A. Several reasons have been proposed to justify mergers. Among the more prominent are (1) tax considerations, (2) risk reduction, (3) control, (4) purchase of assets at below-replacement cost, and (5) synergy. In general, which of the reasons are economically justifiable? Which are not? Which fit the situation at hand? Explain. B. Briefly describe the differences between a hostile merger and a friendly merger. C. Use the data developed in Table 1 to construct the H divisions cash flow statements for 2015 through 2018. Why is interest expense deducted in merger cash flow statements, whereas it is not normally deducted in a capital budgeting cash flow analysis? Why are earnings retentions deducted in the cash flow statement? D. Conceptually, what is the appropriate discount rate to apply to the cash flows developed in part c? What is your actual estimate of this discount rate? E. What is the estimated continuing value of the acquisition; that is, what is the estimated value of the H divisions cash flows beyond 2018? What is Hills value to Smittys? Suppose another firm were evaluating Hills as an acquisition candidate. Would it obtain the same value? Explain. F. Assume that Hills has 10 million shares outstanding. These shares are traded relatively infrequently, but the last trade, made several weeks ago, was at a price of $9 per share. Should Smittys make an offer for Hills? If so, how much should it offer per share? G. What merger-related activities are undertaken by investment bankers? TABLE 1 Estimates of Hills Hardware Data for Merger Analysis 2015 2016 2017 2018 Net sales $60.00 $90.00 $112.50 $127.50 Cost of goods sold (60%) 36 54 67.5 76.5 Selling/administrative expense 4.5 6 7.5 9 Interest expense 3 4.5 4.5 6 Necessary retained earnings 0 7.5 6 4.5