Exam 20: Mergers and Acquisitions and Financial Distress

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 sales-to-total assets ratio. Based on past bankruptcy experience, the linear probability model is estimated as: PD_i = .60 (debt/equity) + .02 (sales/total assets) A firm you are thinking of lending to has a sales-to-assets ratio of 1.75 and its expected probability of default, or bankruptcy, is estimated to be 8.1 percent. Calculate the firm's debt ratio.

HiHo Inc. is evaluating a merger with the following cash flows: - Years 1-3 Incremental Cash Flows: $10 million each year - Value of incremental cash flows after year 3 as of the end of year 3: $30 million - Discount rate = 10% What is the most HiHo should pay for this merger?

Which of these is the person who liquidates the firm's assets through a private sale or public auction and then distributes any proceeds from the sale to the firms' creditors and stockholders?

Calculation of Average Costs with Economies of Scope 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.

Calculation of Altman's Z-Score: Use the following financial statements for Lake of Egypt Marina to calculate the Altman's Z-score for this firm.

Which of the following statements is incorrect?

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 = .02 (equity multiplier) + .01 (total asset turnover) A firm you are thinking of lending to has an equity multiplier of 3.2 times and a total asset turnover ratio of 1.95. 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: PDi = .013 (debt/equity) + .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.

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 = .03 (debt/equity) + .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.

The Altman's Z-score model has several weaknesses. What are they?

Which of the following is defined as a transaction in which two firms combine to form a single firm?

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

Which of the following is defined as the purchase of one firm by another firm?

What is a credit-scoring model?

Calculation of Altman's Z-Score: Suppose that the financial ratios of a potential borrowing firm took the following values: X₁ = Net working capital/Total assets = .30, X₂ = Retained earnings/Total assets = .40, X₃ = Earnings before interest and taxes/Total assets = .43, X₄ = Market value of equity/Book value of long-term debt = .65, X₅ = Sales/Total assets ratio = 0.95. Calculate the Altman's Z-score for this firm.

Which of the following involves a firm and its creditors agreeing to a private reorganization outside the formal bankruptcy process?

Calculation of Average Costs with Economies of Scope 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 (J_P) of $900,000. Calculate the average cost of production for the Crib and Tots firms, respectively.

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

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

Which of the following is defined as a merged firm's ability to generate synergistic cost savings through the joint use of inputs in producing multiple products?