Exam 26: Mergers and Acquisitions

Al's is analyzing the possible acquisition of Baker's. Both firms have no debt. Al's believes the acquisition will increase its total aftertax annual cash flows by $2.8 million indefinitely. The current market value of Baker's is $91 million, and that of Al's is $143.6 million. The appropriate discount rate for the incremental cash flows is 11 percent. Al's is trying to decide whether it should offer 40 percent of its stock or $104 million in cash to Baker's shareholders. The cost of the cash alternative is ________, while the cost of the stock alternative is ________.

If a firm sells its crown jewels when threatened with a takeover attempt, the firm is employing a strategy commonly referred to as a ________ strategy.

Which one of the following statements is correct?

KN Markets has decided to acquire a controlling interest in BJ's by purchasing shares of BJ stock in the public markets. Which one of these statements correctly applies to this acquisition?

Black Teas recently acquired Green Teas in a transaction that had a net present value of $1.23 million. The $1.23 million is referred to as:

Nationwide Markets is a diversified company with many divisions. It is also the sole shareholder of a wholly owned subsidiary. Management has decided to implement an IPO offering for 25 percent of the ownership of the subsidiary. Which one of these terms applies to this offering?

The shareholders of Jolie Company have voted in favor of a buyout offer from Pitt Corporation. Jolie has a price-earnings ratio of 6, earnings of $230,000, and 60,000 shares outstanding. Pitt has a price-earnings ratio of 12, earnings of $660,000, and 125,000 shares outstanding. Jolie's shareholders will receive one share of Pitt stock for every three shares they hold in Jolie. Assume the NPV of the acquisition is zero. What will the post-merger PE ratio be for Pitt?

Outdoor Living has agreed to be acquired by New Adventures for $100,000 worth of New Adventures stock. New Adventures currently has 12,000 shares of stock outstanding at a price of $27 a share. Outdoor Living has 2,000 shares outstanding at a price of $46 a share. The incremental value of the acquisition is $12,000. What is the value of the merged firm?

If GE, a highly diversified company, were to acquire Ocean Freight Limited, the acquisition would be classified as a ________ acquisition.

In a merger the:

Firm A is acquiring Firm B for $69,000 in cash. Firm A has 4,300 shares of stock outstanding at a market value of $32 a share. Firm B has 2,100 shares of stock outstanding at a market price of $32 a share. Neither firm has any debt. The incremental value of the acquisition is $2,200. What is the price per share of Firm A's stock after the acquisition?

Which one of the following statements correctly applies to a merger?

VC is merging with DRW. VC will pay DRW's shareholders the current value of their shares in shares of VC stock. VC currently has 15,200 shares of stock outstanding at a market price of $28 a share. DRW has 2,500 shares outstanding at a price of $20 a share. How many shares of stock will be outstanding in the merged firm?

When evaluating an acquisition you should:

The bidding firm (Firm B) has 2,300 premerger shares outstanding at $43 a share. The target firm (Firm T) has 1,100 premerger shares outstanding at $24 a share. Assume neither firm has any debt outstanding. Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $2,600. What is the NPV of the merger assuming that Firm T is willing to be acquired for $26 per share in cash?

Diet Soda and High Caffeine are two firms that compete in the soft drink market. These two competitors have decided to invest $10 million to form a new company, Fruit Tea, which will manufacture flavored teas. This new firm is defined as a:

For financial statement purposes, goodwill created by an acquisition:

If Food Markets were to acquire Meat Processors, the acquisition would be classified as a ________ acquisition.

Which one of the following statements is correct?

Lucas Motors is considering the acquisition of TM Repair. Lucas has 43,000 shares outstanding at a market price of $32 a share. TM has 12,800 shares outstanding priced at $44 a share. The acquisition is expected to create $5,400 of synergy. What is the maximum amount of cash Lucas should pay for this acquisition?