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chap030 - Chapter 30 Mergers and Acquisitions 30.1 The new...

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¤ ¨ L » * Chapter 30: Mergers and Acquisitions 30.1 The new corporation issues $300,000 in new debt. The merger creates $100,000 of goodwill because the merger is a purchase. Balance Sheet Lager Brewing (in $ thousands) Current assets $480 Current liabilities $200 Other assets 140 Long-term debt 400 Net fixed assets 580 Equity 700 Goodwill 100 Total assets $1,300 Total liabilities $1,300 30.2 If the balance sheet for Philadelphia Pretzel shows assets at book value instead of market value, the goodwill will be only $60,000 (=$300,000 - $240,000). Thus, the net fixed assets are $620,000 (=$1,300,000 - $480,000 - $140,000 - $60,000). Balance Sheet Lager Brewing (in $ thousands) Current assets $480 Current liabilities $200 Other assets 140 Long-term debt 400 Net fixed assets 620 Equity 700 Goodwill 60 Total assets $1,300 Total liabilities $1,300 30.3 Balance Sheet Lager Brewing (in $ thousands) Current assets $480 Current liabilities $280 Other assets 140 Long-term debt 100 Net fixed assets 580 Equity 820 Total assets $1,200 Total liabilities $1,200 30.4 a. False. Although the reasoning seems correct, the Stillman-Eckbo data do not support the monopoly power theory. b. True. When managers act in their own interest, acquisitions are an important control device for shareholders. It appears that some acquisitions and takeovers are the consequence of underlying conflicts between managers and shareholders. c. False. Even if markets are efficient, the presence of synergy will make the value of the combined firm different from the sum of the values of the separate firms. Incremental cash flows provide the positive NPV of the transaction. d. False. In an efficient market, traders will value takeovers based on “Fundamental factors” regardless of the time horizon. Recall that the evidence as a whole suggests efficiency in the markets. Mergers should be no different. e. False. The tax effect of an acquisition depends on whether the merger is taxable or non-taxable. In a taxable merger, there are two opposing factors to consider, the capital gains effect and the write-up effect. The net effect is the sum of these two effects. Answers to End-of-Chapter Problems B-233
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f. True. Because of the coinsurance effect, wealth might be transferred from the stockholders to the bondholders. Acquisition analysis usually disregards this effect and considers only the total value. 30.5 (in $ millions) Net Cash Flow Per Year (Perpetual) Discount Rate (%) Value Small Fry 8 16% 50 Whale 20 10% 200 Benefits from Acquisition: 5 11.76% 42.5 Revenue Enhancement 2.5 20% 12.5 Cost Reduction 2 10% 20 Tax Shelters 0.5 5% 10 Whale-Fry $33 11.28% $292.5 Per share price = ($292.5-100)/5 = $38.5 30.6 a. The weather conditions are independent. Thus, the joint probabilities are the products of the individual probabilities. Possible states Joint probability Rain Rain 0.1 x 0.1=0.01 Rain Warm 0.1 x 0.4=0.04 Rain Hot 0.1 x 0.5=0.05 Warm Rain 0.4 x 0.1=0.04 Warm Warm 0.4 x 0.4=0.16 Warm Hot 0.4 x 0.5=0.20 Hot Rain 0.5 x 0.1=0.05 Hot Warm 0.5 x 0.4=0.20 Hot Hot 0.5 x 0.5=0.25 Since the state Rain Warm has the same outcome (revenue) as Warm Rain, their probabilities can be added. The same is true of Rain Hot, Hot Rain and Warm Hot, Hot Warm. Thus the joint probabilities are
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