Exam 20: Mergers and Acquisitions and Financial Distress

Tim's Fix It Shop, Inc., is asking a price of $50 million to be purchased by Taylor's Tire Hut Corp. The two firms currently have cumulative total cash flows of $4 million which are growing at 2 percent annually. Managers estimate that because of synergies the merged firm's cash flows will increase to 5 percent for the first four years following the merger. After the first four years cash flows will grow at a rate of 3 percent. The WACC for the merged firms is 12 percent. Calculate the NPV of the merger. Should Taylor's Tire Hut Corporation agree to acquire Tim's Fix It Shop, Inc., for the asking price of $50 million?

A linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt-to-equity ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as: PD_i = 0.03 (debt/equity) + 0.65 (profit margin) A firm you are thinking of lending to has a debt-to-equity ratio of 105 percent and its expected probability of default, or bankruptcy, is estimated to be 7 percent. If sales are $3 million, calculate the firm's net income.

A survey of a local market has provided the following average cost data: Johnson Construction Corp. (JCC) has assets of $3 million and an average cost of 22 percent. Anderson Architects (AA) has assets of $4 million and an average cost of 31 percent. Cole Home Builders (CHB) has assets of $5 million and an average cost of 28 percent. For each firm, average costs are measured as a proportion of assets. JCC is planning to acquire AA and CHB with the expectation of reducing overall average costs by eliminating the duplication of services. If JCC plans to reduce operating costs by $500,000 after the merger, what will the average cost be for the new firm?

The cost advantage when fixed costs are spread over a large number of units is ________.

Dee's Dry Cleaning is considering a merger with Larry's Laundry Supply Stores. Dee's total operating costs of producing services are $600,000 for sales volume of $4 million. Larry's total operating costs of producing services are $200,000 for a sales volume (JP) of $1 million. For a sales volume of $5 million, calculate the reduction in production costs the merged firms need to experience such that the total average cost (TAC) for the merged firms is equal to 10 percent.

Which of the following is NOT a tax consideration motive for a merger?

Crib World is considering a merger with Tots Supply Stores. Crib's total operating costs of producing services are $250,000 for sales volume of $1.25 million. Tots' total operating costs of producing services are $210,000 for a sales volume (JP) of $900,000. For a sales volume of $2.15 million, calculate the reduction in production costs the merged firms need to experience such that the total average cost (TAC) for the merged firms is equal to 17.5 percent.

If Walmart acquires Target, this would be an example of a:

Which of the following is a formal bankruptcy proceeding which outlines the process to be followed for liquidating a failed firm?

Windows N Such, Inc., is asking a price of $195 million to be purchased by Curtain Rods Corp. The two firms currently have cumulative total cash flows of $15 million which are growing at 1 percent annually. Managers estimate that because of synergies the merged firm's cash flows will increase to 3 percent for the first four years following the merger. After the first four years cash flows will grow at a rate of 2 percent. The WACC for the merged firms is 10 percent. Calculate the NPV of the merger. Should Curtain Rods Corporation agree to acquire Windows N Such, Inc., for the asking price of $195 million?

Flowers Galore is considering a merger with Balloons N More. Flowers Galore's total operating costs of producing services are $400,000 for a sales volume of $4 million. Balloons' total operating costs of producing services are $30,000 for a sales volume of $700,000. If the two firms merge, calculate the total average cost for the merged firm assuming no synergies.

Cindy's Computer Corp. is considering a merger with Bobby's Computer, Inc. Cindy's total operating costs of producing services are $2.1 million for a sales volume (SC) of $13 million. Bobby's total operating costs of producing services are $2.5 million for a sales volume (SB) of $7 million. If the two firms merge, calculate the total average cost (TAC) for the merged firm assuming no synergies.

Suppose a linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as: PD_i = 0.20 (debt ratio) + 0.50 (profit margin) You know a particular firm has a debt ratio of 60 percent and a probability of default of 15 percent. Calculate the firm's profit margin.

Suppose that the financial ratios of a potential borrowing firm took the following values: X₁ = Net working capital/Total assets = 0.25, X₂ = Retained earnings/Total assets = 0.30, X₃ = Earnings before interest and taxes/Total assets = 0.35, X₄ = Market value of equity/Book value of long-term debt = 0.50, X₅ = Sales/Total assets ratio = 0.9. Calculate the Altman's Z-score for this firm.

Which of the following is cost savings usually attributed to superior management skills and other difficult-to-measure managerial factors?

Which of these makes the following a true statement? Diversification resulting from a merger can:

Suppose that the financial ratios of a potential borrowing firm took the following values: X₁ = Net working capital/Total assets = 0.30, X₂ = Retained earnings/Total assets = 0.40, X₃ = Earnings before interest and taxes/Total assets = 0.43, X₄ = Market value of equity/Book value of long-term debt = 0.65, X₅ = Sales/Total assets ratio = 0.95. Calculate the Altman's Z-score for this firm.

Suppose a linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as: PD_i = 0.23 (debt ratio) + 0.08 (profit margin) A firm you are thinking of lending to has a debt ratio of 60 percent and a profit margin of 12 percent. Calculate the firm's expected probability of default, or bankruptcy.

Which of the following refers to a firm that is still allowed to continue to operate while the creditors' claims are settled using a collective procedure?

LD Inc. declared bankruptcy through a Chapter 7 filing. Consider the following data in millions of dollars and determine the funds available for secured creditors. -Proceeds from the liquidation of assets = $395 -First mortgage = $100 -Administration expenses associated with the bankruptcy = $2 -Notes payable to the banks = $205 -Subordinated debentures = $350 -Taxes due to federal, state, and other governmental agencies = $12 -Wages due employees (1,000 employees) = $3