Exam 7: Merger and Acquisition Cash Flow Valuation Basics

Assume a firm has a market value of less than $50 million and a $\beta$ of 1.75.Also,assume the risk-free rates of return and equity premium are 5.0 and 5.5 percent,respectively.The firm's cost of equity using the CAPM method adjusted for firm size is 23.8%.

(True/False)

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Question 21

The weights used to calculate the weighted average cost of capital for a firm with common equity and debt only represent the book value of equity and debt.

(True/False)

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Question 22

A firm's credit rating is a poor measure of a firm's default risk.

(True/False)

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Question 23

The constant growth model is most applicable to firms in mature markets.

(True/False)

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Question 24

In the absence of debt, $\beta$ measures the volatility of a firm's financial return to changes in the general market's overall financial return.

(True/False)

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Question 25

A beta coefficient is a measure of a firm's diversifiable risk.

(True/False)

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Question 26

Interest payments are tax deductible to firms in the U.S.

(True/False)

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Question 27

Preferred dividends are tax deductible to U.S.corporations.

(True/False)

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Question 28

A risk-free rate of return is one for which the expected return is certain.

(True/False)

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Question 29

A firm's leveraged beta reflects all of the following except for

(Multiple Choice)

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Question 30

Free cash flow to the firm is calculated before debt and taxes.

(True/False)

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Question 31

All of the following are true about the marginal tax rate for the firm except for

(Multiple Choice)

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Question 32

Studies show that the market risk premium is unstable,lower during periods of prosperity and higher during periods of economic slowdowns.

(True/False)

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Question 33

Discounted cash flow and the asset-oriented valuation methods necessarily provide identical results.

(True/False)

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Question 34

In the absence of debt,the unlevered beta measures the volatility of the firm's financial return to changes in the general stock market's overall return.

(True/False)

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Question 35

For a firm having common and preferred equity as well as debt,common equity value can be estimated in which of the following ways?

(Multiple Choice)

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Question 36

A three-month Treasury bill rate is not free of risk for a five- or ten-year period,since interest and principal received at maturity must be reinvested at three month intervals.

(True/False)

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Question 37

When evaluating an acquisition,you should do which of the following:

(Multiple Choice)

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Question 38

Case Study Short Essay Examination Questions Creating a Global Luxury Hotel Chain Fairmont Hotels & Resorts Inc. announced on January 30, 2006, that it had agreed to be acquired by Kingdom Hotels and Colony Capital in an all-cash transaction valued at $45 per share. The transaction is valued at $3.9 billion, including assumed debt. The purchase price represents a 28% premium over Fairmont's closing price on November 4, 2005, the last day of trading when Kingdom and Colony expressed interest in Fairmont. The combination of Fairmont and Kingdom will create a luxury global hotel chain with 120 hotels in 24 countries. Discounted cash-flow analyses, including estimated synergies and terminal value, value the firm at $43.10 per share. The net asset value of Fairmont's real estate is believed to be $46.70 per share. 1. Is it reasonable to assume that the acquirer could actually be getting the operation for "free," since the value of the real estate per share is worth more than the purchase price per share? Explain your answer. 2. Assume the acquirer divests all of Fairmont's hotels and real estate properties but continues to manage the hotels and properties under long-term management contracts. How would you estimate the net present value of the acquisition of Fairmont to the acquirer? Explain your answer. -Is it reasonable to assume that the acquirer could actually be getting the operation for "free," since the value of the real estate per share is worth more than the purchase price per share? Explain your answer.

(Essay)

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Question 39

Which of the following factors is excluded from the calculation of free cash flow to the firm?

(Multiple Choice)

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Question 40

Showing 21 - 40 of 81

Assume a firm has a market value of less than $50 million and a $\beta$ of 1.75.Also,assume the risk-free rates of return and equity premium are 5.0 and 5.5 percent,respectively.The firm's cost of equity using the CAPM method adjusted for firm size is 23.8%.

The weights used to calculate the weighted average cost of capital for a firm with common equity and debt only represent the book value of equity and debt.

A firm's credit rating is a poor measure of a firm's default risk.

The constant growth model is most applicable to firms in mature markets.

In the absence of debt, $\beta$ measures the volatility of a firm's financial return to changes in the general market's overall financial return.

A beta coefficient is a measure of a firm's diversifiable risk.

Interest payments are tax deductible to firms in the U.S.

Preferred dividends are tax deductible to U.S.corporations.

A risk-free rate of return is one for which the expected return is certain.

A firm's leveraged beta reflects all of the following except for

Free cash flow to the firm is calculated before debt and taxes.

All of the following are true about the marginal tax rate for the firm except for

Studies show that the market risk premium is unstable,lower during periods of prosperity and higher during periods of economic slowdowns.

Discounted cash flow and the asset-oriented valuation methods necessarily provide identical results.

In the absence of debt,the unlevered beta measures the volatility of the firm's financial return to changes in the general stock market's overall return.

