other unidentified bidders will actually pay more than 35 per share to acquire

# Other unidentified bidders will actually pay more

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other unidentified bidders will actually pay more than \$35 per share to acquire the company, then they should still fight the offer. However, if the current management cannot increase the value of the firm beyond the bid price, and no other higher bids come in, then management is not acting in the interests of the shareholders by fighting the offer. Since current managers often lose their jobs when the corporation is acquired, poorly monitored managers have an incentive to fight corporate takeovers in situations such as this. 4 #3: Firm A and Firm B have debt/total asset ratios of 35% and 30% and returns on total assets of 12% and 11% respectively. Which firm has a greater return on equity? Debt = total debt (interest bearing & non-interest bearing 5 Firm A Firm B D / TA = 0.35 D / TA = 0.30 (TA – E) / TA = 0.35 (TA – E) / TA = 0.30 (TA / TA) – (E / TA) = 0.35 (TA / TA) – (E / TA) = 0.30 1 – (E / TA) = 0.35 1 – (E / TA) = 0.30 E / TA = 0.65 E / TA = 0.30 E = 0.65(TA) E = 0.70 (TA) Rearranging ROA, we find: NI / TA = 0.12 NI / TA = 0.11 NI = 0.12(TA) NI = 0.11(TA) Since ROE = NI / E, we can substitute the above equations into the ROE formula, which yields: Firm A: ROE = 0.12(TA) / 0.65(TA) = 0.12 / 0.65 = 18.46% Firm B: ROE = 0.11(TA) / 0.70 (TA) = 0.11 / 0.70 = 15.71% 6 #4: Sherwood Inc.’s net income for the most recent year was \$13,168. The tax rate was 34 percent. The firm paid \$3,605 in total interest expense and deducted \$2,382 in depreciation expense. What was the cash coverage ratio for the year? Cash Coverage ratio = EBITDA/interest Net Sales - COGS - SG&A EBITDA - Depr/ Amort EBIT - Interest expense EBT - Taxes EAT or NI NI = (1 – t)EBT EBT = \$13,168 / (1 – 0.34) = \$19,951.52 EBIT = EBT + Interest paid = \$19,951.52 + 3,605 = \$23,556.52 EBITD = EBIT + Depreciation = \$23,556.52 + 2,382 = \$25,938.52 Cash coverage ratio = EBITD / Interest = \$25,938.52 / \$3,605 = 7.20 times  #### You've reached the end of your free preview.

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