Question 1

Exhibit 26.1
Best Window & Door Corporation is considering the acquisition of Glassmakers Inc. Glassmakers has a capital structure consisting of $5 million (market value)  of 11% bonds and $10 million (market value)  of common stock. Glassmakers' pre-merger beta is 1.36. Best's beta is 1.02, and both it and Glassmakers face a 40% tax rate. Best's capital structure is 40% debt and 60% equity. The free cash flows from Glassmakers are estimated to be $3.0 million for each of the next 4 years and a horizon value of $10.0 million in Year 4. Tax savings are estimated to be $1 million for each of the next 4 years and a horizon value of $5 million in Year 4. New debt would be issued to finance the acquisition and retire the old debt, and this new debt would have an interest rate of 8%. Currently, the risk-free rate is 6.0% and the market risk premium is 4.0%.
-Refer to Exhibit 26.1.What is the value of Glassmakers' equity to Best? (Round your answer to the closest thousand dollars.)

Accepted Answer

A)  $16,019,000
B)  $17,111,000
C)  $18,916,000
D)  $22,111,000
E)  $22,916,000F) A) and E)
G) C) and D)

Question 2

A joint venture is one in which two,or sometimes more,independent companies agree to combine resources in order to achieve a specific objective,usually limited in scope.

Accepted Answer

A) True 
 B)False

Question 3

Borrowing funds on terms that would require immediate repayment of all funds if the firm is acquired,selling off valuable assets,and granting huge "golden parachutes" that open if the firm is acquired are three procedures used to defend against hostile takeovers.These strategies are known as "poison pills."

Accepted Answer

A) True 
 B)False

Question 4

Any goodwill created in a merger must be amortized over its expected life,usually 40 years,for shareholder reporting purposes.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements is most CORRECT?

Accepted Answer

A)  Regulations in the United States prohibit acquiring firms from using common stock to purchase another firm.
B)  Defensive mergers are designed to make a company less vulnerable to a takeover.
C)  Hostile mergers always create value for the acquiring firm.
D)  In a tender offer, the target firm's management always remain after the merger is completed.
E)  A conglomerate merger is one where a firm combines with another firm in the same industry.F) B) and D)
G) A) and C)

Question 6

The three main advantages of holding companies are (1)control with fractional ownership, (2)taxation benefits,and (3)isolation of operating risks.

Accepted Answer

A) True 
 B)False

Question 7

If the capital structure is stable,and free cash flows are expected to be growing at a constant rate at the horizon date,then the horizon value is calculated by discounting the free cash flows plus the expected future tax shields at the weighted average cost of capital.

Accepted Answer

A) True 
 B)False

Question 8

The two principal advantages of holding companies are (1)the holding company can control a great deal of assets with limited equity and (2)the dividends received by the parent from the subsidiary are not taxed if the parent holds at least 50% of the subsidiary's stock.

Accepted Answer

A) True 
 B)False

Question 9

In a financial merger,the relevant post-merger cash flows are simply the sum of the expected cash flows of the two companies,measured as if they were operated independently.

Accepted Answer

A) True 
 B)False

Exam 26: Mergers and Corporate Control

If the capital structure is stable,and free cash flows are expected to be growing at a constant rate at the horizon date,then the horizon value is calculated by discounting the free cash flows plus the expected future tax shields at the weighted average cost of capital.

Correct Answer
verified

The three main advantages of holding companies are (1)control with fractional ownership, (2)taxation benefits,and (3)isolation of operating risks.

Correct Answer
verified

Correct Answer
verified

Any goodwill created in a merger must be amortized over its expected life,usually 40 years,for shareholder reporting purposes.

Correct Answer
verified

In a financial merger,the relevant post-merger cash flows are simply the sum of the expected cash flows of the two companies,measured as if they were operated independently.

Correct Answer
verified

A joint venture is one in which two,or sometimes more,independent companies agree to combine resources in order to achieve a specific objective,usually limited in scope.

Correct Answer
verified

Correct Answer
verified

Which of the following statements is most CORRECT?

Correct Answer
verified

The two principal advantages of holding companies are (1)the holding company can control a great deal of assets with limited equity and (2)the dividends received by the parent from the subsidiary are not taxed if the parent holds at least 50% of the subsidiary's stock.

Correct Answer
verified

Exam 26: Mergers and Corporate Control

If the capital structure is stable,and free cash flows are expected to be growing at a constant rate at the horizon date,then the horizon value is calculated by discounting the free cash flows plus the expected future tax shields at the weighted average cost of capital.

Correct AnswerverifiedShow Answer

The three main advantages of holding companies are (1)control with fractional ownership, (2)taxation benefits,and (3)isolation of operating risks.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Any goodwill created in a merger must be amortized over its expected life,usually 40 years,for shareholder reporting purposes.

Correct AnswerverifiedShow Answer

In a financial merger,the relevant post-merger cash flows are simply the sum of the expected cash flows of the two companies,measured as if they were operated independently.

Correct AnswerverifiedShow Answer

A joint venture is one in which two,or sometimes more,independent companies agree to combine resources in order to achieve a specific objective,usually limited in scope.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is most CORRECT?

Correct AnswerverifiedShow Answer

The two principal advantages of holding companies are (1)the holding company can control a great deal of assets with limited equity and (2)the dividends received by the parent from the subsidiary are not taxed if the parent holds at least 50% of the subsidiary's stock.

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified