Q2

QUESTION TWO (20 Marks) Mergers and Acquisitions A. What types of actions might the management of a firm take to fight a hostile acquisition bid from an unwanted suitor? How do the target firm shareholders benefit from the defensive tactics of their management team? How are the target firm shareholders harmed by such actions? Explain. (5 marks) B. What does it mean to say that a proposed merger will take advantage of available economies of scale? Suppose Eastern Power Co. and Western Power Co. are located in different time zones. Both operate at 60 percent of capacity except for peak periods, when they operate at 2 | P a ge Dec 2021 BAC 411 MW SBS MU 100 percent of capacity. The peak periods begin at 9:00 a.m. and 5:00 p.m. local time and last about 45 minutes. Explain why a merger between Eastern and Western might make sense(5 marks) C. Predator Corp. is analysing the possible acquisition of Target Company. Both firms have no debt. Predator believes the acquisition will increase its total after tax annual cash flow by K160,000 indefinitely. The current market value of Teller is K65,000 and that of Penn is K98,000. The appropriate discount rate for the incremental cash flows is 12 percent. Penn is trying to decide whether it should offer 40 percent of its stock or K70,000 in cash to Teller's shareholders. Required: i. What is the cost of each alternative? (4 marks) ii. What is the NPV of each alternative? ( 3 marks) iii. Which alternative should Penn choose