Question 1

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?

Accepted Answer

The answer of Tangshan Mining is considering the acquisition of...

Question 2

The long-run effect on the earnings per share of the merged firm depends largely on

Accepted Answer

The synergy of the merged firm, which refers to the increase in value resulting from the combination of the two firms, will have the largest impact on the long-run earnings per share of the merged firm. The pre-merger P/E ratio, ratio of exchange, and tax considerations may also have some influence, but they are not as significant as the potential synergy between the two firms.

Question 3

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?

Accepted Answer

The answer of ZhenYee Electronics, Inc. is considering the acquisition...

Question 4

Maxi, Inc. is evaluating the acquisition of Mini, Inc., which had a loss carryforward of $2.75 million which resulted from earlier operations. Maxi can purchase Mini for $3.5 million and liquidate the assets for $1.25 million. Maxi expects earnings before taxes in the three years following the acquisition to be as follows:  (These earnings are assumed to fall within the limit legally allowed for application of a tax loss carryforward resulting from the proposed acquisition.) Maxi has a 40 percent tax rate and a cost of capital of 10 percent. The total present value of tax advantage of the acquisition in the following three years is

Accepted Answer

To determine the tax advantage of the acquisition, we need to calculate the present value of the tax shield resulting from the loss carryforward.

Step 1: Calculate the present value of the cash flows from operations for the next 3 years:
PV(CF) = ($1,000,000/1.10) + ($1,750,000/1.10^2) + ($2,500,000/1.10^3) = $4,472,527

Step 2: Calculate the present value of the tax shield resulting from the loss carryforward:
PV(TS) = $2.75 million x 0.40 x (1 - 1 / 1.10^3) / 0.10 = $842,000

Step 3: Calculate the total present value of the tax advantage:
PV(TA) = PV(TS) - (Purchase price - Liquidation value) = $842,000 - ($3,500,000 - $1,250,000) = $592,000

Therefore, the total present value of tax advantage of the acquisition in the following three years is $842,000, which corresponds to answer choice B.

Question 5

When making a cash acquisition of a going concern, the acquiring corporation must be certain

Accepted Answer

The acquiring corporation must adjust the discount rate for risk differences to accurately reflect the risk profile of the acquired entity, ensuring that the valuation and financial projections are realistic.

Question 6

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

Accepted Answer

This is because a holding company owns a controlling interest in multiple subsidiary companies, giving them control over their assets without having to merge with them.

Question 7

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

Accepted Answer

By owning a holding company, individuals or entities can control multiple subsidiary companies and their assets, making it possible to control larger amounts of assets than they could by simply acquiring companies through mergers.

Question 8

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)

Accepted Answer

The answer of Tangshan Mining is attempting to acquire Zhengsen...

Question 9

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

Accepted Answer

If the P/E paid for a target company is less than the P/E of the acquiring company, it means the acquiring company is paying less for each dollar of earnings of the target company. This can result in a positive effect on the earnings per share (EPS) of the acquiring company, as the acquisition can increase the overall earnings of the company without a proportionate increase in the number of shares outstanding.

Question 10

Greenmail is a takeover defense under which the target firm repurchases a large block of stock at a premium from one or more shareholders in order to end a hostile takeover attempt by those shareholders.

Accepted Answer

This statement accurately describes the concept of greenmail.

Question 11

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

Accepted Answer

Holding companies often use leverage to finance their subsidiaries, which increases the overall risk in the event of financial difficulties of one or more subsidiaries.

Question 12

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

Accepted Answer

The P/E ratio is a measure of how much investors are willing to pay for each dollar of earnings. If the P/E paid is less than the P/E of the acquiring company, it means that investors are paying less for each dollar of earnings of the acquired company. This will result in a lower earnings per share for the acquired company.

Question 13

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

Accepted Answer

To calculate the maximum cash price Hayley Medical would be willing to pay for Health-o-Matic, we need to find out the present value of the tax savings that would result from acquiring Health-o-Matic with its loss carryforward.

1. First, let's calculate the tax savings for each year by applying Health-o-Matic's loss carryforward to Hayley Medical's earnings before taxes:

Year 1 tax savings = $3.75 million × 40% = $1.5 million
Year 2 tax savings = $3.75 million × 40% = $1.5 million
Year 3 tax savings = $2 million × 40% = $0.8 million

2. Next, let's calculate the present value of these tax savings using Hayley Medical's cost of capital of 15%:

PV of Year 1 tax savings = $1.5 million ÷ (1 + 0.15)^1 = $1.304 million
PV of Year 2 tax savings = $1.5 million ÷ (1 + 0.15)^2 = $1.132 million
PV of Year 3 tax savings = $0.8 million ÷ (1 + 0.15)^3 = $0.470 million

3. Finally, we can calculate the total present value of the tax savings as follows:

Total PV of tax savings = $1.304 million + $1.132 million + $0.470 million = $2.906 million

4. Since Hayley Medical can purchase Health-o-Matic for $4.5 million and liquidate the assets for $3.25 million, the net cost of the acquisition would be $1.25 million. Therefore, the maximum cash price Hayley Medical would be willing to pay for Health-o-Matic is:

Maximum price = net cost + total PV of tax savings = $1.25 million + $2.906 million = $4.156 million

Therefore, the best choice is (C) $4,410,000.

Question 14

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 of $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? Calculate the net value of a second alternative that would allow Tangshan to purchase a better quality asset for $12,000,000 that would provide a $2,600,000 in after-tax inflows for the next 5 years. Which alternative would you choose?

Accepted Answer

The answer of Tangshan Mining is considering the acquisition of...

Question 15

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.

Accepted Answer

A white knight is a friendly investor or company that acquires a corporation at fair consideration when it is under the threat of a hostile takeover, not a takeover defense mechanism involving the issuance of securities with special rights.

Question 16

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. If the ratio of exchange is 1.8, what will be the EPS of the merged firm?

Accepted Answer

The answer of Tangshan Mining is attempting to acquire Zhengsen...

Question 17

The overriding goal for merging is to

Accepted Answer

The primary goal of mergers is to increase shareholder wealth. This is typically achieved by maximizing the share price of the acquiring company, which in turn maximizes the value of the target firm. Increasing cash flows and maximizing operating efficiency may be secondary goals of the merger, but they are not the primary objective.

Question 18

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

Accepted Answer

A two-tier offer is designed to incentivize shareholders to tender their shares early by offering more favorable terms, such as a higher price per share or a lower minimum threshold for acceptance. This creates a sense of urgency and encourages shareholders to act quickly, while also allowing the acquirer to gain control of the target company more efficiently.

Question 19

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?

Accepted Answer

The answer of Jia's Oven Manufacturing is evaluating the acquisition...

Question 20

A poison pill is a takeover defense in which the target firm finds an acquirer more to its liking than the initial hostile acquirer and prompts the two to compete to take over the firm.

Accepted Answer

A poison pill is a strategy used by a target company to make itself less attractive to a hostile acquirer, often by issuing new shares to dilute the acquirer's stake, not by finding a more favorable acquirer.

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

The long-run effect on the earnings per share of the merged firm depends largely on

When making a cash acquisition of a going concern, the acquiring corporation must be certain

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

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

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

Greenmail is a takeover defense under which the target firm repurchases a large block of stock at a premium from one or more shareholders in order to end a hostile takeover attempt by those shareholders.

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

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

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.

The overriding goal for merging is to

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

A poison pill is a takeover defense in which the target firm finds an acquirer more to its liking than the initial hostile acquirer and prompts the two to compete to take over the firm.