Question 1

A spinoff is a last resort effort to divest a badly failing business.

Accepted Answer

A spinoff can also be a strategic decision to separate a profitable business unit from the parent company in order to maximize its value and competitiveness.

Question 2

A leveraged buyout is a transaction in which a publicly traded company is converted into a privately held firm.

Accepted Answer

A leveraged buyout (LBO) typically involves a group of investors using a significant amount of debt to purchase a publicly traded company, take it private, and then operate it as a privately held firm. By going private, the company is no longer subject to the reporting and disclosure requirements of the Securities and Exchange Commission (SEC).

Question 3

In Chapter 7 bankruptcy, firms are voluntarily reorganized. Chapter 11, on the other hand, requires immediate liquidation.

Accepted Answer

This statement is incorrect. In Chapter 11 bankruptcy, firms are given the opportunity to reorganize and restructure their debts under court supervision, not immediate liquidation.

Question 4

Alpha Corp is thinking about acquiring Omega Inc. Omega generated cash of $50M last year and is expected to grow at 5% indefinitely. Alpha expects synergies of at least $15M per year after the merger which will also grow at 5%. Omega has 20M shares of common stock outstanding on which stockholders earn a return of about 15%. What is the maximum price per share Alpha should offer for Omega?

Accepted Answer

The answer of Alpha Corp is thinking about acquiring Omega...

Question 5

The emergence of the junk bond as a financing tool contributed significantly to the merger and acquisition activity of the 1980s. Describe the junk bond and explain the premise on which its popularity grew. What was the inherent flaw in the rationale?

Accepted Answer

The answer of The emergence of the junk bond as...

Question 6

Technical insolvency is a firm's inability to meet its current obligations. Legal insolvency means the firm's liabilities exceed its assets.

Accepted Answer

Technical insolvency and legal insolvency are two different concepts, where technical insolvency pertains to a firm's inability to meet its current obligations, while legal insolvency refers to a situation where a firm's liabilities exceed its assets.

Question 7

Why don't hostile takeovers create feuds between the stockholders of the companies involved?

Accepted Answer

The answer of Why don't hostile takeovers create feuds between...

Question 8

Lavender Inc. is thinking about acquiring Scarlet Corp. After all benefits, synergies and tax effects, Lavender's management has estimated that the incremental cash flows from the acquisition will be as follows
 $\begin{array}{ll}
\text { Year } & \text { CasihFlow } \
\hline 1& \$ 120,000 \
2 & \$ 135,000 \
3 & \$ 140,000 \
\text { Beyond } & 3 \% \text { growth }
\end{array}$ They have also estimated the project's discount rate, appropriately adjusted for risk, at 12%.
Scarlet is a privately owned firm with 50,000 shares of stock outstanding. How much should Lavender be willing to pay per share?

Accepted Answer

The answer of Lavender Inc. is thinking about acquiring Scarlet...

Question 9

There is virtually no distinction between economic and commercial business failures.

Accepted Answer

Economic failures refer to macro-level events such as recession, inflation, and changes in government policies, whereas commercial failures are more specific to individual businesses and their decisions regarding operations and management.

Question 10

A common method of debt restructuring in bankruptcy is the conversion of debt into equity.

Accepted Answer

Debt restructuring in bankruptcy can involve converting debt into equity, which means that the creditors become shareholders in the company. This is a common method of reducing the debt burden of a company in bankruptcy.

Question 11

Appleton Inc. wants to acquire Gentronix Corp., but its offer of a friendly merger has been rejected. Gentronix's board of directors includes six of the firm's top managers who together own 40% of its stock. Is a hostile takeover bypassing the board likely to succeed?

Accepted Answer

The answer of Appleton Inc. wants to acquire Gentronix Corp.,...

Question 12

In a Chapter 11 bankruptcy, a firm voluntarily enters the procedure intending a reorganization under which it can continue in business. A Chapter 7 bankruptcy, on the other hand generally results in the firm's liquidation.

Accepted Answer

Chapter 11 bankruptcy is intended for reorganization, while Chapter 7 bankruptcy typically results in liquidation.

