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essentials corporate finance

Questions and Answers of Essentials Corporate Finance

3. What was the role of “strategic controls” in implementing the K2 business plan?
4. How did the K2 negotiating strategy seek to meet the primary needs of the Fotoball shareholders and employees?
1. What was the total purchase price of the merger?
2. What are some of the reasons Cingular used cash rather than stock or some combination to acquire AT&T Wireless? Explain your answer.
3. How might the amount and composition of the purchase price affect Cingular’s, SBC’s, and BellSouth’s cost of capital?
4. With substantially higher operating margins than Cingular, what strategies would you expect Verizon Wireless to pursue? Explain your answer.
6–3. Why might the time required to integrate acquisitions vary by industry?
6–4. What are the costs of employee turnover?
6–5. Why is candid and continuous communication so important during the integration phase?
6–6. What messages might be communicated to the various audiences or stakeholders of the new company?
6–7. Cite examples of difficult decisions that should be made early in the integration process.
6–8. Cite the contract-related “transition issues” that should be resolved before closing.
6–9. How does the process for integrating business alliances differ from that of integrating an acquisition?
6–10. How are the processes for integrating business alliances and M&As similar?
6–12. In your judgment, are acquirers more likely to under- or overestimate anticipated cost savings? Explain your answer.
6–13. Cite examples of expenses you believe are commonly incurred in integrating target companies. Be specific.
6–14. A common justification for mergers of competitors are the potential crossselling opportunities it would provide. Comment on the challenges that might be involved in making such a marketing
1. Why is it important to establish both top-down (i.e., provided by top management) and bottom-up (provided by operating units) estimates of synergy?
2. How did ArcelorMittal attempt to bridge cultural differences during the integration? Be specific.
3. Why are communication plans so important? What methods did ArcelorMittal employ to achieve these objectives? Be specific.
4. Comment on ArcelorMittal management’s belief that the cultural diversity within the combined firms was an advantage. Be specific.
5. The formal phase of the post-merger integration period was to be completed within six months. Why do you believe that ArcelorMittal’s management was eager to integrate the two businesses
1. Explain the logic behind combining the two companies. Be specific.
2. What major challenges are the management of the combined companies likely to face? How would you recommend resolving these issues?
3. Most corporate mergers are beset by differences in corporate cultures. How do cross-border transactions compound these differences?
4. Why do you think mergers, both domestic and cross-border, are often communicated by the acquirer and target firms’ management as mergers of equals?
5. In what way would you characterize this transaction as a merger of equals? In what ways should it not be considered a merger of equals?
7–3. Under what circumstances is it important to adjust the capital asset pricing model for firm size? Why?
7–5. Explain the conditions under which it makes most sense to use the zero-growth and constant-growth DCF models. Be specific.
7–11. ABC Incorporated shares are currently trading for $32 per share. The firm has 1.13 billion shares outstanding. In addition, the market value of the firm’s outstanding debt is $2 billion.
7–12. HiFlyer Corporation does not currently have any debt. Its tax rate is 0.4 and its unlevered beta is estimated by examining comparable companies to be 2.0. The 10-year bond rate is 6.25
7–13. Abbreviated financial statements are given for Fletcher Corporation in Table 7–5.Yearend working capital in 2000 was $160 million and the firm’s marginal tax rate was 40 percent in both
7–14. In 2002, No Growth Incorporated had operating income before interest and taxes of $220 million. The firm was expected to generate this level of operating income indefinitely. The firm had
7–15. Carlisle Enterprises, a specialty pharmaceutical manufacturer, has been losing market share for three years, since several key patents expired.Free cash flow to the firm is expected to
7–16. Ergo Unlimited’s current year’s free cash flow to equity is $10 million. It is projected to grow at 20 percent per year for the next five years. It is expected to grow at a more modest 5
7–17. In the year in which it intends to go public, a firm has revenues of $20 million and net income after taxes of $2 million. The firm has no debt, and revenue is expected to grow at 20 percent
7–18. The information in Table 7–6 is available for two different common stocks:Company A and Company B.Table 7–6 Information on the Stocks in Problem 7–18 Company A Company B Free cash flow
7–19. You have been asked to estimate the beta of a high-technology firm that has three divisions with the characteristics shown in Table 7–7.Table 7–7 Characteristics of the Firm in Problem
1. Is it reasonable to assume that the acquirer could actually be getting the operation for “free,” since the value of the real estate per share is worth more than the purchase price per share?
2. Assume the acquirer divests all of Fairmont’s hotels and real estate properties but continues to manage the hotels and properties under long-term management contracts. How would you estimate the
1. Use discounted cash flow (DCF) methods to determine if @Home overpaid for Excite.
2. What other assumptions might you consider in addition to those identified in the case study?
3. What are the limitations of the discounted cash flow method employed in this case?
8–7. How is the liquidation value of the firm calculated? Why is the assumption of orderly liquidation important?
8–11. BigCo’s chief financial officer is trying to determine a fair value for PrivCo, a non-publicly traded firm that BigCo is considering acquiring. Several of PrivCo’s competitors, Ion
8–13. Siebel Incorporated, a non-publicly traded company, has 2009 earnings before interest and taxes (EBIT) of $33.3 million, which is expected to grow at 5 percent annually into the foreseeable
8–14. Titanic Corporation reached an agreement with its creditors to voluntarily liquidate its assets and use the proceeds to pay off as much of its liabilities as possible. The firm anticipates
8–15. Best’s Foods is seeking to acquire the Heinz Baking Company, whose shareholders’ equity and goodwill are $41 million and $7 million, respectively.A comparable bakery was recently acquired
8–16. Delhi Automotive Inc. is the leading supplier of specialty fasteners for passenger cars in the U.S. market, with an estimated 25 percent share of this$5 billion market. Delhi’s rapid growth
