Exam 20: Mergers and Acquisitions and Financial Distress

If Verizon buys the Green Bay Packers,this would be an example of a:

Economies of Scope A survey of a local market provided the following average cost data: Johnson Construction Corp.(JCC)has assets of $4 million and an average cost of 10 percent; Anderson Architects (AA)has assets of $5 million and an average cost of 20 percent; Cole Home Builders (CHB)has assets of $5 million and an average cost of 15 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. What should be the average cost after the acquisition for JCC to justify this merger?

What is the difference between a Chapter 11 and a Chapter 7 bankruptcy?

If Walt Disney and American Airlines merged,it would be an example of a:

Which of the following is defined as a merged firm's ability to generate synergistic cost savings through the joint use of inputs in producing multiple products?

HiHo Inc.is evaluating a merger with the following cash flows: • Years 1 to 3 Incremental Cash Flows: $10 million each year • Value of incremental cash flows after year 3 as of the end of year 3: $30 million • Discount rate = 10 percent What is the most HiHo should pay for this merger?

Calculation of Average Costs with Economies of Scope Jan's Bakery is considering a merger with Tina's Cookies.Jan's total operating costs of producing services are $300,000 for a sales volume of $2 million.Tina's total operating costs of producing services are $75,000 for a sales volume of $600,000.If the two firms merge,calculate the total average cost for the merged firm assuming no synergies.

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 sales-to-total assets ratio.Based on past bankruptcy experience,the linear probability model is estimated as: PD_i = 0.60 (debt/equity)+ 0.02 (sales/total assets) A firm you are thinking of lending to has a sales-to-assets ratio of 1.75 and its expected probability of default,or bankruptcy,is estimated to be 8.1 percent.Calculate the firm's debt ratio.

George's Dry Cleaning is considering a merger with Weezzie's Laundry Supply Stores.George's total operating costs of producing services are $590,000 for sales volume (S_G)of $4.7 million.Weezzie's total operating costs of producing services are $152,000 for a sales volume (S_W)of $2.3 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 9 percent.

Which of the following is the type of financial distress in which the return on a firm's assets is less than the firm's cost of capital?

What is a credit-scoring model?

Calculation of Average Costs with Economies of Scope Jewelry Designs is considering a merger with Beads Supply Stores.Jewelry's total operating costs of producing services are $300,000 for sales volume of $2 million.Beads' total operating costs of producing services are $125,000 for a sales volume (J_P)of $2.25 million.Calculate the average cost of production for the Jewelry and Beads firms,respectively.

Calculation of Change in the HHI Associated with a Merger The Justice Department has been asked to review a merger request for a market with the following four firms. What is the HHI for the existing market?

Calculation of Bankruptcy Probability Suppose a linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt ratio and the profit margin.Based on past bankruptcy experience,the linear probability model is estimated as: PD_i = 0.18 (debt ratio)+ 0.35 (profit margin) You know a particular firm has a debt ratio of 35 percent and a probability of default of 8 percent.Calculate the firm's profit margin.

The managers of State Bank have been approached by City Bank about a possible merger.State Bank is asking a price of $171.78 million to be purchased by City Bank.City Bank currently has total cash flows of $30 million that are growing at 2 percent annually.Managers of State Bank estimate that because of synergies the merged firm's cash flows will increase by an additional 6 percent for the first four years following the merger.After the first four years,managers of State Bank have estimated that incremental cash flows will grow at a rate of 3 percent.The WACC for the merged firms is 11 percent.Managers of City Bank agree that cash flows should grow at an additional 6 percent for the first four years,but are unsure of the long-term growth rate in incremental cash flows estimated by City Bank.Calculate the minimum growth rate needed after the first four years such that City Bank would see this merger as a positive NPV project.

Which of the following combines two companies that have no related products or markets?

Peter's TV Supplies is considering a merger with Jan's Radio Supply Stores.Peter's total operating costs of producing services are $330,000 for a sales volume (S_P)of $4.5 million.Jan's total operating costs of producing services are $30,000 for a sales volume (S_J)of $550,000.Suppose that synergies in the production process result in a cost of production for the merged firms totaling $360,000 for a sales volume of $5,050,000.Calculate the total average cost (TAC)for the merged firm.

Calculation of Average Costs with Economies of Scope Crib World is considering a merger with Tots Supply Stores.Crib's total operating costs of producing services are $250,000 for sales volume of $1.25 million.Tots' total operating costs of producing services are $210,000 for a sales volume (J_P)of $900,000.For a sales volume of $2.15 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 17.5 percent.

Valuation of a Merger The managers of BSW Inc.have been approached by EAG Corp.for a possible merger.EAG Corp.is asking a price of $20.5 million to be purchased by BSW Inc.The two firms currently have cumulative total cash flows of $1 million that are growing at 3 percent annually.Managers of EAG estimate that because of synergies the merged firm's cash flows will increase by an additional 4 percent for the first three years following the merger.After the first three years,managers of EAG have estimated that cash flows will grow at a rate of 2 percent.The WACC for the merged firms is 8 percent.Managers of BSW Inc.agree that cash flows should grow at an additional 4 percent for the first three years,but are unsure of the long-term growth rate in cash flows estimated by EAG.Calculate the minimum growth rate needed after the first three years such that BSW Inc.would see this merger as a positive NPV project.

Calculation of Change in the HHI Associated with a Merger The Justice Department has been asked to review a merger request for a market with the following four firms. If Firm A acquires Firm D,what is the HHI for the new market?