{ "key_pair_value_system": true, "answer_rating_count": "", "question_feedback_html": { "html_star": "", "html_star_feedback": "" }, "answer_average_rating_value": "", "answer_date_js": "2024-05-25T09:04:31-04:00", "answer_date": "2024-05-25 09:04:31", "is_docs_available": "", "is_excel_available": "", "is_pdf_available": "", "count_file_available": 0, "main_page": "student_question_view", "question_id": "1678230", "url": "\/study-help\/questions\/mergers-and-acquisitions-lavender-repair-company-a-regional-hardware-chain-1678230", "question_creation_date_js": "2024-05-25T09:04:31-04:00", "question_creation_date": "May 25, 2024 09:04 AM", "meta_title": "[Solved] Mergers and Acquisitions Lavender Repair | SolutionInn", "meta_description": "Answer of - Mergers and Acquisitions Lavender Repair Company, a regional hardware chain that specializes in do it yourself materia | SolutionInn", "meta_keywords": "mergers,acquisitions,lavender,repair,company,regional,hardware,chain,specializes,materials,equipment,rentals", "question_title_h1": " Mergers and Acquisitions Lavender Repair Company, a regional hardware chain that specializes in do it yourself materials and equipment rentals, is cash rich because", "question_title": " Mergers and Acquisitions Lavender Repair Company, a regional hardware chain that", "question_title_for_js_snippet": "Mergers and Acquisitions Lavender Repair Company, a regional hardware chain that specializes in do it yourself materials and equipment rentals, is cash rich because of several consecutive good years One of the alternative uses for the excess funds is an acquisition Doug Zona, Lavender's treasurer, and your boss, has been asked to place a value on a potential target, Lyons Lighting (LL), a chain that operates in several adjacent states, and he has enlisted your help The table below indicates Zona's estimates of LL's earnings potential if it came under Lavender's management (in millions of dollars) The interest expense listed here includes the interest (1) on LL's existing debt, which is $ million at a rate of 9 , and (2) on new debt expected to be issued over time to help finance expansion within the new L division, the code name given to the target firm If acquired, LL will face a 35 tax rate Security analysts estimate LL's beta to be X The acquisition would not change Lyons' capital structure, which is 22 debt Zona realizes that Lyons Lighting's business plan also requires certain levels of operating capital and that the annual investment could be significant The required levels of total net operating capital are listed in the table Zona estimates the risk free rate to be 7 2 and the market risk premium to be 4 75 He also estimates that free cash flows after 2020 will grow at a constant rate of Z Group 1 Group 2 Group 3 Group 4 Group 5 Group 6 Group 7 LL's debt 63 68 72 77 51 58 55 LL's beta (X) 1 18 1 22 1 35 1 38 1 07 1 15 1 12 Free Cash 6 25 6 5 6 25 6 5 6 6 25 6 5 Flow growth Rate (2) Following are projections for sales and other items Net Sales Cost of Goods Sold Selling Administrative Expense 2015 2018 2019 2016 2017 2020 $60 00 $90 00 $112 50 $127 50 $139 70 36 00 54 00 67 50 76 50 83 80 4 80 6 10 7 60 9 20 11 30 Interest Expense Total Net Operating Capital 5 00 6 50 6 50 7 00 8 16 168 00 173 00 $150 00 150 00 157 50 163 50 Lavender's management is new to the merger game, so Zona has been asked to answer some basic questions about mergers as well as to perform the merger analysis To structure the task, Zona has developed the following questions, which you must answer and then defend to Lavender's board 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, (5) synergy, and (6) globalization 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 What are the steps in valuing a merger d Use the data developed in the table to construct the L division's free cash flows for 2016 through 2020 Why are we identifying interest expense separately when it is not normally included in calculating free cash flows or in a capital budgeting cash flow analysis Why is investment in net operating capital included when calculating the free cash flow e Conceptually, what is the appropriate discount rate to apply to the