Exam 20: Mergers and Acquisitions and Financial Distress

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.For a sales volume of $3.125 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 19.5 percent.

A merger between BankOne and Amcore is an example of a:

List and explain the three dimensions of the revenue-enhancement argument.

Firm-specific reasons for financial distress include all of the following EXCEPT:

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 percent.

The main reason for a vertical merger is:

The merged firm's ability to generate synergistic cost savings through the joint use of inputs in producing multiple products is referred to as:

Calculating the Probability of Bankruptcy A linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt-to-equity ratio and the profit margin.Based on past bankruptcy experience,the linear probability model is estimated as: PD_i = 0.03 (debt/equity)+ 0.65 (profit margin) A firm you are thinking of lending to has a debt-to-equity ratio of 105 percent and its expected probability of default,or bankruptcy,is estimated to be 7 percent.If sales are $3 million,calculate the firm's net income.

Stubborn Motors,Inc.,is asking a price of $10.5 million to be purchased by Rubber Tire Motor Corp.Rubber Tire currently has total cash flows of $6 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 4 percent for the first four years following the merger.After the first four years,incremental cash flows will grow at a rate of 3 percent annually.The WACC for the merged firms is 9.75 percent.Calculate the NPV of the merger.Should Rubber Tire Motor Corporation agree to acquire Stubborn Motors for the asking price of $10.5 million?

Why is NPV valuation an appropriate tool to use in the evaluation of a merger target?

Which of these makes the following a true statement? Diversification resulting from a merger can:

Calculation of Average Costs with Economies of Scope Dee's Dry Cleaning is considering a merger with Larry's Laundry Supply Stores.Dee's total operating costs of producing services are $600,000 for sales volume of $4 million.Larry's total operating costs of producing services are $200,000 for a sales volume (J_P)of $1 million.For a sales volume of $5 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 10 percent.

Which of the following is defined as the purchase of one firm by another firm?

Which of the following is NOT a tax consideration motive for a merger?

Calculating the Probability of Bankruptcy A linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt-to-equity ratio and the profit margin.Based on past bankruptcy experience,the linear probability model is estimated as: PD_i = 0.02 (debt/equity)+ 0.80 (profit margin) A firm you are thinking of lending to has a debt-to-equity ratio of 110 percent and its expected probability of default,or bankruptcy,is estimated to be 8 percent.If sales are $2 million,calculate the firm's net income.

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?

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

The main motive for a merger is:

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 = 0.04 (equity multiplier)+ 0.01 (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.

A survey of a local market has provided the following average cost data: Johnson Construction Corp.(JCC)has assets of $3 million and an average cost of 22 percent.Anderson Architects (AA)has assets of $4 million and an average cost of 31 percent.Cole Home Builders (CHB)has assets of $5 million and an average cost of 28 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 $500,000 after the merger,what will the average cost be for the new firm?