Mergers and Acquisitions The Relentless Pursuit of Synergy Answer. In this post you will get Quiz & Assignment Answer Of Mergers and Acquisitions The Relentless Pursuit of Synergy
Mergers and Acquisitions The Relentless Pursuit of Synergy
Offered By ”Moscow Institute of Physics and Technology”
Week- 1
1 – Takeover process, stakeholders, and environment
1.
Question 1
A horizontal merger is likely to have the following benefits:
1 point
- Improved planning due to more efficient information flow
- Advantages along the production process
- Reduced costs of transportation and communication
- Economies of scope
2.
Question 2
In a hostile tender offer, the bidder:
1 point
- Makes an offer directly to the target bondholders
- Negotiates the transaction with the target management
- Requires controlling interest in the target
- Makes an offer directly to the target shareholders
3.
Question 3
An arbitrage firm A notes that a bidder B (selling at $35 a share) makes an offer to buy target T (selling at $60 a share) for the B stock at 2 to 1. T rises to $66, B stays at $35. A sells 2 shares of B short and buys 1 share of T. In two months, the transaction is completed, with B at $35 and T at $70. What is the dollar gain to A, if a 50% margin is required for both investments?
1 point
- $2
- $5
- $0
- $4
4.
Question 4
In terms of Question 3, what is the simple annualized percentage gain to A?
1 point
- 35.5%
- Can’t say
- 20.8%
- 28.7%
5.
Question 5
In terms of Question 3, assume that the cost of capital is 8% a year. What will be the simple annualized percentage gain to A?
1 point
- 18.8%
- 27.3%
- Can’t say
- 35.3%
6.
Question 6
In terms of Question 3, assume that A uses its own funds to cover both positions (does not borrow on margin). What then will be the simple annualized percentage gain to A?
1 point
- 17.6%
- Can’t say
- 23.3%
- 31.4%
7.
Question 7
In terms of Question 3, assume that the margin on both investments drops to 40%, while the cost of capital is still 8% a year. What will be the simple annualized percentage gain to A now?
1 point
- Can’t say
- 24.1%
- 29.4%
- 17.6%
8.
Question 8
If in an M&A transaction the bidder is a Swedish company and the target is from Germany, major financial stakeholders are likely to be:
1 point
- European
- Chinese
- American
- Can’t say
9.
Question 9
The bidder B has the total tangible assets (TTA) of $1,870 million and the total debt (TD) of $320 million. The target T has the total tangible assets (TTA) of $680 million and the total debt (TD) of $260 million. B offers to buy T for $890 million in its stock. There is no step-up in depreciable assets. How much is assigned to goodwill?
1 point
- $230 million
- $290 million
- $470 million
- $440 million
10.
Question 10
In terms of Question 9, assume that the excess of purchase price over the target’s book net worth is split equally between depreciable assets and goodwill. How much is assigned to goodwill now?
1 point
- $220 million
- Nothing
- $235 million
- $470 million
Week- 2
2 – M&A strategy and value creation potential in the uncertain world
1.
Question 1
In the second decade of the 21st century the balance in the competition between the cost leadership and the differentiation advantage started to go back in favor of differentiation. What is the major reason for that?
1 point
Customer influence has grown tremendously due to the social media
Unprecedented prosperity allowed ignoring higher prices
New manufacturing technologies required very heavy investments
Labor costs in China have significantly increased
2.
Question 2
In the VUCA (volatility, uncertainty, complexity, and ambiguity) world, the role of strategy is changing because:
1 point
A company may best predict the future by creating it
It is possible to more accurately predict the future
Classic competitive advantages become obsolete
Value creation in this world loses sense
3.
Question 3
In the today’s uncertain world, the role of ethics and values in formulating strategy:
1 point
Decreases because it’s out of fashion nowadays
Increases because it’s been trendy in recent years
Decreases due to the multitude of opinions that dominate in the social media
Increases because they allow reaching adequate leadership
4.
Question 4
Under the theory of managerialism:
1 point
Managers engage in M&As to increase their compensation
Shareholders can effectively prevent adverse actions by the management
Managers pursue increased form size to enhance efficiency
Mergers and acquisitions provide a solution to agency problems
5.
Question 5
The free cash flow theory as a remedy against agency problems recommends:
1 point
To promote higher volumes of bond issues
To increase the amount of cash under management control as an incentive
To prevent managers from investing in moderately profitable projects
To finance projects privately
6.
Question 6
Under the hubris hypothesis:
1 point
Bids exceed fair market value of targets
Bidders in successful mergers pay moderate well-justified premia
The “winner’s curse” phenomenon does not exist
The market places too high valuations on target companies
7.
