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26 Feb 2018

A host of empirical evidence indicates that the gains from a typical merger accrue to the shareholders of the target corporation, not to the shareholders of the acquiring corporation. It seems the acquiring corporation should be in the "driver’s seat" in a typical merger.

Apple recently acquired Beats. please share your thoughts regarding this in light of this recent acquisition.

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Lelia Lubowitz
Lelia LubowitzLv2
28 Feb 2018

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A.) A host of empirical evidence indicates that the gains from a typical merger accrue to the shareholders of the target corporation, not to the shareholders of the acquiring corporation. It seems the acquiring corporation should be in the "driver’s seat" in a typical merger. Why don’t their shareholders benefit? What do you think typically goes wrong to cause this result? Elaborate and Explain Please

B. The order of priority of claims in liquidation is firmly established in legal precedent. As depicted in Table 18.9 of the textbook, common shareholders are last in priority. Yet, in bankruptcy negotiations, creditors (who have a relatively high priority) often give up their debt in exchange for shares of common stock, whose claim on liquidation proceeds are last on the list. Why might they do this? Do you believe it is a good idea? Explain.

25. If a merger is done for __________ reasons, then the combined corporation will be worth more than the two individual corporations (2+2 = 5).

  1. Expropriation
  2. Synergy
  3. Hubris
  4. Wealth Redistribution

26. A(n) __________ is when a parent company sells shares of a subsidiary to the public.

  1. Divestiture
  2. Leveraged Buyout
  3. Joint Venture
  4. Equity Carveout

27. Antitakeover measures primarily protect ______________.

  1. Acquiring firm managers
  2. Acquiring firm shareholders
  3. Target firm shareholders
  4. Target firm managers

28. If investors prefer dividends to capital gains (Bird in the Hand theory is true), then

  1. The cost of equity will decrease as the retention ratio increases
  2. The cost of equity will decrease as the payout ratio decreases
  3. The cost of equity will increase as the retention ratio decreases
  4. The cost of equity will increase as the payout ratio decreases

29. _______________ are when the firm buys back a set number of shares on a set date for a specific price.

  1. Dividend Reinvestment Plans
  2. Tender Offers
  3. Dutch auctions
  4. Clientele Repurchases

30. Any signaling effect of dividends should occur on the ______________.

  1. Declaration Date
  2. Ex-Dividend Date
  3. Record Date
  4. Payment Date

31. Which statement is TRUE?

  1. Dividend rights say that shareholders get any remaining assets after all creditors have been paid in bankruptcy
  2. According to financial theory, shareholder wealth should be unaffected by a two-for-one stock split.
  3. A stock split is a large stock dividend so that you might have twice as many shares with each share being worth half as much.
  4. The stock price should fall by the amount of the dividend on the ex-dividend date.

32. Which statement is FALSE?

  1. In a Stock Swap, the acquiring firm issues shares of stock in order to pay for the acquisition
  2. A conglomerate merger is between unrelated firms
  3. A Leveraged Buyout involves creating a new company out of part of your company and then selling shares of the new company to the public.
  4. In an asset purchase, the acquiring firm does not assume the liabilities of the target firm.

33. Suppose that prior to a merger the stock price of the target company was $50 and the stock price of the acquiring company was $40. If the acquiring firm agrees to pay 1.5 share of their stock for every share of the target firms stock, then what premium are they offering?

a) 10% b) 20% c) 25% d) 33%

34. Which statement is FALSE?

  1. The White Knight defense is when you try to sell yourself to a

Merger Bid

Hastings Corporation is interested in acquiring VandellCorporation. Vandell has 1 million shares outstanding and a targetcapital structure consisting of 30% debt; its beta is 1.20 (givenits target capital structure). Vandell has $9.09 million in debtthat trades at par and pays an 7.1% interest rate. Vandell’s freecash flow (FCF0) is $2 million per year and is expectedto grow at a constant rate of 5% a year. Both Vandell and Hastingspay a 30% combined federal and state tax rate. The risk-free rateof interest is 7% and the market risk premium is 5%.

Hastings Corporation estimates that if it acquires VandellCorporation, synergies will cause Vandell’s free cash flows to be$2.6 million, $2.8 million, $3.5 million, and $3.81 million atYears 1 through 4, respectively, after which the free cash flowswill grow at a constant 5% rate. Hastings plans to assume Vandell’s$9.09 million in debt (which has an 7.1% interest rate) and raiseadditional debt financing at the time of the acquisition. Hastingsestimates that interest payments will be $1.6 million each year forYears 1, 2, and 3. After Year 3, a target capital structure of 30%debt will be maintained. Interest at Year 4 will be $1.477 million,after which the interest and the tax shield will grow at 5%.

Indicate the range of possible prices that Hastings could bidfor each share of Vandell common stock in an acquisition. Roundyour answers to the nearest cent. Do not round intermediatecalculations.

The bid for each share should range between $ per share and $per share.

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