Exam 20: Mergers and Acquisitions and Financial Distress

Which of the following is a type of merger in which two firms that sell the same products in different market areas are combined?

Jenny's Day Care is considering a merger with Lionel's Diaper Manufacturers. Jenny's total operating costs of producing services are $350,000 for sales volume of $1.4 million. Lionel's total operating costs of producing services are $300,000 for a sales volume of $1.3 million. For a sales volume of $2.7 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 20%.

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 (1000 employees) = $3

George's Dry Cleaning is considering a merger with Weezzie's Laundry Supply Stores. George's total operating costs of producing services are $590,000 for sales volume (S_G) of $4.7 million. Weezzie's total operating costs of producing services are $152,000 for a sales volume (S_W) of $2.3 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 9%.

If Walt Disney and American Airlines merged together, it would be an example of a ___________.

Calculating the Probability of 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 = .02 (debt/equity) + .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 is NOT one of the sources of value enhancing synergy in a merger?

Valuation of a Merger 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 by an additional 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?

Calculation of Bankruptcy Probability 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 = .18 (debt ratio) + .35 (profit margin) You know a particular firm has a debt ratio of 35 percent and a probability of default of 8 percent. Calculate the firm's profit margin.

Which of these terms is defined as the value of the combined firms being greater than the sum of the value of the two firms individually?

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 = $225 - First mortgage = $50 - Administration expenses associated with the bankruptcy = $5 - Notes payable to the banks = $205 - Subordinated debentures = $350 - Taxes due to federal, state and other governmental agencies = $17 - Wages due employees (2000 employees) = $6

Which of the following is an incorrect priority of claims in the event of liquidation? (Note: The first item would be paid first.)

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 = .28 (debt ratio) + .51 (profit margin) You know a particular firm has a debt ratio of 46 percent and a probability of default of 18 percent. Calculate the firm's profit margin.

The managers of State Bank have been approached by City Bank about a possible merger. State Bank is asking a price of $171.78 million to be purchased by City Bank. City Bank currently has total cash flows of $30 million that are growing at 2 percent annually. Managers of State Bank estimate that because of synergies the merged firm's cash flows will increase by an additional 6 percent for the first four years following the merger. After the first four years, managers of State Bank have estimated that incremental cash flows will grow at a rate of 3 percent. The WACC for the merged firms is 11 percent. Managers of City Bank agree that cash flows should grow at an additional 6 percent for the first four years, but are unsure of the long-term growth rate in incremental cash flows estimated by City Bank. Calculate the minimum growth rate needed after the first four years such that City Bank would see this merger as a positive NPV project.

If Verizon buys the Green Bay Packers, this would be an example of a ___________.

Economies of Scope A survey of a local market has provided the following average cost data: Johnson Construction Corp. (JCC) has assets of $4 million and an average cost of 10 percent. Anderson Architects (AA) has assets of $5 million and an average cost of 20 percent. Cole Home Builders (CHB) has assets of $5 million and an average cost of 15 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. What should be the average cost after the acquisition for JCC to justify this merger?

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 = $102 - Administration expenses associated with the bankruptcy = $5 - Notes payable to the banks = $205 - Subordinated debentures = $350 - Taxes due to federal, state and other governmental agencies = $17 - Wages due employees (2000 employees) = $6

All of the following are problems associated with using the Z-score model to make credit risk evaluations except _______________.

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: PDi = .01 (debt/equity) + .76 (profit margin) A firm you are thinking of lending to has a debt-to-equity ratio of 121 percent and its expected probability of default, or bankruptcy, is estimated to be 8.125 percent. If sales are $1 million, calculate the firm's net income.

Valuation of a Merger The managers of BSW Inc. have been approached by EAG Corp. for a possible merger. EAG Corp. is asking a price of $20.5 million to be purchased by BSW Inc. The two firms currently have cumulative total cash flows of $1 million that are growing at 3 percent annually. Managers of EAG estimate that because of synergies the merged firm's cash flows will increase by an additional 4 percent for the first three years following the merger. After the first three years, managers of EAG have estimated that cash flows will grow at a rate of 2 percent. The WACC for the merged firms is 8 percent. Managers of BSW Inc. agree that cash flows should grow at an additional 4 percent for the first three years, but are unsure of the long-term growth rate in cash flows estimated by EAG. Calculate the minimum growth rate needed after the first three years such that BSW Inc. would see this merger as a positive NPV project.