Exam 18: Mergers, Lbos, Divestitures, and Business Failure

Hayley Medical, Inc. is evaluating the acquisition of Health-o-Matic, Inc., which had a loss carryforward of $3.75 million, resulting from earlier operations. Hayley Medical can purchase Health-o-Matic for $4.5 million and liquidate the assets for $3.25 million. Hayley Medical expects earnings before taxes in the three years following the acquisition to be as follows: (These earnings are assumed to fall within the annual limit legally allowed for application of a tax loss carryforward resulting from the proposed acquisition.) Hayley Medical has a 40 percent tax rate and a cost of capital of 15 percent. The approximate maximum cash price Hayley Medical would be willing to pay for Health-o-Matic is ________.

In defending against a hostile takeover, the strategy that involves the target firm finding a more suitable acquirer and prompting it to compete with the initial hostile acquirer to take over the firm is called the ________ strategy.

A formal proposal to purchase a given number of shares of a firm's stock at a specified price is a ________.

Under recapitalization, debts are generally exchanged for equity or the maturities of existing debts are extended.

A conglomerate merger is a merger combining firms in unrelated businesses.

Holding companies are corporations that have voting control of one or more other corporations and the companies they control are referred to as subsidiaries.

A financial merger is undertaken to ________.

Aiyah, Inc. recently has had financial difficulty and is being liquidated by the Federal Bankruptcy Court. The firm has a liquidation value of $1,000,000-$400,000 from the fixed assets that served as collateral for the mortgage bonds and $600,000 from all other assets (all prior claims have been satisfied). The firm's current capital structure is as follows: The common stockholders will receive ________ in the liquidation.

The companies controlled by a holding company are normally referred to as its subsidiaries.

If the net present value of the target company is ________.

Greater control over the acquisition of new materials or the distribution of finished goods is an economic benefit of horizontal merger.

A takeover target's management will not support a proposed takeover due to a very high tender offer.

A method of acquisition in which the acquiring firm exchanges its debt for shares of the target company according to a predetermined ratio is called a leveraged buyout.

Business combinations are used by firms to externally expand in order to increase ________.

Acquisitions are especially attractive when an acquiring firm's stock price is high, because fewer shares must be exchanged to acquire the firm.

The sale of a unit of a firm to existing management is often achieved through a leveraged buyout.

The ability to use the same sales and distribution channels to reach customers of both businesses is a benefit of ________.

If the P/E paid for a target company is greater than the P/E of the acquiring company, the effect on the earnings per share of the acquiring company will be ________.

A debtor in possession in a Chapter 11 bankruptcy proceeding is responsible for valuing the bankrupt firm both in terms of its liquidation value and as a going concern.

In a voluntary settlement, each creditor will be paid only 45 cents on a dollar immediately. This is an example of ________.