Question 1

Which group most consistently benefits from the process of one business acquiring another business?

Accepted Answer

D

Question 2

Live in Colour! Inc. is a steadily growing regional company-owned chain of home decorating stores with two million shares outstanding. Its share price at the start of the year was $31.50 with a P/E of 10. The founder and president, an award winning designer, retained 15% of the shares. The rest traded sporadically on the TSX and were held principally in lots of less than 500 by small investors. Peri Paint and Wallpaper is a US-based chain looking for entry into Canada and at Live in Colour!'s mall locations. It purchased 20% of Live In Colour! shares causing a flurry on the TSX and a price gain to $42.25 a share. Live in Colour!'s president purchased another 100,000 shares and gained assurances from shareholders who own another 15% of shares that they would not sell or vote out the current Board of Directors who are opposed to the takeover. Assuming analysts are right and they believe that the P/E ratio will go to 25 before ownership of the company is decided, what would the maximum cash outlay that a white squire would have to be prepared to pay?

Accepted Answer

E

Question 3

Granastein Grocers purchased Ridgway Food Warehousing and Logistics Inc. What is this type of merger?

Accepted Answer

Vertical merger involves the combination of two companies operating at different stages of the production process but within the same industry. In this case, Granastein Grocers may have acquired Ridgway Food Warehousing and Logistics Inc. to gain control over the storage and distribution of their products.

Question 4

Victorian Antiques Ltd. has a price/earnings ratio of 22 and is selling for $32.00 a share. Smith and Sons is a family held business not traded on the stock exchange. Which of the following characteristics of Victorian Antiques must be identical to Smith and Sons to allow a comparison with Victorian Antiques to determine the valuation of the unlisted company?

Accepted Answer

The risk level and growth rate of the two companies must be identical to make a comparison for valuation purposes. The other options are not as relevant in determining the value of an unlisted company.

Question 5

What type of merger occurs when a company eliminates a competitor by buying it?

Accepted Answer

A horizontal merger occurs when a company buys a competitor with similar products or services, essentially eliminating competition in the market.

Question 6

What is the concept underlying the term "market for corporate control"?

Accepted Answer

The concept underlying the term "market for corporate control" is that mergers and acquisitions serve as a mechanism to replace underperforming or weak management teams with more efficient ones, thereby ensuring that companies are managed in a way that maximizes profitability and shareholder wealth.

Question 7

When a large multinational packaged goods company purchased the advertising agency it has used for the past five years, its net savings after increases to salaries and overhead was equal to 12% of its media purchases and advertising production costs. There was no loss of the agency's client base and creative success increased as revenue-generation concerns diminished. What is this an example of?

Accepted Answer

This is an example of Synergy, where the combined operation of the company and the advertising agency it purchased is more efficient or productive than their separate operations. The net savings and increased creative success indicate that the whole is greater than the sum of its parts, a hallmark of synergy.

Question 8

Dominion Brands Inc., a packaged goods firm, has ten factories, total value of $150 million, that have been operating at an average capacity of 54%. The net income before tax and amortization (EBITDA) is $36 million annually. The company is considering the purchase of a regional manufacturer that went up for sale for $110 million. The assets of the acquisition would be broken up and sold and the production rolled into the Dominion facilities. It would provide an overall improvement in capacity to 70% and increase annual income to $47 million. The sale of assets, net of all transactions cost, would yield $40 million. Considering an investment horizon of 10 years with no residual value at the end and a cost of capital for Dominion of 10%, should the company go forward with the acquisition?

Accepted Answer

The answer of Dominion Brands Inc., a packaged goods firm,...

Question 9

When Tuscarora Transport was purchased by Domus Logistics Inc., Domus was able to reduce costs by using the larger customer base to ensure trucks filled to capacity on the routes, to increase utilization of salaried maintenance personnel in outlying regions to 80% from 60% and to more broadly allocate the costs of telecommunications hardware and administration. What is the term for these types of benefits to Domus of the Tuscarora acquisition?

Accepted Answer

The benefits described (filling trucks to capacity, increasing utilization of maintenance personnel, and allocating costs more broadly) are all examples of economies of scale, which is the term for the cost advantages that arise when production expands.

Question 10

What are managers who pursue merger and acquisition activities for personal goals or interests at the expense of maximizing shareholder wealth demonstrating?

Accepted Answer

Managers who pursue merger and acquisition activities for personal goals or interests at the expense of maximizing shareholder wealth are demonstrating the agency problem, in which the interests of the managers do not align with the interests of the shareholders they are supposed to serve.

Question 11

Shareholders of a company being merged with another may take bonds from the acquiring company in exchange for their shares instead of common shares in the new company. What advantage does this have for the acquired company shareholders?

