Exam 20: Mergers and Acquisitions and Financial Distress

The merged firm's ability to generate synergistic cost savings through the joint use of inputs in producing multiple products is referred to as:

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) + 0.15 (profit margin) A firm you are thinking of lending to has a debt ratio of 75 percent and a profit margin of 6 percent. Calculate the firm's expected probability of default, or bankruptcy.

A type of horizontal merger that combines two firms that sell the same products in different market areas is a ________.

Which of the following is defined as a merged firm's advantage over smaller firms if cuts associated with the merger lower the firm's operating costs of production?

Consider a market that has three firms with the following market shares: Firm A 15 percent Firm B 25 percent Firm C 60 percent Suppose Firm B wants to acquire Firm A so that the post-acquisition market would exhibit the following shares: B + A = 40 percent C = 60 percent What is the change in the HHI resulting from the merger?

Suppose that the financial ratios of a potential borrowing firm took the following values: X₁ = Net working capital/Total assets = 0.65, X₂ = Retained earnings/Total assets = 1.10, X₃ = Earnings before interest and taxes/Total assets = 0.10, X₄ = Market value of equity/Book value of long-term debt = 2.05, X₅ = Sales/Total assets ratio = 0.45. Calculate the Altman's Z-score for this firm.

Blinds N Such is considering a merger with Window Supply Stores. Blinds' total operating costs of producing services are $750,000 for sales volume of $6 million. Window's total operating costs of producing services are $100,000 for a sales volume (JP) of $1 million. Calculate the average cost of production for the Blinds and Window firms, respectively.

Which of the following is a type of merger in which an entirely new firm is created?

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 = 0.15 (debt ratio) + 0.05 (profit margin) A firm you are thinking of lending to has a debt ratio of 50 percent and a profit margin of 8 percent. Calculate the firm's expected probability of default, or bankruptcy.

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 = 0.013 (debt/equity) + 0.78 (profit margin) A firm you are thinking of lending to has a debt-to-equity ratio of 112 percent and its expected probability of default, or bankruptcy, is estimated to be 15.35 percent. If sales are $1.55 million, calculate the firm's net income.

A merger between Bank of America and JP Morgan Chase is an example of a:

Suppose that the financial ratios of a potential borrowing firm took the following values: X₁ = Net working capital/Total assets = 0.15, X₂ = Retained earnings/Total assets = 0.10, X₃ = Earnings before interest and taxes/Total assets = 0.15, X₄ = Market value of equity/Book value of long-term debt = 0.40, X₅ = Sales/Total assets ratio = 0.8. Calculate the Altman's Z-score for this firm.

Kasha Inc. is evaluating a merger with the following cash flows: -Years 1 and 2 Incremental Cash Flows: $60 million each year -Year 3 incremental cash flow: $70 million -Discount rate = 9 percent What is the most Kasha should pay for this merger?

A linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the equity multiplier and the total asset turnover ratio. Based on past bankruptcy experience, the linear probability model is estimated as: PD_i = 0.05 (equity multiplier) + 0.02 (total asset turnover) A firm has an equity multiplier of 1.9 times and a probability of default of 10 percent. Calculate the firm's total asset turnover ratio.

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 = 0.02 (debt/equity) + 0.80 (profit margin) A firm you are thinking of lending to has a debt-to-equity ratio of 110 percent and its expected probability of default, or bankruptcy, is estimated to be 8 percent. If sales are $2 million, calculate the firm's net income.

Which of the following combines two companies that have no related products or markets?

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. Calculate the average cost of production for Dee's and Larry's firms, respectively.

Blinds N Such is considering a merger with Window Supply Stores. Blinds' total operating costs of producing services are $750,000 for sales volume of $6 million. Window's total operating costs of producing services are $100,000 for a sales volume (JP) of $1 million. For a sales volume of $7 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 12 percent.

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 sales-to-total assets ratio. Based on past bankruptcy experience, the linear probability model is estimated as: PD_i = 0.45 (debt/equity) + 0.01 (sales/total assets) A firm you are thinking of lending to has a sales-to-assets ratio of 1.9 and its expected probability of default, or bankruptcy, is estimated to be 7 percent. Calculate the firm's debt-to-assets ratio.

Jan's Bakery is considering a merger with Tina's Cookies. Jan's total operating costs of producing services are $100,000 for a sales volume of $250,000. Tina's total operating costs of producing services are $75,000 for a sales volume of $300,000. If the two firms merge, calculate the total average cost for the merged firm assuming no synergies.