8–17. Photon Inc. is considering acquiring one of its competitors. Photon’s management wants to buy a firm it believes is most undervalued. The firm’s three major competitors, AJAX, BABO, and
8–18. Acquirer Incorporated’s management believes that the most reliable way to value a potential target firm is by averaging multiple valuation methods, since all methods have their
8–19. An investor group has the opportunity to purchase a firm whose primary asset is ownership of the exclusive rights to develop a parcel of undeveloped land sometime during the next five years.
8–20. Acquirer Company’s management believes that there is a 60 percent chance that Target Company’s free cash flow to the firm will grow at 20 percent per year during the next five years from
1. What alternative valuation methods could Google have used to justify the purchase price it paid for YouTube? Discuss the advantages and disadvantages of each.
2. The purchase price paid for YouTube represented more than 1 percent of Google’s then market value. If you were a Google shareholder at that time, how might you have evaluated the wisdom of the
3. To what extent might the use of stock by Google have influenced the amount they were willing to pay for YouTube? How might the use of “overvalued”shares impact future appreciation of the stock?
4. What is the appropriate cost of equity for discounting future cash flows? Should it be Google’s or YouTube’s? Explain your answer.
5. What are the critical valuation assumptions implicit in the valuation method discussed in this case study? Be specific.
1. Merrill owns less than half of the combined firms, although it contributed more than one half of the combined firms’ assets and net income. Discuss how you might use DCF and relative valuation
2. Why do you believe Merrill was willing to limit its influence in the combined firms?
3. What method of accounting would Merrill use to show its investment in BlackRock?
9–1. Why are financial modeling techniques used in analyzing M&As?
9–2. Give examples of the limitations of financial data used in the valuation process.
9–3. Why is it important to analyze historical data on the target company as part of the valuation process?
9–5. What are common-size financial statements, and how are they used to analyze a target firm?
9–7. Define the minimum and maximum purchase price range for a target company.
9–9. Can the offer price ever exceed the maximum purchase price? If yes, why? If no, why not?
9–10. Why is it important to clearly state assumptions underlying a valuation?
9–11. Assume two firms have little geographic overlap in terms of sales and facilities.If they were to merge, how might this affect the potential for synergy?
9–13. Dow Chemical’s acquisition of Rhom and Haas included a 74 percent premium over the firm’s preannouncement share price. What is the probable process Dow employed in determining the
9–15. How does the presence of management options and convertible securities affect the calculation of the offer price for the target firm?
9–16. Acquiring Company is considering the acquisition of Target Company in a share-for-share transaction in which Target Company would receive $50.00 for each share of its common stock. Acquiring
9–17. Acquiring Company is considering buying Target Company. Target Company is a small biotechnology firm that develops products licensed to the major pharmaceutical firms. Development costs are
9–18. Using the Excel-Based Offer Price Simulation Model (Table 9–7) found on the CD-ROM accompanying this book, what would the initial offer price be if the amount of synergy shared with the
1. Purchase price premiums contain a synergy premium and a control premium. The control premium represents the amount an acquirer is willing to pay for the right to direct the operations of the
2. Based on the information in Table 9–9 and the initial offer price of $10 billion, did this transaction implicitly include a control premium? How much? In what way could the implied control
3. The difference in postacquisition EPS between an offer price in which Cliffs shared 100 percent of synergy and one in which it would share only 10 percent of synergy is about 22 percent (i.e.,
1. Using the M&A model financial statements for the two firms in Tables 9–10 through 9–14, determine the differences between the market value and stand-alone value of StarTrak and Alanco. How
2. Alanco shareholders ceded only 40 percent of the synergy to StarTrak shareholders, yet StarTrak shareholders received 77 percent ownership of the combined firms.Why?
3. Alanco shareholders owned less than one fourth of the new firm. Was this a good deal for them? Explain your answer.
10–1. Why is it more difficult to value privately held companies than publicly traded firms?
10–2. What factors should be considered in adjusting target company data?
10–3. What is the capitalization rate, and how does it relate to the discount rate?
10–4. What are the common ways of estimating the capitalization rate?
10–5. What is the liquidity discount, and what are common ways of estimating this discount?
10–6. Give examples of private company costs that might be understated, and explain why.
10–7. How can an analyst determine if the target firm’s costs and revenues are understated or overstated?
10–8. What is the difference between the concepts of fair market value and fair value?
10–9. What is the importance of IRS Revenue Ruling 59–60?
10–10. Why might shell corporations have value?
10–11. Why might succession planning be more challenging for a family firm?
10–12. How are governance issues between public and private firms the same and how are they different?
10–13. What are some of the reasons a family-owned or privately owned business may want to go public? What are some of the reasons that discourage such firms from going public?
10–14. Why are family-owned firms often attractive to private equity investors?
10–16. It is usually appropriate to adjust the financials received from the target firm to reflect any changes that you, as the new owner, would make to create an adjusted EBITDA. Using the
10–17. Based on its growth prospects, a private investor values a local bakery at$750,000. While wanting to own the operation, she intends to keep the current owner to manage the business. To do
10–18. You have been asked by an investor to value a local restaurant. In the most recent year, the restaurant earned pretax operating income of $300,000.Income has grown an average of 4 percent
1. Who were Panda Ethanol, Grove Street Investors, Grove Panda, and Cirracor?What were their roles in the case study? Be specific.
2. Discuss the pros and cons of a reverse merger versus an initial public offering for taking a company public. Be specific.
3. Why did Panda Ethanol undertake a private equity placement totaling $90 million shortly before implementing the reverse merger?

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