Disaster Airlines is a firm in severe financial distress. The firm can no longer pay its bills on time and it is far behind on payments to its banks and long-term debt holders. The firm has decided to either be purchased by another air carrier or liquidate its assets and close. The managers have approached Altruistic Airlines about being acquired. After examining Disasters financial statements, looking at the routes owned by Disaster, and looking at the condition of the fixed assets, Altruistic Airlines has offered to pay the stockholders of Disaster Airlines $8 million to be acquired. Disaster Airlines covers flights to both areas in which Altruistic already flies, but also has routes in areas into which Altruistic is interested in expanding. As part of the analysis, Altruistic determined that the additional cash flows resulting from the acquisition would total $500,000 this year (Year One) and would grow at a rate of 4% for the next three years. After this time, the cash flows would grow at a constant rate of 2% annually for the foreseeable future. The weighted average cost of capital (WACC) of Altruistic Airlines would be 8% after the merger.

If, instead, Disaster Airlines decides to liquidate its assets, it will pay off its debt and give any remaining funds to the firms stockholders. Disaster Airlines balance sheet is attached. The Accrued Wages were earned within the last 90 days prior to filing for bankruptcy. The Unpaid Employee Benefits were due in the six months prior to the filing for bankruptcy. The Unsecured Customer Deposits are for less than $900 each. Disaster Airlines has no property taxes past due. The First Mortgage is secured against the fixed assets of the firm. The Subordinate Debentures are subordinate to the Notes Payable to Banks. The liquidation of the firms Current Assets would produce $186,000; liquidation of the firms fixed assets would produce $800,000. This totals to $986,000 in funds to distribute to the creditors and stockholders of the firm. The trustee expenses associated with the bankruptcy totaled $50,000 and unpaid expenses incurred after the filing of the bankruptcy petition, but before the trustee was appointed totaled $10,000.

Please answer the following questions:

1. What type of merger is the potential merger between Disaster Airlines and Altruistic Airlines

(i.e., horizontal, vertical, congeneric, or conglomerate)?

a. Why or what factors led you to classify the merger this way?

2. Synergy, a situation in which the value of the combined enterprise exceeds the sum

of the values of the firms that are joining, is a typical motivation for a merger to occur.

What synergy(s) do you see between Disaster Airlines and Altruistic Airlines?

3. The Corporate Valuation Model (CVM), described on Slides #17--#49 of the Part Two

Powerpoint file for Chapter 26, can be used to value a potential acquisition candidate.

Given the information provided in the case study above and using the Corporate

Value Model, calculate the maximum value (in millions of dollars) that Altruistic

Airlines should pay for Disaster Airlines stock.

a. In the footnote to the attached balance sheet for Disaster Airlines, it states that Disaster

Airlines currently has 20 million shares of stock outstanding. Given this and the

total value of Disaster Airlines stock that you calculated in Question #3 above, what is

the theoretical offering price for each shareof Disaster Airlines stock that is

outstanding?

b. According to the case study above, Altruistic Airlines has offered $8 million to Disaster

Airlines. Calculate this offering price on a per share basis, based on the 20 million

Stock shares of Disaster Airlines that are outstanding.

c. Why do you think there is a difference between the stock value per share that you

calculated in Question #3.a. and Question #3.b.

4. The other option available to Disaster Airlines is to liquidate under the proceedings of the

bankruptcy court. The proceeds that Disaster Airlines would receive from liquidation of

its assets are described on page one of this case study. Please review the priority of claims

in a Chapter 7 liquidation proceeding, which appear on Slides #30--#33 of the Part Two

Powerpoint file for Chapter 25.

a. What is the total value of creditor(i.e., not stockholder) claims from all sources?

b. What is the total value of the funds available for distribution following the liquidation

of Disaster Airlines assets?

c. Given your answers to Questions #4.a. and #4.b., would you consider Disaster Airlines to

be solvent? Why or why not?

5. Given the information provided in the case study and the priority distribution listing found on

Slides #30--#33 of the Part Two Powerpoint file for Chapter 25, construct a distribution chart showing the dollar valueof each creditor claim that will be satisfied, as well as the percentageof this claim that will be satisfied if Disaster Airlines is liquidated. You may use Slides #36--#37 of the Part Two Powerpoint file for Chapter 25 as a guide when constructing your distribution chart.

6. Given your calculations and analysis in the above questions, would you recommend that

Disaster Airlines liquidate its assets and distribute the proceeds orwould you recommend

that Disaster Airlines accept the $8 million merger offer from Altruistic Airlines orwould you

recommend that Disaster Airlines pursue some other course of action? (Note: Please

identify which of these options you recommend and then explain your reasoning for

your choice.)