cash flows developed in part e What is your actual estimate of this discount rate f What is the estimated horizon, or continuing, value of the acquisition that is, what is the estimated value of the L division's cash flows beyond 2020 What is LL's value to Lavender's shareholders Suppose another firm were evaluating LL as an acquisition candidate Would it obtain the same value Explain g Assume that LL has 22 million shares outstanding These shares are traded relatively infrequently, but the last trade (made several weeks ago) was at a price of $11 per share Should Lavender's make an offer for Lyons Lighting If so, how much should it offer per share h How would the analysis be different if Lavender intended to recapitalize LL with 40 debt costing 10 at the end of 4 years This amounts to $221 6 million in debt as of the end of 2019 i There has been considerable research undertaken to determine whether mergers really create value and, if so, how this value is shared between the parties involved What are the results of this research j What method is used to account for mergers k What merger related activities are undertaken by investment bankers 1 What are the major types of divestitures What motivates firms to divest assets m What are holding companies What are their advantages and disadvantages ", "question_description": "\"image\"image", "transcribed_text": "Mergers and Acquisitions Lavender Repair Company, a regional hardware chain that specializes in \"do it yourself\" materials and equipment rentals, is cash rich because of several consecutive good years. One of the alternative uses for the excess funds is an acquisition. Doug Zona, Lavender's treasurer, and your boss, has been asked to place a value on a potential target, Lyons Lighting (LL), a chain that operates in several adjacent states, and he has enlisted your help. The table below indicates Zona's estimates of LL's earnings potential if it came under Lavender's management (in millions of dollars). The interest expense listed here includes the interest: (1) on LL's existing debt, which is $ million at a rate of 9%, and (2) on new debt expected to be issued over time to help finance expansion within the new \"L division,\" the code name given to the target firm. If acquired, LL will face a 35% tax rate. Security analysts estimate LL's beta to be X. The acquisition would not change Lyons' capital structure, which is 22% debt. Zona realizes that Lyons Lighting's business plan also requires certain levels of operating capital and that the annual investment could be significant. The required levels of total net operating capital are listed in the table. Zona estimates the risk-free rate to be 7.2% and the market risk premium to be 4.75%. He also estimates that free cash flows after 2020 will grow at a constant rate of Z%. Group 1 Group 2 Group 3 Group 4 Group 5 Group 6 Group 7 LL's debt 63 68 72 77 51 58 55 LL's beta (X) 1.18 1.22 1.35 1.38 1.07 1.15 1.12 Free Cash 6.25 6.5 6.25 6.5 6 6.25 6.5 Flow growth Rate (2) Following are projections for sales and other items. Net Sales Cost of Goods Sold Selling\/Administrative Expense 2015 2018 2019 2016 2017 2020 $60.00 $90.00 $112.50 $127.50 $139.70 36.00 54.00 67.50 76.50 83.80 4.80 6.10 7.60 9.20 11.30 Interest Expense Total Net Operating Capital 5.00 6.50 6.50 7.00 8.16 168.00 173.00 $150.00 150.00 157.50 163.50 Lavender's management is new to the merger game, so Zona has been asked to answer some basic questions about mergers as well as to perform the merger analysis. To structure the task, Zona has developed the following questions, which you must answer and then defend to Lavender's board. 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, (5) synergy, and (6) globalization. 