FIN 540 – Homework Chapter 22

.

FIN 540 Homework Chapter 22

Page 1 of 2

Directions: Answer the following five questions on a separate document. Explain how you reached the

answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using

the assignment link in the course shell. Each question is worth five points apiece for a total of 25 points

for this homework assignment.

1. Which of the following statements is most CORRECT?

a. The smaller the synergistic benefits of a particular merger, the greater the scope for

striking a bargain in negotiations, and the higher the probability that the merger will be

completed.

b. Since mergers are frequently financed by debt rather than equity, a lower cost of debt or

a greater debt capacity are rarely relevant considerations when considering a merger.

c. Managers who purchase other firms often assert that the new combined firm will enjoy

benefits from diversification, including more stable earnings. However, since

shareholders are free to diversify their own holdings, and at what’s probably a lower cost,

diversification benefits is generally not a valid motive for a publicly held firm.

d. Operating economies are never a motive for mergers.

e. Tax considerations often play a part in mergers. If one firm has excess cash, purchasing

another firm exposes the purchasing firm to additional taxes. Thus, firms with excess

cash rarely undertake mergers.

2. Which of the following statements is most CORRECT?

a. Financial theory says that the choice of how to pay for a merger is really irrelevant

because, although it may affect the firm’s capital structure, it will not affect its overall

required rate of return.

b. The basic rationale for any financial merger is synergy and, thus, the estimation of pro

forma cash flows is the single most important part of the analysis.

c. In most mergers, the benefits of synergy and the premium the acquirer pays over the

market price are summed and then divided equally between the shareholders of the

acquiring and target firms.

d. The primary rationale for most operating mergers is synergy.

e. The acquiring firm’s required rate of return in most horizontal mergers will not be affected,

because the 2 firms will have similar betas.

3. Which of the following statements about valuing a firm using the APV approach is most

CORRECT?

a. The horizon value is calculated by discounting the free cash flows beyond the horizon

date and any tax savings at the cost of debt.

b. The horizon value is calculated by discounting the expected earnings at the WACC.

c. The horizon value is calculated by discounting the free cash flows beyond the horizon

date and any tax savings at the WACC.

d. The horizon value must always be more than 20 years in the future.

e. The horizon value is calculated by discounting the free cash flows beyond the horizon

date and any tax savings at the levered cost of equity.

FIN 540 – Homework Chapter 22

FIN 540 Homework Chapter 22

Page 2 of 2

4. Which of the following statements about valuing a firm using the APV approach is most

CORRECT?

a. The value of equity is calculated by discounting the horizon value, the tax shields, and

the free cash flows at the cost of equity.

b. The value of operations is calculated by discounting the horizon value, the tax shields,

and the free cash flows before the horizon date at the unlevered cost of equity.

c. The value of equity is calculated by discounting the horizon value and the free cash flows

at the cost of equity.

d. The APV approach stands for the accounting pre-valuation approach.

e. The value of operations is calculated by discounting the horizon value, the tax shields,

and the free cash flows at the cost of equity.

5. Which of the following statements is most CORRECT?

a. A defensive merger is one where the firm’s managers decide to merge with another firm

to avoid or lessen the possibility of being acquired through a hostile takeover.

b. Acquiring firms send a signal that their stock is undervalued if they choose to use stock to

pay for the acquisition.

c. Cash payments are used in takeovers but never in mergers.

d. Managers often are fired in takeovers, but never in mergers.

e. If a company that produces military equipment merges with a company that manages a

chain of motels, this is an example of a horizontal merger.