defensive mergers Answer: b Diff: E

. Conglomerate merger Answer: b Diff: E

. Merger analysis Answer: a Diff: E

/ . Merger terms Answer: a Diff: E

. Defensive tactics Answer: a Diff: E

1) . Poison pill defense Answer: a Diff: E

11 . oint venture Answer: a Diff: E

12 . !everaged buyout Answer: a Diff: E

1! . Mergers and interest rates Answer: b Diff: E

1$ . Merger accounting Answer: b Diff: E

1( . Merger accounting Answer: b Diff: E

1 . Merger accounting Answer: a Diff: E

1 . Holding company advantages Answer: b Diff: M

1/ . "nternational mergers Answer: a Diff: M

1 . Merger cas# flows Answer: b Diff: M

2) . $elevant merger cas# flows Answer: a Diff: M

21 . %inancial merger Answer: a Diff: M

22 . &wo-tier offer Answer: b Diff: M

2! . 'ertical merger Answer: a Diff: M

2$ . Congeneric merger Answer: a Diff: M

2( . Merger motivation Answer: a Diff: M

2 . Merger motivation Answer: b Diff: M

2 . Managerial control Answer: b Diff: M

2/ . Managerial opposition Answer: b Diff: M

2 . Merger discount rate Answer: b Diff: M

!) . Synergistic gain Answer: b Diff: M



!1 . Merger analysis Answer: a Diff: M

!2 . Merger analysis Answer: b Diff: M

!! . Merger analysis Answer: a Diff: M

!$ . Merger tactics Answer: e Diff: E

!( . Mergers Answer: e Diff: E

! . Defensive strategies Answer: d Diff: E

! . Miscellaneous concepts Answer: c Diff: E

!/ . Merger motivation Answer: d Diff: M

! . !evel of merger activity Answer: c Diff: M

$) . Merger analysis Answer: e Diff: M

$1 . Aspects of mergers Answer: d Diff: M

$2 . !()s Answer: e Diff: M

$! . Miscellaneous concepts Answer: b Diff: M

$$ . Merger analysis Answer: d Diff: M

$( . Merger analysis Answer: c Diff: M

$ . Merger accounting Answer: b Diff: M

$ . Ma*imum price per s#are Answer: d Diff: E

0rice per share H D1/.1!.HmillionD$

millionD 2.(2

$/

. "ntercompany dividends Answer: a Diff: E

>ffective tax rate H %1 - >xclusion&%Tax rate& H %1 - ). )&%).!$& H 1).2E.

?et dividends H 6ross dividends - Tax H D2,()),))) - D2,()),)))%1 - ). )&%).!$& H D2,()),))) - D2((,))) H D2,2$(,))).

Alternate method >ffective tax rate H Tax amount 6ross dividends. H 2((,))) 2,()),))) H 1).2E.



$. Discount rate Answer: c Diff: E

r s4 H /E J 2.)%$E& H 1 EB r s7 H ).2)%/E& J )./)%1 E& H 1$.$E.()

. Post-merger return to e+uity Answer: e Diff: M

9alculate the current re uired return to Grieble:s e uityK r G H r f J b%r mrp & H E J %). &$E H . E9alculate Grieble:s unlevered cost of e uityK r 7 H # dr d J # s r s H ).2)%/E& J )./)% . E& H .2/E9alculate Grieble:s levered cost of e uity at ne# capital structure #ith ne#cost of debtK

r 4 H r 7 J %r u L r d&%8 & H .2/E J % .2/E - E& %). ).$& H . E (1. 'alue of ac+uisition Answer: b Diff: M

r 4 H r f J b%r mrp & H /E J 2.)%$E& H 1 E

r 7 H # dr d J # s r s H ).!)%1)E& J ). )%1 E& H 1$.2E

Time lineK %In millions& ) r H 1$.2E 1 2 ! $ Fears

M M M M M0C H = 2 $ ( 1)

@C H 1) F9F $ H 11

Financial calculator solutionK %In millions&InputsK 9F ) H )B 9F 1 H 2B 9F 2 H $B 9F ! H (B 9F $ H 11 B I H 1$.25utputK ?0C H D . H Calue of operations.

Calue of e uity H value of operations L value of debt H D . L 1( H D 1.million.

(2

. ,ACC for ac+uired firm Answer: d Diff: M

illybob:s unlevered cost of e uity is 12E, because it has no debt. "t adebt level of !)E, and a debt interest rate of E the levered cost of e uityisK

r s4 H r s7 J %r s7 L r d&%8 & H 12E J %12E - E&%).! ). & H 1!.!E.<"99 H # dr d%1-T& J # r H ).!% E&%1 L ).$& J ). %1!.!E& H 1). E

(!. ,ACC of target Answer: c Diff: M

The pre merger #eight on debt is ( %(J1)& H ).!!!



The pre-merger re uired rate on e uity is E J 1.! %$E& H 11.$$E<"99 H # dr d%1-T& J # r H ).!!!%11E&%1-).$)& J ). %11.$$E& H ./!E

($. Discount rate for value of operations Answer: c Diff: M

The correct discount rate is the unlevered cost of e uity. The levered costof e uity is E J 1.! %$E& H 11.$$E, the percent of debt is ( %(J1)& H ).!!!.

The rate on the debt is 11E

The unlevered cost of e uity is # dr d J # e r s4 H ).!!!%11E& J ). %11.$$E& H11.2 E

((

. 'alue of e+uity Answer: b Diff: M

Time lineK %In millions&

) rH11.2 E 1 2 ! $ ears

M M M M M0C H = $.) $.) $.) 1 .)

Financial calculator solutionKInputsK 9F ) H )B 9F 1 H $,))),)))B ? 3 H !B 9F 2 H 1 ,))),)))B I H 11.25utputK 0C Inflo#s H D22,1) , 2 H vops.

Calue of e uity H vops L debt H 22.1) L ( H D1 .1) million.

(

. Merger P' Answer: c Diff: &

Time lineK %In millions& ) r u H 1 .(E 1 2 g H $E ! ears

M M M M-$( J J2( 1(%1.)$&

-1) @C H 1(%1.)$&1( H F9F %).1$ L ).)$&

J 2 H 1(1

1(1 !

Cops H %1.1 (& J 1 ! %1.1 (& 2 H D1!!.) H C e uity since there is no debt.

The npv is 1!! L $( H D// million

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FM11 Ch 25 Test Bank