Exam 20: Mergers and Acquisitions and Financial Distress

Calculation of Change in HHI Associated with a Merger Consider a market that has three firms with the following market shares: Firm A 25 percent Firm B 55 percent Firm C 20 percent Suppose Firm A wants to acquire Firm C so that the post-acquisition market would exhibit the following shares: A + C = 45 percent B = 55 percent What is the change in the HHI resulting from the merger?

Which of the following is a formal bankruptcy proceeding which outlines the process to be followed for liquidating a failed firm?

LD Inc.declared bankruptcy through a Chapter 7 filing.Consider the following data in millions of dollars and determine the funds available for secured creditors. • Proceeds from the liquidation of assets = $395 • First mortgage = $100 • Administration expenses associated with the bankruptcy = $2 • Notes payable to the banks = $205 • Subordinated debentures = $350 • Taxes due to federal,state,and other governmental agencies = $12 • Wages due employees (1,000 employees)= $3

Calculation of Altman's Z-Score: 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.

Calculation of Altman's Z-Score: 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.

All of the following are an advantage of prepackaged bankruptcy EXCEPT:

Which of the following is an incorrect priority of claims in the event of liquidation? (Note: The first item would be paid first.)

Valuation of a Merger Department Stores,Inc.,is asking a price of $25 million to be purchased by Discount Stores Corp.The two firms currently have cumulative total cash flows of $2 million which are growing at 2.5 percent annually.Managers estimate that because of synergies the merged firm's cash flows will increase by an additional 5 percent for the first four years following the merger.After the first four years cash flows will grow at a rate of 4.5 percent.The WACC for the merged firms is 13 percent.Calculate the NPV of the merger.Should Discount Stores Corporation agree to acquire Department Stores,Inc.,for the asking price of $25 million?

If Whole Foods grocery store buys Whole Wheat Bread,this would be an example of a:

Which of the following is NOT a source of value-enhancing synergy in a merger?

Which of the following involves a firm and its creditors agreeing to a private reorganization outside the formal bankruptcy process?

Calculation of Altman's Z-Score: Use the following financial statements for Lake of Egypt Marina to calculate the Altman's Z-score for this firm.

Which of the following is a type of merger in which an entirely new firm is created?

How can managers' personal incentives result in value-destroying mergers and acquisitions?

Economies of Scope 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?

Suppose that the financial ratios of a potential borrowing firm took the following values: X₁ = Net working capital/Total assets = 0.05,X₂ = Retained earnings/Total assets = 0.12,X₃ = Earnings before interest and taxes/Total assets = 0.17,X₄ = Market value of equity/Book value of long-term debt = 0.42,X₅ = Sales/Total assets ratio = 0.6.Calculate and interpret the Altman's Z-score for this firm.

Which of the following is a voluntary liquidation proceeding that passes the liquidation of the firm's assets to a third party that is designated as the assignee or trustee?

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?

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?

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.Calculate the average cost of production for the Dee's and Larry's firms,respectively.