6. A)Suppose Chics management has a substantial ownership interest in the company, but not enough to block a merger. If Chics managers want to keep the firm independent, what are some actions they could take to discourage potential suitors?

B)If Chics managers conclude that they cannot remain independent, what are some actions they might take to help their stockholders (and themselves) get the maximum price for their stock?

C) If Chics managers conclude that the maximum price they can get anyone to bid for the company is less than its true value, is there any other action they might take that would benefit both outside stockholders and the managers themselves? Explain.

D)Do Chics managers face any potential conflicts of interest in any of the situations presented in a through c? Explain and suggest what might be done to reduce the damage from conflicts of interest.

7. Chic has 5 million shares of common stock outstanding. The shares are trade

infrequently and in small blocks, but the last trade, of 500 shares, was at a price of $1.5 per

share. Based on this information, and on your answers to Questions 5 and 6, how much

should Ninas offer, per share, for Chic, and how should it go about making the offer?

What I know.. Ninas expected value to Chic is equal to $11,508,996. I think I am supposed to divide that number by 5,000,000 to find the max price per share. If you do that, you get $2.30 share. But what will that cause?

Merger Valuation Analysis NINA'S FASHIONS INC. Nina's Fashions, Inc., operates a chain of retail clothing stores in Michigan, Wisconsin, and Illinois. In the late 1970s, the chain opened its first suburban store which differed significantly from the older stores. The new store was much larger, stocking many more items than the old stores. Many new stores followed, which were primarily located in shopping malls and shopping centers. The new stores were a resounding success, and over the past ten years, Nina's has been aggressively selling its older locations and opening suburban stores. The downtown areas in many of Nina's locations have been revitalized and are now filled with high-rise office buildings and upscale retail outlets, so downtown property values have skyrocketed. Thus, the sale of its old store properties resulted in large cash inflows to Nina's. Since the company's strategic plans call for it to lease the new suburban stores rather than to purchase them, the firm now has a "war chest" of excess cash. Many alternative uses have been discussed for the excess cash, ranging from repurchases of stock or debt to higher dividend payments. However, management has decided to use the cash to make one or more acquisitions, since they believe an expansion would contribute the most to stockholders' wealth. One of the acquisitions candidates is Chic, a chain of eleven stores which operates in northern Illinois. The issues now facing the company are (1) how to approach Chic's management and (2) how much to offer for Chic's stock. Executives at Nina's are good at running retail clothing stores, but they are not finance experts and have no experience with acquisitions. Bob Sharpe, the treasurer, has an accounting background, but he did attend a three-day workshop on mergers at Harvard University last year specifically to learn something about the subject. Nina's had no acquisition plans at that time; Sharpe just felt that it would be useful to become familiar with the subject. Table 1 contains some basic data that Sharpe developed relating to the cash flows Nina's could expect if it acquired Chic. The interest expense listed in the table includes (1) the interest on Chic's existing debt, (2) the interest on new debt that Nina's would issue to help finance the acquisition, and (3) the interest on new debt that Nina's would issue over time to help finance expansion within the new division. The required retentions shown in Table 1 represent earnings generated within Chic that would be earmarked for reinvestment within the acquired company to help finance growth. Note too that all the estimates Table 1 are the incremental flows Chic is expected to produce and to make available to Nina's if it is acquired. Although specific estimates were only made for 2014 through 2017, the acquired company would be expected to grow at a 5 percent rate in 2018 and beyond. Table 1 Incremental Cash Flows to Nina's if Chic is acquired: Net Sales Cost of Goods Sold (50% of sales) Depreciation Selling/admin. Expense Interest expense Retentions $ 2014 4,000,000 $ 2015 6,000,000 $ 2016 7,500,000 $ 2017 8,500,000 $ $ 2,000,000 400,000 $ $ 3,000,000 450,000 $ $ 3,750,000 500,000 $ $ 4,250,000 550,000 $ $ $ 300,000 200,000 - $ $ $ 400,000 300,000 500,000 $ $ $ 500,000 300,000 400,000 $ $ $ 600,000 400,000 300,000 Chic currently finances with 40 percent debt; it pays taxes at a 30 percent federal-plusstate tax rate; and its beta is 1.2. If the acquisition takes place, Nina's would increase Chic's debt ratio to 50 percent, and consolidation, coupled with expected earnings improvements, would move Chic's federal-plus-state tax rate up to that of Nina's, 40 percent. One part of the analysis involves determining a discount rate to apply to the estimated cash flows. Bob Sharpe remembers from the Harvard workshop that Professor Robert Hamada had developed some equations that can be used to unlever and then relever betas, and Sharpe believes that these equations may be helpful in the analysis: Formula to unlever beta: bU Formula to relever beta: bL 1 (1 T)(D / S) b L b U 1 (1 T)(D / S) . Here, b U is the beta that Chic would have if it used no debt financing, T is the applicable tax rate, and D/S is the applicable market value debt-to-equity ratio, Sharpe notes that the T-bond rate is 10 percent, and a call to the company's investment bankers produced an estimate of 6 percent for the market risk premium. Assume that you were recently hired as Bob Sharpe's assistant, and he has asked you to answer some basic questions about mergers as well as to do some calculations pertaining to the proposed Chic acquisition. Then, you and Sharpe will meet with the board of directors, and it will decide whether or not to proceed with the acquisition, how to start the negotiations, and the maximum price to offer. As you go through the questions, recognize that either Sharpe or anyone on the board could ask you follow up questions, so you should thoroughly understand the implications of each question and answer. Your predecessor was fired for \"being too mechanical and superficial,\" and you don't want to suffer the same fate