Question 1

Which of the following is not true of an acquisition of equity or tender offers?

Accepted Answer

In most cases, not 100% of the equity of the target firm is tendered, as some shareholders may choose not to sell their shares.

Question 2

Firm X is being acquired by Firm Y for £35,000 worth of Firm Y equity.The incremental value of the acquisition is £2,500.Firm X has 2,000 shares of equity outstanding at a price of £16 a share.Firm Y has 1,200 shares of equity outstanding at a price of £40 a share.What is the actual cost of the acquisition using company equity?

Accepted Answer

The answer of Firm X is being acquired by Firm...

Question 3

Rudy's and Blackstone are all-equity firms.Rudy's has 1,500 shares outstanding at a market price of £22 a share.Blackstone has 2,500 shares outstanding at a price of £38 a share.Blackstone is acquiring Rudy's for £36,000 in cash.What is the merger premium per share?

Accepted Answer

The merger premium per share is calculated as the difference between the offer price per share and the current market price per share. Rudy's is being acquired for £36,000, and it has 1,500 shares outstanding, so the offer price per share is £36,000 / 1,500 = £24. The current market price per share is £22. Therefore, the merger premium per share is £24 - £22 = £2.00.

Question 4

Firm V was worth £450 and Firm A had a market value of £375.Firm V acquired Firm A for £425 because they thought the combination of the new Firm VA was worth £925.What is the synergy from the merger of Firm V and Firm A?

Accepted Answer

The answer of Firm V was worth £450 and Firm...

Question 5

Firm A is acquiring Firm B for £25,000 in cash.Firm A has 2,000 shares of equity outstanding at a market value of £21 a share.Firm B has 1,200 shares of equity outstanding at a market price of £17 a share.Neither firm has any debt.The net present value of the acquisition is £1,500.What is the price per share of Firm A after the acquisition?

Accepted Answer

The total value of Firm A before the acquisition is 2,000 shares * £21 = £42,000. The cost of acquiring Firm B is £25,000, and the NPV of the acquisition is £1,500. The new total value of Firm A is £42,000 + £1,500 = £43,500. The number of shares remains 2,000, so the price per share after the acquisition is £43,500 / 2,000 = £21.75.

Question 6

Rudy's and Blackstone are all-equity firms.Rudy's has 1,500 shares outstanding at a market price of £22 a share.Blackstone has 2,500 shares outstanding at a price of £38 a share.Blackstone is acquiring Rudy's for £36,000 in cash.The incremental value of the acquisition is £3,500.What is the value of Rudy's Inc.to Blackstone?

Accepted Answer

The value of Rudy's Inc. to Blackstone is the cash paid plus the incremental value, which is £36,000 + £3,500 = £39,500.

Question 7

Jennifer's Boutique has 2,100 shares outstanding at a market price per share of £26.Sally's has 3,000 shares outstanding at a market price of £41 a share.Neither firm has any debt.Sally's is acquiring Jennifer's for £58,000 in cash.The incremental value of the acquisition is £2,500.What is the value of Jennifer's Boutique to Sally's?

Accepted Answer

To find the value of Jennifer's Boutique, we need to calculate its market value first. 
Market value of Jennifer's Boutique = 2,100 x £26 = £54,600
Next, we need to add the incremental value of the acquisition to this market value.
Total value of Jennifer's Boutique = £54,600 + £2,500 = £57,100
Since Sally's is acquiring Jennifer's Boutique for £58,000, this means that Sally's is paying more than the actual value of Jennifer's Boutique. Therefore, the value of Jennifer's Boutique to Sally's is £57,100.

Question 8

Firm A is acquiring Firm B for £40,000 in cash.Firm A has 2,500 shares of equity outstanding at a market value of £18 a share.Firm B has 1,500 shares of equity outstanding at a market price of £25 a share.Neither firm has any debt.The net present value of the acquisition is £2,500.What is the value of Firm A after the acquisition?

Accepted Answer

The total cost of the acquisition is £40,000, which Firm A will be paying in cash. This means that the value of Firm A after the acquisition will be the sum of its original equity value and the value of the cash used to acquire Firm B.

The value of Firm A's original equity is 2,500 shares * £18 per share = £45,000.

The cash used for the acquisition is £40,000, and we know the net present value of the acquisition is £2,500. Therefore, the total value of Firm B is £40,000 + £2,500 = £42,500.

Firm B has 1,500 shares outstanding at a market value of £25 per share, which means the total equity value of Firm B is 1,500 shares * £25 per share = £37,500.

After the acquisition, the total equity value of the combined firm will be £45,000 (Firm A) + £37,500 (Firm B) = £82,500.

Finally, we need to divide the total equity value of the combined firm by the total number of shares outstanding to find the value of Firm A's shares after the acquisition. There are 2,500 shares outstanding from Firm A and 1,500 from Firm B, for a total of 4,000 shares outstanding.

Therefore, the value of Firm A's shares after the acquisition will be £82,500 / 4,000 shares = £20.625 per share.

So the value of Firm A after the acquisition is £20.625 per share * 2,500 shares = £51,562.50, which is closest to D) £47,500.

Question 9

Turner has £4.2 million in net working capital.The firm has fixed assets with a book value of £48.6 million and a market value of £53.4 million.Martin & Sons is buying Turner for £60 million in cash.The acquisition will be recorded using the purchase accounting method.What is the amount of goodwill that Martin & Sons will record on its balance sheet as a result of this acquisition?

