Question : 11) Acquisitions especially attractive when an acquiring firm's stock price : 1417815

 

 

11) Acquisitions are especially attractive when an acquiring firm's stock price is high, because fewer shares must be exchanged to acquire the firm.

 

 

12) Cash acquisitions of going concerns are best analyzed using ________.

A) an investment opportunity schedule

B) ratio analysis

C) capital budgeting techniques

D) the weighted marginal cost of capital theory

 

 

13) Markepta, Inc. is considering the acquisition of Management Theories, Inc. at a cash price of $1.5 million. Crimson Services, Inc. has short-term liabilities of $500,000. As a result of acquiring Crimson Services, Inc., Markepta, Inc. would acquire the copyrights of a national best-seller which would provide an estimated cash flow of $300,000 for the next five years. The firm has a cost of capital of 20 percent. The approximate net present value of this acquisition is ________.

A) $500,000

B) $480,800

C) -$102,700.55

D) -$1,102,816.36

 

 

14) If the net present value of the target company is ________.

A) lesser than zero, the merger is acceptable

B) greater than zero, the merger is acceptable

C) greater than zero, the merger is rejected

D) equal to zero, the merger is acceptable

 

15) When making a cash acquisition of a going concern, the acquiring corporation should ________.

A) adjust after-tax cash flows generated from new assets

B) recognize different accounting techniques

C) adjust the discount rate for risk differences

D) consider the problems of assimilating the acquired management

 

 

16) Maxi, Inc. is evaluating the acquisition of Mini, Inc., which had a loss carryforward of $2.75 million which resulted from earlier operations. Maxi can purchase Mini for $3.5 million and liquidate the assets for $1.25 million. Maxi expects earnings before taxes in the three years following the acquisition to be as follows:

 

(These earnings are assumed to fall within the limit legally allowed for application of a tax loss carryforward resulting from the proposed acquisition.) Maxi has a 40 percent tax rate and a cost of capital of 10 percent. The total present value of tax advantage of the acquisition in the following three years is ________.

A) $440,374

B) $842,374

C) $1.1 million

D) $2.75 million

 

17) Tangshan Mining is considering the acquisition of Zhengsen Mining at a cash price of $6,000,000. The primary motivation for Tangshan's purchase of Zhengsen is for a special piece of drilling equipment that it believes will generate after-tax cash flows if $2,000,000 per year during the next 5 years. Zhengsen Mining has liabilities of $9,000,000 and Tangshan estimates that it can sell the remaining assets $6,500,000. Tangshan will use a 15 percent cost of capital for evaluating the acquisition. Based on this information, what is the net value of the special drilling equipment?

A) $1,795,690

B) $1,500,000

C) ($1,795,690)

D) ($1,500,789)

 

 

18) Tangshan Mining is considering the acquisition of Zhengsen Mining at a cash price of $6,000,000. The primary motivation for Tangshan's purchase of Zhengsen is for a special piece of drilling equipment that it believes will generate after-tax cash flows of $2,000,000 per year during the next 5 years. Zhengsen Mining has liabilities of $9,000,000 and Tangshan estimates that it can sell the remaining assets $6,500,000. Tangshan will use a 15 percent cost of capital for evaluating the acquisition. Based on this information, what is the net value of the special drilling equipment? Calculate the net value of a second alternative that would allow Tangshan to purchase a better quality asset for $12,000,000 that would provide a $2,600,000 in after-tax inflows for the next 5 years. Which alternative would you choose?

A) $1,795,700, $3,284,400, both

B) $1,500,000, $4,500,000, both

C) ($1,795,700), ($3,284,400), neither

D) ($1,795,700), ($4,500,000), neither

 

19) Hayley Medical, Inc. is evaluating the acquisition of Health-o-Matic, Inc., which had a loss carryforward of $3.75 million, resulting from earlier operations. Hayley Medical can purchase Health-o-Matic for $4.5 million and liquidate the assets for $3.25 million. Hayley Medical expects earnings before taxes in the three years following the acquisition to be as follows:

 

 

(These earnings are assumed to fall within the annual limit legally allowed for application of a tax loss carryforward resulting from the proposed acquisition.) Hayley Medical has a 40 percent tax rate and a cost of capital of 15 percent. The approximate maximum cash price Hayley Medical would be willing to pay for Health-o-Matic is ________.

A) $4,757,000

B) $4,253,000

C) $4,409,600

D) $3,750,000

 

 

20) The acquiring firm pays a price that is a premium above the market price of the acquired firm. This means that the ratio of exchange in market price is ________.

A) less than 1

B) greater than 1

C) 0, because the ratio of exchange results in no increase or decrease of shares

D) equal to 1