Exam 20: Mergers and Acquisitions and Financial Distress

Which of the following is the termination of the firm as a going concern in which assets are sold and any proceeds go to pay off the firm's creditors?

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. What should be the average cost after the acquisition for JCC to justify this merger?

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 = 0.02 (equity multiplier)+ 0.01 (total asset turnover) A firm you are thinking of lending to has an equity multiplier of 3.2 times and a total asset turnover ratio of 1.95.Calculate the firm's expected probability of default,or bankruptcy.

Valuation of a Merger You own stock in Carpet City,Inc.,which has just made a bid of $165 million to purchase Tile Corporation.The two firms currently have cumulative total cash flows of $25 million which are growing at 2 percent annually.Managers 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 cash flows will grow at a rate of 3 percent.The merged firms are expected to have a beta = 1.75,the risk-free rate is 5.5 percent,and the market risk premium is currently 7.5 percent.Calculate the NPV of the merger.Will you vote in favor of the merger?

When will the Justice Department most likely to challenge a firm's application to acquire another firm? What measure might they use?

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 = 0.52 (debt/equity)+ 0.01 (sales/total assets) A firm you are thinking of lending to has a sales-to-assets ratio of 2.0 and its expected probability of default,or bankruptcy,is estimated to be 12 percent.Calculate the firm's debt ratio.

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 = 0.30,X₂ = Retained earnings/Total assets = 0.40,X₃ = Earnings before interest and taxes/Total assets = 0.43,X₄ = Market value of equity/Book value of long-term debt = 0.65,X₅ = Sales/Total assets ratio = 0.95.Calculate the Altman's Z-score for this firm.

Which of the following is a type of merger in which two firms that sell the same products in different market areas are combined?

If Walmart acquires Target,this would be an example of a:

Which of the following is cost savings usually attributed to superior management skills and other difficult-to-measure managerial factors?

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 = 0.15 (debt ratio)+ 0.1 (profit margin) A firm you are thinking of lending to has a debt ratio of 57 percent and a profit margin of 7.15 percent.Calculate the firm's expected probability of default,or bankruptcy.

Jenny's Day Care is considering a merger with Lionel's Diaper Manufacturers.Jenny's total operating costs of producing services are $350,000 for sales volume of $1.4 million.Lionel's total operating costs of producing services are $300,000 for a sales volume of $1.3 million.For a sales volume of $2.7 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 20 percent.

List the order for the distribution of the funds from asset liquidation in a bankruptcy.

Which of the following is a combination of a firm with a supplier or distributor?

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

Cost savings not directly due to economies of scope or economies of scale are referred to as:

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 C acquires Firm D,what is the HHI for the new market?

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.Calculate the average cost of production for the Blinds and Window firms,respectively.

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 = 0.25 (debt ratio)+ 0.12 (profit margin) A firm you are thinking of lending to has a debt ratio of 62 percent and a profit margin of 14 percent.Calculate the firm's expected probability of default,or bankruptcy.

Economies of Scope A survey of a national market provided the following average cost data: Jackson County Construction (JCC)has assets of $2 million and an average cost of 30 percent; Arkansas Architects (AA)has assets of $1.5 million and an average cost of 20 percent; Colorado Home Builders (CHB)has assets of $500,000 and an average cost of 10 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 $200,000 after the merger,what will the average cost be for the new firm?