Question 7
Let’s assume that cash flows of the bidder and the target are uncorrelated. After the successful merger, in order to increase the shareholder value, the management of the combined company is likely to:
1 point
Pay no attention to the leverage altogether
Keep leverage stable to ensure smooth development
Increase leverage to push up volatility of cash flows
Decrease leverage to further reduce the risk of the company cash flows
8.
Question 8
Redistribution from bondholders in M&As generally leads to:
1 point
Large losses to bondholders with respect to merger gains
No negative impact on bondholders in debt for stock exchanges
Significant gains to shareholders at the expense of bondholders
Negligible negative impact on bondholders in leveraged buyouts
9.
Question 9
Persuading the large shareholder in a public corporation to agree to the tender offer is:
1 point
An example of collusion that could discriminate small shareholders
A market solution to free-rider problem
Realistic only if the large shareholder holds controlling package
A signal to small shareholders that they could profit from tendering
10.
Question 10
Let’s consider the successful share repurchase offer from target management (see Handout 2.3) in greater detail. Suppose that the target shareholder decides to sell his two shares to the Bidder. The Bidder offers $70 a share up to five shares. Why is the investor’s payoff in Table 2 just $80?
1 point
The Bidder withdraws, and the investor’s shares are repurchased at $40
The Bidder buys two shares at $70, the payoff must be $140
The first share is repurchased at $80, the Bidder buys the second at $70
The Bidder buys one share at $70 and another at $20, the payoff must be $90
Week- 3
3 – Getting used to value drivers and formulas
1.
Question 1
Company TGT has the following characteristics:
Cost of equity 14% Revenue $800 million
Cost of debt 4% Operating margin 15%
D/E ratio 30% Investment (as percent of revenue) 8%
Tax rate 40% Growth rate 16%
TGT is expected to grow for 5 years; then cash flows are likely to flat out. Company BDR is considering buying company TGT. What will be the total value of TGT (in USD million)?
1 point
$879
$971
$781
$826
2.
Question 2
In terms of Question 1, assume that investors have reconsidered the growth potential of TGT. The supernormal growth is expected to continue for 5 years but it will be followed by the constant annual growth of 2% due to the more favorable market demand forecast. What would be the total value (in USD million) of TGT now?
1 point
$906
$763
$860
$889
3.
Question 3
In terms of Question 2, assume that the D/E ratio of 30% (see Question 1) correctly represents market values of debt and equity. How much (in USD million) would BDR have to pay for TGT, if it can be acquired at a 40% premium to its fair value?
1 point
$1,268
$975
$887
$744
4.
Question 4
In addition to TGT, BDR is considering another target UHU. All value drivers for UHU are the same as for TGT (see Question 1), except that some data for its cost of capital. UHU has an equity beta of 1.3 and a D/E ratio of 50%. Assume that the risk-free rate is 4%, and the equity risk premium is 6%. If we expect the 5-year supernormal growth for UHU followed by no growth, what will be the total fair value of UHU (in USD million):
1 point
$1,035
$1,162
$1,200
$1,406
5.
Question 5
In terms of Questions 1, 3 and 4, assume that unlike TGT, UHU can be purchased at a much smaller premium of 10% to its equity value. How much (in USD million) would BDR have to pay to acquire UHU?
1 point
$880
$1,209
$762
$913
6.
Question 6
Compare Questions 3 and 5. At what premium for the UHU equity value would BDR become indifferent between the two targets?
1 point
20%
22%
18%
15%
7.
Question 7
Assume the following data for the bidder BDR:
Cost of equity 12% Revenue $2 billion
Cost of debt 4% Operating margin 20%
D/E ratio 25% Investment (as percent of revenue) 3%
Tax rate 40% Growth rate 1%
BDR believes that without any acquisitions the company will continue to grow at a constant rate of 1 percent a year. What is a fair value of BDR (in USD million)?
1 point
$2,116
$2,238
$2,678
$2,002
8.
Question 8
In terms of Questions 4 and 7 assume that BDR buys UHU. The combined company is expected to grow at 10% for 5 years and then to grow at 1%. What will be the value of the combined company (in USD million) if its WACC stays the same as for the BDR?
1 point
$2,790
$2,298
$3,465
$3,261
9.
Question 9
In terms of Questions 4, 7, and 8 assume that BDR pays the
asked 10% premium to acquire UHU. What will be the gain (loss) in value as a
result of the transaction?
1 point
A loss of $17 million
A loss of $53 million
A gain of $182 million
A gain of $272 million
10.
Question 10
In terms of Questions 4, 7, and 8 assume that UHU learned
that TGT required a 40% premium if BDR wanted to buy it. Then, UHU reconsiders
the amount of the premium asked and also raises it to 40%. What will be the
gain (loss) in value if BDR agrees to pay the asked premium?
1 point
A loss of $138 million
A loss of $58 million
A gain of $22 million
A gain of $102 million
Week- 4
4 – Junk bonds and LBOs – how investors profit from them
1.
