Question 1

The appropriate discount rate for the combined firms is generally the target's cost of capital unless the two firms have similar risk profiles and are based in the same country.

Accepted Answer

The answer of The appropriate discount rate for the combined...

Question 2

A simple model to project cash flow rarely involves the projection of revenue and the various components of cash flow as a percent of projected revenue.

Accepted Answer

A simple model to project cash flow usually involves the projection of revenue and the various components of cash flow as a percent of projected revenue.

Question 3

Financial models are of little value in determining whether the proposed purchase price can be financed by the acquirer.

Accepted Answer

Financial models are useful in determining whether the proposed purchase price can be financed by the acquirer. These models help the acquirer to analyze various financing options and estimate the impact of different capital structures on the company's financials. Therefore, financial models are an important tool in determining the feasibility of a potential acquisition.

Question 4

Common size financial statements may be constructed by calculating the percentage each line item of the income statement,balance sheet,and cash flow statement is of annual sales for each quarter or year for which historical data are available.

Accepted Answer

Common size financial statements are calculated as a percentage of a base amount, such as annual sales, for each line item of the financial statements.

Question 5

In calculating the value of net synergy,the costs required to realize the anticipated synergy should be ignored because they are difficult to forecast.

Accepted Answer

The costs required to realize the anticipated synergy should not be ignored as they are an important factor in calculating the value of net synergy. These costs should be estimated and subtracted from the anticipated benefits in order to determine the true value of net synergy.

Question 6

By expressing the target's line-item data as a percentage of sales,it is possible to compare the target company with other companies' line item data expressed in terms of costs to highlight significant differences.

Accepted Answer

The answer of By expressing the target's line-item data as...

Question 7

Historical cash flow may be adjusted by deducting unusually large increases in reserves or by adding back large decreases in reserves from free cash flow to the firm.

Accepted Answer

The answer of Historical cash flow may be adjusted by...

Question 8

Examples of relevant historical relationships that are useful for forecasting cash flows include the relationship between fixed and variable expenses,and the impact on revenue of changes in product prices and unit sales.If these relationships can reasonably be expected to continue through the forecast period,they can be used to project the earnings and cash flows used in the valuation process.However,it is important to ignore cyclical movements in the data.

Accepted Answer

The answer of Examples of relevant historical relationships that are...

Question 9

Trend extrapolation,which entails extending present trends into the future using historical growth rates or multiple regression techniques,is rarely used to forecast cash flow.

Accepted Answer

Trend extrapolation is commonly used in financial forecasting, including cash flow projections, as it provides a basis for estimating future performance based on historical data.

Question 10

Potential sources of value rarely include factors not recorded on a firm's balance sheet.

Accepted Answer

While a firm's balance sheet provides a good measure of its tangible assets and liabilities, there are many potential sources of value that are not recorded on the balance sheet, such as brand equity, customer loyalty, intellectual property, and human capital.

Question 11

Value drivers are factors such as product volume,selling price,and cost of sales that have a significant impact on the value of the firm whenever they are altered.

Accepted Answer

Value drivers are indeed factors that have a significant impact on the value of the firm whenever they are altered. These factors can include changes in product volume, selling price, cost of sales, and other key elements that affect a company's performance and success. By understanding and analyzing value drivers, companies can make strategic decisions that can help them increase their overall value and achieve greater success in their markets.

Question 12

In determining the initial offer price,the acquiring company must decide how much of anticipated synergy it is willing to share with the target firm's shareholders.

Accepted Answer

The amount of synergy that the acquiring company is willing to share with the target firm's shareholders is a factor that can influence the initial offer price.

Question 13

It is rarely useful to review more than one or two years of historical data for the acquiring or target firms.

Accepted Answer

Reviewing more than one or two years of historical data for acquiring or target firms is often crucial for understanding long-term performance, trends, financial health, and strategic fit, which can significantly impact the decision-making process in mergers and acquisitions.

Question 14

Financial ratio analysis is the calculation of performance ratios from data in a company's financial statements to identify the firm's financial strengths and weaknesses.

Accepted Answer

Financial ratio analysis involves calculating various ratios based on financial statement data to evaluate a company's financial performance and potential risks. These ratios can help reveal a company's strengths, weaknesses, and areas for improvement, making them useful tools for investors, analysts, and managers.

Question 15

The accuracy of any valuation is heavily dependent on understanding the historical competitive dynamics of the industry,the historical performance of the company within the industry,and the reliability of the data used in the valuation.

Accepted Answer

Valuation analysis requires an understanding of the industry, company performance, and data reliability, so accuracy is indeed heavily dependent on these factors.

Question 16

The appropriate financial structure can be determined from a range of different scenarios created by making small changes in selected value drivers.

Accepted Answer

By adjusting various value drivers such as interest rates, tax rates, and capital expenditures, different financial scenarios can be created, allowing for the determination of the optimal financial structure for a company.

Question 17

Revenue-related synergy may result from the acquirer being able to sell their products to the target firm's customers.

Accepted Answer

Revenue-related synergy is related to an increase in revenue through the combined efforts of the two companies. In this case, the acquirer can potentially increase their revenue by selling their products to the target firm's customers.

Question 18

It is unimportant whether the acquirer uses the target's or its own weighted average cost of capital when valuing the target firm.

Accepted Answer

The acquirer should use the target firm's weighted average cost of capital (WACC) when valuing the firm, as it represents the cost of the target's specific mix of debt and equity. Using the acquirer's WACC would not accurately reflect the target firm's cost of capital and could lead to an inaccurate valuation.

Question 19

Competitive dynamics simply refer to the factors within the industry that determine industry profitability and cash flow.

Accepted Answer

Competitive dynamics are the factors that determine industry profitability and cash flow, such as the level of competition, bargaining power of suppliers and buyers, new entrants, substitutes, and the degree of rivalry among existing competitors.

Question 20

Assume Firm A's acquisition of Firm B results in a reduction in the combined firms' debt-to-total capital ratio to .25.If the same ratio for the industry is .5,the combined firm may be able to increase its borrowing to the industry average,assuming no extenuating circumstances.However,this should not be viewed as a source of value to the acquiring firm.

Accepted Answer

The answer of Assume Firm A's acquisition of Firm B...

Quiz 9: Applying Financial Models to Value, structure, and Negotiate Mergers and Acquisitions