Accepted Answer

By taking bonds instead of common shares, shareholders are essentially becoming lenders to the acquiring company. This means they are entitled to interest payments regardless of the company's earnings, whereas dividends to common shareholders may be withheld during periods of low earnings. This provides a more predictable cash flow for the shareholders-turned-lenders.

Question 12

What is a disadvantage associated with replacement cost method of business valuation?

Accepted Answer

The answer of What is a disadvantage associated with replacement...

Question 13

To avoid the situation where a localized economic downturn eliminates the income of the company, which type of diversification should a company practice?

Accepted Answer

Geographic diversification involves expanding a company's operations to different countries or regions. This type of diversification can reduce risks associated with localized economic downturns because the company is not solely reliant on one region for revenue. By expanding to different regions, the company can spread out its risk and avoid being impacted by a downturn in any one area. Asset diversification involves investing in non-related assets, while conglomerate diversification involves expanding into unrelated businesses. Revenue diversification involves expanding a company's product line or customer base within its existing market. Investment capital diversification involves diversifying a company's investment portfolio.

Question 14

Assiniboine Mills, incorporated ten years ago, shows on its year-end balance sheet net total assets of $30 million, current liabilities of $5 million, long term liabilities of $13 million and paid-in capital from common shares of $12 million at $15.00 each, now selling for $19.50. Of the assets, net realizable value of current assets and liabilities is 90% of book values, $9 million and $5 million, respectively. Land with a book value of $5 million, has appreciated steadily, averaging a 6% increase year-over-year. Building and equipment can be sold at net book value. Assiniboine issued 15-year bonds five years ago at par with an annual coupon rate of 6% and a face value of $12 million. Current interest rates are at 8%.What is the liquidation value per common share?

Accepted Answer

The liquidation value per common share is calculated by determining the net realizable value of assets minus liabilities, then dividing by the number of shares. Current assets are 90% of $9 million, land appreciated to $6.7 million, and bonds are valued at $10.8 million due to interest rate changes. After adjusting for liabilities, the remaining value is divided by the number of shares (800,000) to get $22.71 per share.

Question 15

What is the business strategy involving a defensive tactic against a hostile takeover where severance packages involving enormous sums are approved by the Board of Directors to be paid to senior managers in the event of dismissal because of a takeover known as?

Accepted Answer

This business strategy is known as a golden parachute. The Board of Directors approves severance packages for senior managers that include substantial financial benefits if the company is taken over, with the intention of deterring a hostile takeover bid.

Question 16

What does the term "merger" indicate?

Accepted Answer

A merger refers to a mutual agreement between two businesses to combine into a single enterprise, with both businesses retaining a measure of control over the merged entity. The other options do not fully describe the concept of a merger.

Question 17

Bryceland Market Garden has current assets of $900,000, capital assets of $6 million, accumulated depreciation of $1.5 million, intangible assets of $250,000, current liabilities of $500,000, a mortgage for $1 million and a bank loan of $150,000. Common shares, at an issue price of $20 a share, provided $4 million of cash. Using the balance sheet (or net book value) method, what is the value of the business per share?

Accepted Answer

The answer of Bryceland Market Garden has current assets of...

Question 18

Craylon Corporation has net income after tax of $4.5 million, cash of $0.5 million, current liabilities of $3.4 million, debt of $6.8 million, retained earnings of $1.5 million, book value for its 5 million common shares of $30 million and a current price/earnings multiple of 18. It is considering the purchase of Dahlia Ltd. whose shares trade at $32.00 and at price/earnings multiple of 24. Craylon plans to offer two of its own shares for one of Dahlia's. What is the disadvantage to this offer?

Accepted Answer

It is less attractive to Dahlia as it is implicitly asking shareholders in the target company to bear the risk of the merger's success.

Question 19

What is the Balance Sheet Method of business valuation most useful in determining?

Accepted Answer

The answer of What is the Balance Sheet Method of...

Question 20

Central Electric Ltd. (CEL), cost of capital of 9%, net income after tax of $140 million and 10 million common shares outstanding. It wishes to spin off its higher risk Wi-Fi business unit. Earnings from the business unit represent 20% of CEL net income. The Wi-Fi unit has a cost of capital of 12% and would issue one million common shares. To accomplish the spin-off, what will CEL most likely have to do?

Accepted Answer

To accomplish the spin-off, CEL will most likely need to provide one share for every 10 shares they hold in CEL, as the Wi-Fi unit plans to issue one million shares and CEL has 10 million shares outstanding. This ensures that the distribution is proportional to the existing ownership in CEL.

Quiz 14: Mergers, Acquisitions, and the Valuation of Shares