Question 1
The demand for junk bonds was fueled by:
1 point
High inflation in the 1970’s
Reduction in overall volatility of financial markets
The greater flexibility of bank loans offered by the 1980’s
All of the above
2.
Question 2
The following risk is much higher for junk bonds than for investment grade bonds:
1 point
Default risk
Reinvestment risk
Interest rate risk
All of the above
3.
Question 3
Empirical studies proved that yields on junk bonds were on average:
1 point
Higher than would be fair given the level of defaults
Lower than would be fair given the level of defaults
About right given the level of defaults
Depending on the issue could be higher, lower, or fair
4.
Question 4
In the 1980’s merger boom, junk bonds:
1 point
Based on empirical studies, were insignificant
Served as a catalyst for the boom
Actually caused the boom
Played a major role as a means of financing M&As during he period
5.
Question 5
The primary cause of the booming junk bond market in the 1980’s was:
1 point
Slow overall growth of corporate debt market
Illegal activity of some investment bankers
The move towards securitization of debt
Demand of largest corporations for low-risk financing
6.
Question 6
In our example of an LBO (see video Lecture 4.6, Handout 4.2) suppose that Company XYZ goes public (engages in a SIPO) earlier – at the end of Year 4. The XYZ management also reaches an agreement with the investment fund to buy back its share earlier – at the end of Year 4 just before the SIPO – on the same terms (at a 30% annual rate). Then the return to XYZ management would approximately equal to:
1 point
69%
79%
60%
73%
7.
Question 7
In our example of an LBO (see video Lecture 4.6, Handout 4.2) suppose that Company XYZ decides to go for a SIPO as early as at the end of Year 2. Because by that time its debt is still high at 71% of total assets, investors require a 25% discount to the book equity value. Then the return to the equity investors would approximately equal to:
1 point
62%
57%
38%
45%
8.
Question 8
In terms of Question 7, suppose that the XYZ management reaches an agreement with the investment fund to buy back its share earlier – at the end of Year 2 just before the SIPO. But the investment fund charges a 50% annual rate. Then the return to XYZ management would approximately equal to:
1 point
59%
64%
74%
51%
9.
Question 9
In our example of an LBO (see video Lecture 4.6, Handout 4.2) suppose that Company XYZ waits for a SIPO until the end of Year 5 when the market for offerings starts to recover. Despite the fact that by that time XYZ’s debt is a meager 24% of total assets, the market is requiring a 15% discount to the book value of XYZ’s equity at the SIPO. Also suppose that the investment fund charges the annual rate of 50% for earlier buyback. Will it be worth for the XYZ management to engage in buyback on such terms?
1 point
false
true
Can’t say
XYZ is indifferent
10.
Question 10
In terms of Question 9, suppose that the management decides to limit the issue in volume by 45 percent of book equity. The only cash available for buyback comes from the SIPO proceeds. The investment fund is negotiating the buyback annual interest rate. At what rate would XYZ management have to reject the buyback due to lack of cash?
1 point
42%
43%
45%
44%
Final Test
1.
Question 1
The advantage of the separation of ownership and control in the modern corporation is likely to result in the following:
2 points
Risk-bearing and decision making are separated
Agents bear the major wealth impact of their decisions
Agency problems get alleviated
Shareholders avoid major wealth impact of the management decisions
2.
Question 2
Which of the following factors could cause leverage ratios in the industry to fall?
2 points
High inflation rates
Uncertainty in future cash flows
Growing level of M&A activity
Favorable economic climate
3.
Question 3
If the fraction of share ownership by the management increases, then:
2 points
Agency problems are less severe
The probability of the hostile bid increases
The level of premium required for a takeover bid to succeed decreases
All of the above
4.
Question 4
If insiders believe that the company is undervalued, the following is likely:
2 points
Investors do not consider the firm as a takeover target
The firm may be subject to a takeover at a relatively low premium
The stock repurchase is too expensive as an antitakeover defense
The real value of the firm is indeed low
5.
Question 5
Most LBOs and MBOs have historically occurred in the industries and firms with the following characteristics:
2 points
Large levels of intangible assets
Technology-driven industries with high level of risk and uncertainty
Capable management with a track record of success
Uncertain and volatile cash flows
6.
Question 6
UVW Corporation has 200,000 shares outstanding selling at $60 each. The bidder B has a program to boost the share price to $90, but to implement this program, controlling package (100,000 shares) is required.
The bidder makes a tender offer to buy 100,000 shares at $75. If fewer shares are tendered, the offer fails and is withdrawn (assume that in this case the stock price stays at $60). If the offer succeeds, no discrimination of minority shareholders is feasible, so their shares will be worth $90.
Suppose that shareholders own one share of stock each and do not coordinate their actions. The dominant strategy for a rational shareholder will be to:
2 points
Hold
Tender
Can’t say
Shareholder is indifferent
7.
