bma_Chapter32 - CHAPTER 32 Mergers Answers to Practice...

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

View Full Document Right Arrow Icon
CHAPTER 32 Mergers Answers to Practice Questions 7. Answers here will vary, depending on student choice. 8. Answers here will vary, depending on student choice. 9. a. This is a version of the diversification argument. The high interest rates reflect the risk inherent in the volatile industry. However, if the merger allows increased borrowing and provides increased value from tax shields, there will be a net gain. b. The P/E ratio does not determine earnings. The efficient markets hypothesis suggests that investors will be able to see beyond the ratio to the economics of the merger. c. There will still be a wealth transfer from the acquiring shareholders to the target shareholders. 10. Suppose the market value of the acquiring firm is $150 million and the value of the firm with a merger is $200 million. If the probability of a merger is 70%, then the market value of the firm pre-merger could be: ($150 × 0.3) + ($200 × 0.7) = $185 million If the acquiring managers used this value, they would underestimate the value of the acquisition. 11. This is an interesting question that centers on the source of the information. If you obtain the information from someone at Backwoods Chemical whom you know has access to this valuable information, then you are guilty of insider trading if you act upon it. However, if you come across the information as a
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.

Page1 / 4

bma_Chapter32 - CHAPTER 32 Mergers Answers to Practice...

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