Question 13

The following information relates to the planned acquisition of a target. Cash flow and synergy figures are after tax. ($M)
 $\begin{array}{lr}\text { EstimatedCash Flow for the first } 3 \text { years }&\$50,\$65,\$75\
\text { Estimated amual synergies }&\$15\\text { Planned reinvestment (including synergies) }&40\%\\text { Projected anmual growth rate beyond the third year }&4\%\\text { Return on the market }\left(k_{M}\right)&16\%\\text { The } \left.90 \text { day } \mathrm{T} \text { bill rate ( } \mathrm{k}_{\mathrm{RF}}\right)&8\%\\text {Beta of the acquiring company }&1.25\
\text { Beta of the target company}&1.75\\text { Number of outstanding shares of target }&10 \text { million }\\text { Today's per share selling price of target }&\$16.50
\end{array}$
 Calculate the maximum percentage premium that should be offered to the target company's shareholders.

Accepted Answer

The answer of The following information relates to the planned...

Question 14

It is generally accepted that horizontal mergers (between competitors) decrease competition. Imagine a three firm industry in which the competitors' market shares are as follows:
 $\begin{array}{ll}
\text { A } & 26 \% \
\text { B } & 20 \
\text { C } & 54 \%
\end{array}$ Is it possible that a merger between A and B would increase competition in the industry to the benefit of customers?

Accepted Answer

The answer of It is generally accepted that horizontal mergers...

Question 15

Tancesco Inc. is considering acquiring Aldine Corp. which it has estimated will generate the following after tax cash flows over the next three years ($000). After that management expects a growth rate of 3% indefinitely.
 $\begin{array}{lr}1&2&3\\$580&\$600&\$650
\end{array}$
 In addition, Tancesco thinks a merger will produce $40,000 per year in after tax synergies. Aldine has 65,000 shares of common stock outstanding. The company's beta is 1.6, the market is currently returning an average of 12% on stock investments and short term treasury bills are yielding 3%.
What should Tancesco be willing to pay per share for Aldine if management is willing to value the acquisition over an indefinitely long time horizon?
($000)

Accepted Answer

The answer of Tancesco Inc. is considering acquiring Aldine Corp....

Question 16

An LBO is a takeover but not a merger.

Accepted Answer

An LBO (leveraged buyout) is a type of takeover where a company or group of investors acquire a controlling interest in another company using a significant amount of borrowed money or leverage. It is different from a merger, which typically involves the joining of two companies to form a new entity with shared ownership and management.

Question 17

Elliott Mfg. is considering acquiring Fox Inc. Fox's cash flows have been estimated in detail for the next three years and are $40M, $45M and $50M respectively. A terminal value consistent with that estimate has been calculated at $700M. The risk-adjusted discount rate for analysis is 12%.
a.	In total, what should Fox be worth to Elliott?
b.	If Fox, Inc. has 12 million shares outstanding, what is the most Elliott should offer, per share, for its stock?
c.	What growth rate did Elliott assume in calculating Fox's terminal value?
d.	If the growth rate assumption changes to 8%, what is the new maximum offer?

Accepted Answer

The answer of Elliott Mfg. is considering acquiring Fox Inc....

Question 18

Two companies are competitors. The following facts about the companies and their industry are significant.
a.	Both firms use similar production, distribution, and sales techniques.
b.	One firm is losing money, while the other is profitable.
c.	There is a great deal of overhead in the business.
d.	The industry is dominated by a single firm that's about as big as these two combined.
 The two companies are considering a merger. State several arguments in favor of the combination.

Accepted Answer

The answer of Two companies are competitors. The following facts...

Question 19

Commercial failure (as opposed to economic failure) is an issue between a business and its owners rather than its creditors.

Accepted Answer

Commercial failure refers to a business's inability to remain competitive or financially viable in the market, affecting not just the owners but also creditors, employees, and other stakeholders. Economic failure, on the other hand, is a broader term that can encompass various aspects of an economy or business operations failing to meet expected outcomes.

Question 20

Contrast the merger negotiations in a friendly merger and a hostile merger.

Accepted Answer

The answer of Contrast the merger negotiations in a friendly...

Quiz 18: Corporate Restructuring