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. What are the steps in valuing a merger? d. Use the data developed in the table to construct the L division's free cash flows for 2016 through 2020. Why are we identifying interest expense separately when it is not normally included in calculating free cash flows or in a capital budgeting cash flow analysis? Why is investment in net operating capital included when calculating the free cash flow? e. Conceptually, what is the appropriate discount rate to apply to the cash flows developed in part e? What is your actual estimate of this discount rate? f. What is the estimated horizon, or continuing, value of the acquisition; that is, what is the estimated value of the L division's cash flows beyond 2020? What is LL's value to Lavender's shareholders? Suppose another firm were evaluating LL as an acquisition candidate. Would it obtain the same value? Explain. g. Assume that LL has 22 million shares outstanding These shares are traded relatively infrequently, but the last trade (made several weeks ago) was at a price of $11 per share. Should Lavender's make an offer for Lyons Lighting? If so, how much should it offer per share? h. How would the analysis be different if Lavender intended to recapitalize LL with 40% debt costing 10% at the end of 4 years? This amounts to $221.6 million in debt as of the end of 2019. i. There has been considerable research undertaken to determine whether mergers really create value and, if so, how this value is shared between the parties involved. What are the results of this research? j. What method is used to account for mergers? k. What merger-related activities are undertaken by investment bankers? 1. What are the major types of divestitures? What motivates firms to divest assets? m. What are holding companies? What are their advantages and disadvantages?", "related_book": { "title": "Accounting for Governmental and Nonprofit Entities", "isbn": "78110939, 978-0078110931", "edition": "16th Edition", "authors": "Earl R. Wilson, Jacqueline L Reck, Susan C Kattelus", "cover_image": "https:\/\/dsd5zvtm8ll6.cloudfront.net\/si.question.images\/book_images\/273.jpg", "uri": "\/textbooks\/accounting-for-governmental-and-nonprofit-entities-16th-edition-273", "see_more_uri": "" }, "free_related_book": { "isbn": "1032506318", "uri": "\/textbooks\/leadership-on-a-blockchain-what-asia-can-teach-us-about-networked-leadership-1st-edition-9781032506319", "name": "Leadership On A Blockchain What Asia Can Teach Us About Networked Leadership", "edition": "1st Edition" }, "question_posted": "2024-05-25 09:04:31", "see_more_questions_link": "\/study-help\/questions\/business-human-resource-management-2020-May-22", "step_by_step_answer": "The Answer is in the image, click to view ...", "students_also_viewed": [ { "url": "\/study-help\/the-economics-of-health-and-health-care\/draw-a-graph-showing-the-marginal-revenue-mr-and-marginal-1257243", "description": "Draw a graph showing the marginal revenue (MR) and marginal cost (MC) of increasing the tax rate (t) in the Peltzman model of regulation represented by equation (19.1). Place the tax rate on the...", "stars": 3 }, { "url": "\/caleb-king-is-interested-in-investing-in-orange-corporation-what", "description": "Caleb King is interested in investing in Orange Corporation. What types of tools should Caleb use to evaluate the company?", "stars": 3 }, { "url": "\/study-help\/introduction-to-programming\/fourier-spikes-write-a-program-that-takes-a-commandline-argument-1256624", "description": "Fourier spikes. Write a program that takes a command-line argument n and plots the function for 500 equally spaced samples of t from -10 to 10 (in radians). Run your program for n = 5 and n = 500....", "stars": 3 }, { "url": "\/study-help\/coaching-supervision-a-practical-guide-for-supervisees\/consider-a-work-or-study-task-you-have-recently-completed-1980218", "description": "Consider a work (or study) task you have recently completed in terms of action regulation theory. What was your goal? What stages can you identify that helped you work towards this goal? Are these...", "stars": 3 }, { "url": "\/nathan-t-corporation-is-comparing-two-different-options-nathan-t", "description": "Nathan T Corporation is comparing two different options. Nathan T currently uses Option 1, with revenues of $65,000 per year, maintenance expenses of $5,000 per year, and operating expenses of...", "stars": 3 }, { "url": "\/study-help\/questions\/salem-amusement-park-paid-180000-for-a-concession-stand-salem-9804202", "description": "Salem Amusement Park paid $180,000 for a concession stand. Salem started