CFM4 Solns Chap 25

CFM4 Solns Chap 25 - CORPORATE FINANCIAL MANAGEMENT, Fourth...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
CORPORATE FINANCIAL MANAGEMENT, Fourth Edition Solutions Manual , Chapter 25 Chapter 25 Questions 1. a. A merger is an absorption of a firm, the acquiree, by another firm, the acquiror. b. A consolidation is the combination of two or more firms into an entirely new entity. c. A horizontal merger is a merger of two firms in the same line of business. d. A vertical merger is a merger of two firms involved in the same industry but operating at different points in the supply chain. e. A conglomerate merger is a merger of two firms in unrelated businesses. 2. Four valid reasons for firms merging are to achieve operating efficiencies, to achieve economies of scale, to realize tax benefits, to capture surplus cash, and to grow quickly and cheaply. 3. Diversification is a questionable motive for merging because shareholders of the acquiror can usually achieve diversification more cheaply on their own. 4. The shareholders of the acquirees usually receive a premium for their shares that is nearly equal to the net advantage of merging. The shareholders of the acquirors usually receive very little of the benefit of the net advantage of merging. 5. The main difference between a tax-free acquisition and a taxable acquisition is that in a tax-free acquisition the selling shareholders are treated as if they have exchanged their shares whereas in a taxable acquisition the selling shareholders are treated as if they have sold their shares. Sellers may prefer a tax-free acquisition because it may defer their taxes. Buyers may also prefer a tax-free acquisition because the acquiror may be able to use the acquiree’s tax loss carryforwards. 6. A tender offer is an offer made by the acquiror to purchase stock from the shareholders of the acquiree. The acquiror can gain control of the acquiree by purchasing enough of the outstanding shares. The main advantages are that it is fast, flexible, and simple. In addition, if a higher bidder subsequently emerges, the original bidder may at least realize some profit on the shares it owns. 7. A proxy contest is an effort by one or more individuals to oppose incumbent management by obtaining sufficient shareholder votes to elect a new board of directors. Control of a firm can be gained if the opposing board of directors is elected. The disadvantage of a proxy contest relative to a tender offer is that few succeed, as shareholders prefer to receive cash for their shares instead of a new management team. 8. 1Financial synergy results when the merged firm is able to make larger securities issues and, thus, reduce its transaction costs relative to the unmerged firms. Business synergy results from eliminating duplicate facilities, operations, or departments and from achieving economies of scale in the operation of the merged firm. Financial synergy is a function of the way the firm is financed, and business synergy is a function of the way the firm is operated; business synergy is likely to be much more important than financial synergy is creating value through a merger. 9.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 09/18/2011 for the course FIN 303 taught by Professor Bernile during the Spring '11 term at University of Miami.

Page1 / 7

CFM4 Solns Chap 25 - CORPORATE FINANCIAL MANAGEMENT, Fourth...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online