Question 7
In terms of Question 6, if all shareholders are rational, the tender offer will:
2 points
Fail
Succeed, the bidder will make a profit
Succeed, the bidder will just break even
Can’t say
8.
Question 8
Now suppose that, in terms of Question 6, the bidder makes a two-tier offer with the freeze-out of minority shareholders if the offer is successful. The first 100,000 shares are paid for at $75, while all other shares (and any remaining minority shareholders) will receive just $45.
If more than 100,000 shares are tendered, the shares receive $75 and $45 on a pro-rational basis. If less than 100,000 shares are tendered, the offer fails.
Suppose that one of the shareholders is against the offer, but expects it to succeed. The dominant strategy for such shareholder will be to:
2 points
Tender
Can’t say
Shareholder is indifferent
Hold
9.
Question 9
In terms of Question 8, if all shareholders think that way, the tender offer will:
2 points
Fail
Succeed, the bidder will make a profit
Can’t say
Succeed, the bidder will just break even
10.
Question 10
Now suppose that, in terms of Question 8, shareholders are allowed to tender approvingly or disapprovingly or not to tender at all. To succeed, an offer must receive at least 50% of approving tenders.
Suppose that one of the shareholders is against the offer, but expects it to succeed. The dominant strategy for such shareholder will be to:
2 points
Tender approvingly
Tender disapprovingly
Hold
Shareholder is indifferent
11.
Question 11
In terms of Question 10, if all shareholders think that way, the tender offer will:
2 points
Fail
Succeed, the bidder will just break even
Can’t say
Succeed, the bidder will make a profit
12.
Question 12
Company ABC is offering to buy Company XYZ in an exchange of shares deal paying 2 shares of ABC for each share of XYZ. The data for both companies is provided in the following table:
Pre-Merger Data ABC XYZ
Earnings $40,000 $2,000
Shares Outstanding 20,000 1,000
P/E 20 40
The after-the-merger EPS for the combined company will be:
2 points
$1.91
Can’t say
$2.00
$3.82
13.
Question 13
In terms of Question 12, suppose that after the merger the ABC P/E prevails. Then the stock price of the combined company will be worth:
2 points
$40.00
$20.00
$19.10
$38.18
14.
Question 14
Company DEF is offering to buy Company UVW for the DEF stock in a one-to-one share exchange transaction. The data for both companies is provided in the following table:
Pre-Merger Data DEF UVW
Earnings $200,000 $100,000
Shares Outstanding 8,000 5,000
The after-the-merger EPS for the combined company will be:
2 points
$20.00
$23.08
$25.00
Can’t say
15.
Question 15
In terms of Question 14, after the merger the EPS for DEF shareholders will:
2 points
Rise by 15.4%
Drop by 7.7%
Drop by 15.4%
Not change
16.
Question 16
The Bidder (B) is considering the purchase of two possible targets T1 and T2. For all companies assume the following:
The supernormal growth period is 10 years and zero growth thereafter
The applicable tax rate is 35%
The other relevant data are given in the following table (MM = millions)
B T1 T2 B acquires T1 B acquires T2
Net operating income (MM) $50.0 $20.0 $30.0 $70.0 $80.0
Market value of debt (MM) 110.0 40.0 40.0 150.0 150.0
Investment rate, b 0.70 0.90 1.20 0.80 1.00
Required return, r 20.0% 18.0% 19.0% 22.0% 20.0%
Weighted cost of capital 10.0% 11.0% 13.0% 10.2% 12.5%
What is the gain in value to the Bidder (in MM) if target T1 is purchased at a 20% premium?
3 points
$167
$132
$313
$241
17.
Question 17
In terms of Question 16, what is the gain (loss) in value to the Bidder (in MM) if target T2 is purchased at a 30% premium?
3 points
$199
$143
$(144)
$(72)
18.
Question 18
In terms of Questions 16 and 17, suppose that in the case of Bidder acquiring T1 the operating income drops to $60 million as a result of intra-company friction. At the same time, suppose that in the case of Bidder acquiring T2 the operating income grows to $100 million as a result of regional market synergy. What should the Bidder do?
2 points
Buy T1
The bidder is indifferent between the targets
Can’t say
Buy T2
19.
Question 19
Let in the case of Bidder acquiring T1 (in terms of Question 18) the investment community believes that the risk grows (because of the intra-company problems) and therefore the appropriate cost of capital rises. At the same time, in the case of Bidder acquiring T2 the operating income is expected to reach $100 million, and the cost of capital (for the acquisition of T2) does not change. At what cost of capital (for the acquisition of T1) will the Bidder become indifferent between the targets?
2 points
10.65%
Can’t say
10.22%
10.01%
Peer-graded Assignment: Company Valuation Based on Supernormal Growth – Value Drivers, Scenarios, and Sensitivity