out depreciating the building using the straight-line method over 10 years with a residual value of zero. After using the...", "stars": 3 }, { "url": "\/study-help\/questions\/5describe-how-pressure-experiments-can-be-used-to-obtain-athe-1061101", "description": "5Describe how pressure experiments can be used to obtain a)The formation volume of a vacancy b)The sum of the formation and activation volume of a vacancy In both cases show exactly what type of plot...", "stars": 3 }, { "url": "\/study-help\/questions\/1-the-height-of-the-transmitting-antenna-is-191meters-and-1427998", "description": "1. The height of the transmitting antenna is 191meters and the receiving antenna is 8 meters. determine the required height increase for the receiving antenna if a 10% increase in radio horizon were...", "stars": 3 }, { "url": "\/study-help\/questions\/true-or-false-workers-compensation-patient-copayments-and-deductibles-are-2139257", "description": "True or false workers compensation patient co-payMents And deductibles are set high enough to discourage abuse and unnecessary medical cost", "stars": 3 }, { "url": "\/study-help\/questions\/a-company-manufacturing-a-product-exclusively-for-the-customers-in-2141777", "description": "Question 1: A company manufacturing a product exclusively for the customers in its home country should not invest in global operations to source raw materials and components for its product....", "stars": 3 }, { "url": "\/study-help\/questions\/fletcher-fabrication-inc-produces-three-products-by-a-joint-production-1431145", "description": "Fletcher Fabrication, Inc., produces three products by a joint production process. Raw materials are put into production in Department X, and at the end of processing in this department, three...", "stars": 3 }, { "url": "\/study-help\/questions\/brenda-apologized-to-kordell-for-an-email-that-upset-him-2142587", "description": "Brenda apologized to Kordell for an e - mail that upset him. She said she had chosen an inconsiderate way of stating her idea, and that she d be happy to discuss it further. Brenda is Multiple...", "stars": 3 }, { "url": "\/study-help\/questions\/when-conducting-a-logistic-regression-analysis-what-is-the-problem-8474513", "description": "When conducting a logistic regression analysis, what is the problem of class imbalance in a dataset?", "stars": 3 }, { "url": "\/2500-lbm-car-moving-at-15-mih-is-accelerated", "description": "A 2500-lbm car moving at 15 mi\/h is accelerated at a constant rate of 15 ft\/s 2 up to a speed of 50 mi\/h. Calculate force and total time required?", "stars": 3 }, { "url": "\/study-help\/financial-markets\/what-factors-are-used-to-determine-a-firms-bond-issue-1703103", "description": "What factors are used to determine a firms bond issue rating? AppendixLO1", "stars": 3 }, { "url": "\/study-help\/financial-markets\/the-major-currencies-in-which-international-bonds-are-denominated-appendixlo1-1703106", "description": "The major currencies in which international bonds are denominated? AppendixLO1", "stars": 3 }, { "url": "\/study-help\/financial-markets\/what-events-can-cause-yield-spreads-on-bond-securities-to-1703105", "description": "What events can cause yield spreads on bond securities to change? AppendixLO1", "stars": 3 } ], "next_back_navigation": { "previous": "\/study-help\/questions\/a-pension-fund-manager-is-considering-three-mutual-funds-the-1678229", "next": "\/study-help\/questions\/nakashima-gallery-had-the-following-petty-cash-transactions-in-february-1678231" }, "breadcrumbs": [ { "name": "Study help", "link": "https:\/\/www.solutioninn.com\/study-help\/questions-and-answers" }, { "name": "Business", "link": "https:\/\/www.solutioninn.com\/study-help\/questions-and-answers\/business" }, { "name": "Finance", "link": "https:\/\/www.solutioninn.com\/study-help\/questions\/business-finance" }, { "name": " Mergers and Acquisitions Lavender Repair Company, a regional hardware chain that", "link": "https:\/\/www.solutioninn.com\/study-help\/questions\/mergers-and-acquisitions-lavender-repair-company-a-regional-hardware-chain-1678230" } ], "skill_details": { "skill_id": "13", "skill_name": "Finance", "parent_id": "1" } }} }