Exam 22: Mergers and Corporate Control

A parent holding company sells shares in its subsidiary such that the parent now owns only 65% of the subsidiary and,thus,the tax returns of the parent and its subsidiary can't be consolidated.The parent receives annual dividends from the subsidiary of $2,500,000.If the parent's marginal tax rate is 34% and if the exclusion on intercompany dividends is 70%,what is the effective tax rate on the intercompany dividends,and how much net dividends are received?

Which of the following statements is most CORRECT?

In a financial merger,the relevant post-merger cash flows are simply the sum of the expected cash flows of the two companies,measured as if they were operated independently.

A company seeking to fight off a hostile takeover might employ the services of an investment banking firm to develop a defensive strategy.

Which of the following statements is most CORRECT?

Juicers Inc.is thinking of acquiring Fast Fruit Company.Juicers expects Fast Fruit's NOPAT to be $9 million the first year,with no net new investment in operating capital and no interest expense.For the second year,Fast Fruit is expected to have NOPAT of $25 million and interest expense of $5 million.Also,in the second year only,Fast Fruit will need $10 million of net new investment in operating capital.Fast Fruit's marginal tax rate is 40%.After the second year,the free cash flows and the tax shields from Fast Fruit to Juicers will both grow at a constant rate of 4%.Juicers has determined that Fast Fruit's cost of equity is 17.5%,and Fast Fruit currently has no debt outstanding.Assume that all cash flows occur at the end of the year,Juicers must pay $45 million to acquire Fast Fruit.What it the NPV of the proposed acquisition? Note that you must first calculate the value to Juicers of Fast Fruit's equity.

A conglomerate merger occurs when two firms with either a horizontal or a vertical business relationship combine.

Borrowing funds on terms that would require immediate repayment of all funds if the firm is acquired,selling off valuable assets,and granting huge "golden parachutes" that open if the firm is acquired are three procedures used to defend against hostile takeovers.These strategies are known as "poison pills."

Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV)approach is most CORRECT?

A two-tier merger offer is one where the acquiring company offers to purchase the target company in a two-part transaction.Cash is paid to some stockholders,bonds are issued to others,but the total values of each part of the transaction are equal.

Firms use defensive tactics to fight off undesired mergers.These tactics do not include

Synergistic benefits can arise from a number of different sources,including operating economies of scale,financial economies,and increased managerial efficiency.

Holland Auto Parts is considering a merger with Workman Car Parts.Workman's market-determined beta is 0.9,and the firm currently is financed with 20% debt,at an interest rate of 8%,and its tax rate is 25%.If Holland acquires Workman,it will increase the debt to 60%,at an interest rate of 9%,and the tax rate will increase to 35%.The risk-free rate is 6% and the market risk premium is 4%.What will Workman's required rate of return on equity be after it is acquired?

Since managers' central goal is to maximize stock price,managerial control issues do not interfere with mergers that would benefit the target firm's stockholders.

Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV)approach is most CORRECT?

Only if a target firm's value is greater to the acquiring firm than its market value as a separate entity will a merger be financially justified.

Which of the following statements is most CORRECT?

If the capital structure is stable,and free cash flows are expected to be growing at a constant rate at the horizon date,then the horizon value is calculated by discounting the free cash flows plus the expected future tax shields at the weighted average cost of capital.

Coca-Cola's acquisition of Columbia Pictures and its announcement that it would operate its new subsidiary separately could be described as primarily a financial merger.

In a merger with true synergies,the post-merger value exceeds the sum of the separate companies' pre-merger values.