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Exam 26: Mergers and Acquisitions

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Question 1

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Alpha is planning on merging with Beta. Alpha will pay Beta's shareholders the current value of their stock in shares of Alpha. Alpha currently has 4,200 shares of stock outstanding at a market price of $40 a share. Beta has 2,500 shares outstanding at a price of $18 a share. The after-merger earnings will be $8,800. What will the earnings per share be after the merger?

A) $1.61
B) $1.65
C) $1.75
D) $1.81
E) $1.86

F) A) and B)
G) All of the above

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B

Question 2

Multiple Choice

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Rosie's has 1,800 shares outstanding at a market price per share of $23.50. Sandy's has 2,500 shares outstanding at a market price of $21 a share. Neither firm has any debt. Sandy's is acquiring Rosie's. The incremental value of the acquisition is $1,200. What is the value of Rosie's to Sandy's?

A) $41,100
B) $41,900
C) $42,300
D) $42,700
E) $43,500

F) A) and E)
G) C) and D)

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Question 3

Multiple Choice

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An auto maker recently acquired a windshield manufacturer. Which type of an acquisition was this?

If an acquisition does not create value and the market is smart, then the:

The Floral Shoppe and Maggie's Flowers are all-equity firms. The Floral Shoppe has 2,500 shares outstanding at a market price of $16.50 a share. Maggie's Flowers has 5,000 shares outstanding at a price of $17 a share. Maggie's Flowers is acquiring The Floral Shoppe for $42,900 in cash. The incremental value of the acquisition is $1,200. What is the net present value of acquiring The Floral Shoppe to Maggie's Flowers?

Diet Soda and High Caffeine are two firms that compete in the soft drink market. These two competitors have decided to invest $10 million to form a new company, Fruit Tea, which will manufacture flavored teas. This new firm is defined as a:

The shareholders of Jolie Company have voted in favor of a buyout offer from Pitt Corporation. Information about each firm is given here: Jolie's shareholders will receive one share of Pitt stock for every three shares they hold in Jolie. Assume the NPV of the acquisition is zero. What will the post-merger PE ratio be for Pitt?

Which one of the following defensive tactics is designed to prevent a "two-tier" takeover offer?

Some Freight Line Express shareholders are very dissatisfied with the performance of the firm's current management team. These shareholders want to gain control of the board of directors so they can have the power to oust current management. As a means of gaining control, these shareholders have select candidates for all of the open positions on the firm's board of directors. Since they have insufficient votes to guarantee the election of these individuals, they are contacting other shareholders and asking them to vote with them on this important matter. Of course, the current management team is encouraging shareholders to vote for their candidates for the board. Which one of the following terms is best illustrated by this situation?

Which of the following are examples of cost reductions that can result from an acquisition? I. allocating fixed overhead across a wider range of products II. lowering office payroll costs by combining job functions III. benefiting from economies of scale when purchasing raw materials IV. reducing the number of management personnel required

Which one of the following generally has a flip-in provision that significantly increases the cost to a shareholder who is attempting to gain control over a firm?

Merchantile Exchange is being acquired by National Sales. The incremental value of the acquisition is $1,800. Merchantile Exchange has 1,500 shares of stock outstanding at a price of $18 a share. National Sales has 3,500 shares of stock outstanding at a price of $54 a share. What is the net present value of the acquisition given that the actual cost of the acquisition using company stock is $28,780?

Taylor's Hardware is acquiring The Corner Store for $20,000 in cash. Taylor's has 1,500 shares of stock outstanding at a market value of $46 a share. The Corner Store has 2,200 shares of stock outstanding at a market price of $8 a share. Neither firm has any debt. The incremental value of the acquisition is $3,500. What is the value of Taylor's Hardware after the acquisition?

Consider the following premerger information about Firm A and Firm B: Assume that Firm A acquires Firm B via an exchange of stock at a price of $25 for each share of B's stock. Both A and B have no debt outstanding. What will the earnings per share of Firm A be after the merger?

When evaluating an acquisition you should:

Defensive merger tactics are designed to thwart unwanted takeovers and mergers. Do such activities work to the advantage of shareholders all of the time? Are these types of activities ethical? Who do you think benefits the most from these activities?

Which one of the following pairs of businesses could probably benefit the most by sharing complementary resources?

Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T) . Assume that neither firm has any debt outstanding. Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $2,600. What is the NPV of the merger assuming that Firm T is willing to be acquired for $28 per share in cash?

Melvin was attempting to gain control of Western Wood Products until he realized that the existing shareholders in the firm had the right to purchase additional shares at a below-market price given his hostile takeover attempt. Thus, Melvin decided to forego investing in this firm. What term applies to the tactic used by Western Wood Products to stave off this takeover attempt?

Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total aftertax annual cash flows by $3.7 million indefinitely. The current market value of Teller is $103 million, and that of Penn is $151.7 million. The appropriate discount rate for the incremental cash flows is 9 percent. Penn is trying to decide whether it should offer 44 percent of its stock of $133 million in cash to Teller's shareholders. The cost of the cash alternative is _____, while the cost of the stock alternative is _____.