Exam 20: Mergers and Acquisitions and Financial Distress

The main reason for a vertical merger is:

Cindy's Computer Corp. is considering a merger with Bobby's Computer, Inc. Cindy's total operating costs of producing services are $2.1 million for a sales volume (SC) of $13 million. Bobby's total operating costs of producing services are $2.5 million for a sales volume (SB) of $7 million. If the two firms merge, calculate the total average cost (TAC) for the merged firm assuming no synergies.

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

Which of the following is the termination of the firm as a going concern in which assets are sold and any proceeds go to pay off the firm's creditors?

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

Suppose that the financial ratios of a potential borrowing firm took the following values: X₁ = Net working capital/Total assets = 0.35, X₂ = Retained earnings/Total assets = 0.50, X₃ = Earnings before interest and taxes/Total assets = 0.60, X₄ = Market value of equity/Book value of long-term debt = 1.50, X₅ = Sales/Total assets ratio = 3.65. Calculate the Altman's Z-score for this firm.

If Walt Disney and American Airlines merged, it would be an example of a:

Which of the following is the type of financial distress in which a firm's operating cash flows are not sufficient to pay its liabilities as they come due?

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.

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?

Suppose that the financial ratios of a potential borrowing firm took the following values: X₁ = Net working capital/Total assets = 0.30, X₂ = Retained earnings/Total assets = 0.40, X₃ = Earnings before interest and taxes/Total assets = 0.43, X₄ = Market value of equity/Book value of long-term debt = 0.65, X₅ = Sales/Total assets ratio = 0.95. Calculate the Altman's Z-score for this firm.

Which of the following refers to a firm that is still allowed to continue to operate while the creditors' claims are settled using a collective procedure?

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 (JP) of $900,000. Calculate the average cost of production for the Crib and Tots firms, respectively.

Which of the following is the most extreme type of financial distress for a business?

The main motive for a merger is:

A survey of a local market 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?

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 percent.

A survey of a local market 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. If JCC plans to reduce operating costs by $300,000 after the merger, what will the average cost be for the new firm?

Jan's Bakery is considering a merger with Tina's Cookies. Jan's total operating costs of producing services are $300,000 for a sales volume of $2 million. Tina's total operating costs of producing services are $75,000 for a sales volume of $600,000. If the two firms merge, calculate the total average cost for the merged firm assuming no synergies.