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1. Twelve days ago A. Corporate Raider acquired 10...

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1. Twelve days ago A. Corporate Raider acquired 10 shares of stock in SMPL Corp. The Original Shareholders own the remaining 30 shares and the share price is currently $10. The Board of Directors of SMPL Corp. does not want Mr. Raider to gain control of the firm and, after consulting a recent graduate of a MBA program, have decided their best strategy is an exclusionary self tender offer to the Original Shareholders. If the Board uses cash to buy 10 shares from the Original shareholders at $15 per share, what will be the value of the 10 shares held by Mr. Raider after the tender offer is complete? In answering assume all original shareholders tender their shares and round to the nearest whole dollar. Answer: a. $150 b. $100 c. $83 d. $167 e. $63 2. A merger is more likely to succeed if: Answer: a. Management is able to correctly identify the specific sources of expected synergies. b. The acquiring firm uses an industry based discount rate to evaluate incremental cash flows from the merger. c. The target firm has no free cash flow. d. The bid price and the present value of synergy are evaluated using the flow-to-equity approach. e. The target firm has no preferred stock. 3. To increase the NPV of a merger management of the acquiring firm should: Answer: (a) Increase the premium paid for target shares. This is particularly effective for diversifying mergers and when acquirers use considerable amount of debt to fund the acquisition. This is known as the leverage effect and it works primarily by reducing the co-insurance discount. (b) Avoid paying a premium for target shares. (c) Reduce the estimate of synergies for the acquisition. One of the reasons so few mergers have a positive NPV is that management usually overestimates the value of synergies. (d) Use debt to finance the acquisition because the dollar volume of debt issues dominates equity issues by a considerable margin. (e)All of the above will increase the NPV of a merger. (f)None of the will increase the NPV of a merger. 4. If two leveraged firms merge, the cost of debt for the new firm will generally be lower than it was for the two firms as separate entities. One reason for this is Answer: (a) strategic fits. (b) net operating losses. (c) surplus funds. (d) co-insurance. (e) None of the above.

 

Paper#5257 | Written in 18-Jul-2015

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