For a firm having common and preferred equity as well as debt,common equity value can be estimated in which of the following ways?

A three-month Treasury bill rate is not free of risk for a five- or ten-year period,since interest and principal received at maturity must be reinvested at three month intervals.

When evaluating an acquisition,you should do which of the following:

Which of the following factors is excluded from the calculation of free cash flow to the firm?

Introduction to Mergers, acquisitions, and Other Restructuring Activities

The Regulatory Environment

The Corporate Takeover Market: Common Takeover Tactics, anti-Takeover Defenses, and Corporate Governance

Planning,developing Business,and Acquisition Plans: Phases 1 and 2 of the Acquisition Process

Implementation: Search Through Closing: Phases 3 to 10 of the Acquisition Process

Postclosing Integration: Mergers, acquisitions, and Business Alliances

Relative,asset-Oriented,and Real Option Valuation Basics

Applying Financial Models to Value, structure, and Negotiate Mergers and Acquisitions

Analysis and Valuation of Privately Held Companies

Structuring the Deal: Payment and Legal Considerations

Structuring the Deal: Tax and Accounting Considerations

Financing the Deal: Private Equity, hedge Funds, and Other Sources of Funds

Highly Leveraged Transactions: Lbo Valuation and Modeling Basics

Business Alliances: Joint Ventures, partnerships, strategic Alliances, and Licensing

Alternative Exit and Restructuring Strategies: Divestitures, spin-Offs, carve-Outs, split-Ups, and Split-Offs

Alternative Exit and Restructuring Strategies: Bankruptcy Reorganization and Liquidation

Cross-Border Mergers and Acquisitions: Analysis and Valuation

Filters

Exam 7: Merger and Acquisition Cash Flow Valuation Basics

Assume a firm has a market value of less than $50 million and a β\betaβ of 1.75.Also,assume the risk-free rates of return and equity premium are 5.0 and 5.5 percent,respectively.The firm's cost of equity using the CAPM method adjusted for firm size is 23.8%.

The weights used to calculate the weighted average cost of capital for a firm with common equity and debt only represent the book value of equity and debt.

A firm's credit rating is a poor measure of a firm's default risk.

The constant growth model is most applicable to firms in mature markets.

In the absence of debt, β\betaβ measures the volatility of a firm's financial return to changes in the general market's overall financial return.

A beta coefficient is a measure of a firm's diversifiable risk.

Interest payments are tax deductible to firms in the U.S.

Preferred dividends are tax deductible to U.S.corporations.

A risk-free rate of return is one for which the expected return is certain.

A firm's leveraged beta reflects all of the following except for

Free cash flow to the firm is calculated before debt and taxes.

All of the following are true about the marginal tax rate for the firm except for

Studies show that the market risk premium is unstable,lower during periods of prosperity and higher during periods of economic slowdowns.

Discounted cash flow and the asset-oriented valuation methods necessarily provide identical results.

In the absence of debt,the unlevered beta measures the volatility of the firm's financial return to changes in the general stock market's overall return.

For a firm having common and preferred equity as well as debt,common equity value can be estimated in which of the following ways?

A three-month Treasury bill rate is not free of risk for a five- or ten-year period,since interest and principal received at maturity must be reinvested at three month intervals.

When evaluating an acquisition,you should do which of the following:

Which of the following factors is excluded from the calculation of free cash flow to the firm?

Introduction to Mergers, acquisitions, and Other Restructuring Activities

The Regulatory Environment

The Corporate Takeover Market: Common Takeover Tactics, anti-Takeover Defenses, and Corporate Governance

Planning,developing Business,and Acquisition Plans: Phases 1 and 2 of the Acquisition Process

Implementation: Search Through Closing: Phases 3 to 10 of the Acquisition Process

Postclosing Integration: Mergers, acquisitions, and Business Alliances

Relative,asset-Oriented,and Real Option Valuation Basics

Applying Financial Models to Value, structure, and Negotiate Mergers and Acquisitions

Analysis and Valuation of Privately Held Companies

Structuring the Deal: Payment and Legal Considerations

Structuring the Deal: Tax and Accounting Considerations

Financing the Deal: Private Equity, hedge Funds, and Other Sources of Funds

Highly Leveraged Transactions: Lbo Valuation and Modeling Basics

Business Alliances: Joint Ventures, partnerships, strategic Alliances, and Licensing

Alternative Exit and Restructuring Strategies: Divestitures, spin-Offs, carve-Outs, split-Ups, and Split-Offs

Alternative Exit and Restructuring Strategies: Bankruptcy Reorganization and Liquidation

Cross-Border Mergers and Acquisitions: Analysis and Valuation

Filters

Assume a firm has a market value of less than $50 million and a $\beta$ of 1.75.Also,assume the risk-free rates of return and equity premium are 5.0 and 5.5 percent,respectively.The firm's cost of equity using the CAPM method adjusted for firm size is 23.8%.

In the absence of debt, $\beta$ measures the volatility of a firm's financial return to changes in the general market's overall financial return.