Exam 20: Mergers and Acquisitions and Financial Distress

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?

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

Calculation of Bankruptcy Probability 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 = .04 (equity multiplier) + .01 (total asset turnover) A firm has an equity multiplier of 1.5 times and a probability of default of 7 percent. Calculate the firm's total asset turnover ratio.

The main motive for a merger is _________________.

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 $50 million to be purchased by BSW Inc. The two firms currently have cumulative total cash flows of $2.5 million that are growing at 2 percent annually. Managers of EAG estimate that because of synergies the merged firm's cash flows will increase by an additional 5 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 12 percent. Managers of BSW Inc. agree that cash flows should grow at an additional 5 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.

Calculation of Average Costs with Economies of Scope 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 (J_P) 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%.

Which of the following is a combination of firms that sell different, but somewhat related, products?

Calculation of Average Costs with Economies of Scope Baby Supplies is considering a merger with Tot Toy Stores. Baby's total operating costs of producing services are $450,000 for sales volume of $2.15 million. Tot's total operating costs of producing services are $250,000 for a sales volume (J_P) of $975,000. Calculate the average cost of production for the Baby and Tot Toy firms, respectively.

Economies of Scope A survey of a local market has provided the following average cost data: Johnson Construction Corp. (JCC) has assets of $5 million and an average cost of 15 percent. Anderson Architects (AA) has assets of $8 million and an average cost of 20 percent. Cole Home Builders (CHB) has assets of $8 million and an average cost of 17 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?

Suppose that the financial ratios of a potential borrowing firm took the following values: X₁ = Net working capital/Total assets = .15, X₂ = Retained earnings/Total assets = .27, X₃ = Earnings before interest and taxes/Total assets = .28, X₄ = Market value of equity/Book value of long-term debt = .68, X₅ = Sales/Total assets ratio = 0.9. Calculate and interpret the Altman's Z-score for this firm.

Which of the following is the type of financial distress in which the return on a firm's assets is less than the firm's cost of capital?

Calculation of Average Costs with Economies of Scope 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 (J_P) of $1 million. Calculate the average cost of production for the Blinds and Window firms, respectively.

Which of the following is NOT a source of value-enhancing synergy in a merger?

Suppose that the financial ratios of a potential borrowing firm took the following values: X₁ = Net working capital/Total assets = .05, X₂ = Retained earnings/Total assets = .12, X₃ = Earnings before interest and taxes/Total assets = .17, X₄ = Market value of equity/Book value of long-term debt = .42, X₅ = Sales/Total assets ratio = 0.6. Calculate and interpret the Altman's Z-score for this firm.

Calculation of Average Costs with Economies of Scope Building Supplies is considering a merger with Tools and More. Building's total operating costs of producing services are $4 million for a sales volume of $20 million. Tools' total operating costs of producing services are $1 million for a sales volume of $5 million. Suppose that synergies in the production process result in a cost of production for the merged firms totaling $4.8 million with total sales remaining unchanged. Calculate the total average cost for the merged firm.

Cost savings not directly due to economies of scope or economies of scale are 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: PDi = .15 (debt ratio) + .1 (profit margin) A firm you are thinking of lending to has a debt ratio of 57 percent and a profit margin of 7.15 percent. Calculate the firm's expected probability of default, or bankruptcy.

Firm-specific reasons for financial distress include all of the following except _________.

Valuation of a Merger 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 by an additional 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?

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