Accepted Answer

The answer of Turner has £4.2 million in net working...

Question 10

Jennifer's Boutique has 2,100 shares outstanding at a market price per share of £26.Sally's has 3,000 shares outstanding at a market price of £41 a share.Neither firm has any debt.Sally's is acquiring Jennifer's for £58,000 in cash.What is the merger premium per share?

Accepted Answer

The answer of Jennifer's Boutique has 2,100 shares outstanding at...

Question 11

If the All-Star Fuel Filling Company,a chain of gasoline stations acquire the Mid-States Refining Company,a refiner of oil products,this would be an example of a:

Accepted Answer

A vertical acquisition occurs when a company acquires a supplier or a distributor of its products or services. In this case, All-Star Fuel Filling Company is acquiring Mid-States Refining Company, which is a refiner of oil products. Therefore, it is a vertical acquisition. A conglomerate acquisition involves acquiring a company in a completely different industry, a white knight is a friendly party that helps a company fend off a hostile takeover bid, a going-private transaction involves a company becoming privately owned, and a horizontal acquisition involves acquiring a competitor in the same industry.

Question 12

Alto and Solo are all-equity firms.Alto has 2,400 shares outstanding at a market price of £24 a share.Solo has 4,000 shares outstanding at a price of £17 a share.Solo is acquiring Alto for £63,000 in cash.The incremental value of the acquisition is £5,500.What is the net present value of acquiring Alto to Solo?

Accepted Answer

The answer of Alto and Solo are all-equity firms.Alto has...

Question 13

When the management and/or a small group of investors take over a firm and the shares of the firm are delisted and no longer publicly available,this action is known as a:

Accepted Answer

A going-private transaction occurs when the management and/or a small group of investors take over a firm and the shares of the firm are delisted and no longer publicly available. This allows the company to operate outside the requirements of public reporting and shareholder demands.

Question 14

One of the most basic reasons for a merger is:

Accepted Answer

Cost reductions are one of the primary reasons for a merger. Combining operations and eliminating redundancies can lead to cost savings for both companies involved.

Question 15

Holiday & Sons is being acquired by Miller's for £20,000 worth of Miller's equity.Miller has 1,300 shares of equity outstanding at a price of £20 a share.Holiday has 1,000 shares outstanding with a market value of £18 a share.The incremental value of the acquisition is £2,000.What is the total number of shares in the new firm?

Accepted Answer

Miller's is issuing £20,000 worth of equity at £20 per share, which means they will issue 1,000 new shares (20,000 / 20). Adding these to the existing 1,300 shares results in a total of 2,300 shares.

Question 16

Cowboy Curtiss' Cowboy Hat Company recently completed a merger.When valuing the combined firm after the merger,which of the following is an example of the type of common mistake that can occur?

Accepted Answer

Using Curtiss' discount rate for the entire company is a mistake because the risk profile of the combined firm may differ from Curtiss' alone, requiring a new, appropriate discount rate.

Question 17

Winslow Co.has agreed to be acquired by Ferrier for £25,000 worth of Ferrier equity.Ferrier currently has 1,500 shares of equity outstanding at a price of £21 a share.Winslow has 1,000 shares outstanding at a price of £22.The incremental value of the acquisition is £4,000.What is the merger premium per share?

Accepted Answer

The answer of Winslow Co.has agreed to be acquired by...

Question 18

Goodday & Sons is being acquired by Baker for £19,000 worth of Baker equity.Baker has 1,500 shares of equity outstanding at a price of £25 a share.Goodday has 1,000 shares outstanding with a market value of £16 a share.The incremental value of the acquisition is £2,000.How many new shares of equity will be issued to complete this acquisition?

Accepted Answer

The incremental value of the acquisition is £2,000. Baker has 1,500 shares of equity outstanding at a price of £25 a share. So, the total value of Baker's equity is £37,500. After the acquisition, the total value of Baker's equity will be £39,500. So, the number of new shares of equity that will be issued is £2,000 / £25 = 80 shares.

Question 19

The Sligo Co.is planning on merging with the Thorton Co.Sligo will pay Thorton's equityholders the current value of their equity in shares of Sligo.Sligo currently has 2,300 shares of equity outstanding at a market price of £20 a share.Thorton has 1,800 shares outstanding at a price of £15 a share.How many shares of equity will be outstanding in the merged firm?

Accepted Answer

The answer of The Sligo Co.is planning on merging with...

Question 20

Firm Q is being acquired by Firm S for £30,000 worth of Firm S equity.The incremental value of the acquisition is £2,000.Firm Q has 1,900 shares of equity outstanding at a price of £15 a share.Firm S has 1,500 shares of equity outstanding at a price of £40 a share.What is the net present value of the acquisition given that the actual cost of the acquisition using company equity is £30,167?

Accepted Answer

The total value of Firm Q's equity is 1,900 shares x £15 per share = £28,500.
The total value of Firm S's equity is 1,500 shares x £40 per share = £60,000.
The incremental value of the acquisition is £2,000.
To calculate the net present value, we need to subtract the actual cost of the acquisition using company equity (£30,167) from the total value of the equity of the two firms plus the incremental value (i.e. £28,500 + £60,000 + £2,000 = £90,500).
Therefore, the net present value = £90,500 - £30,167 = £60,333.
Since we are looking for the rounded answer, the answer is C: £333.

Quiz 29: Mergers and Acquisitions