Question :
MULTIPLE CHOICE
1.Which of the following a means of changing corporate : 1325809
MULTIPLE CHOICE
1.Which of the following is a means of changing corporate control?
a.merger
b.management buyout
c.proxy contest
d.all of the above
Smart Acquires Snazzy
Smart Products plans to acquire Snazzy Snaps, which will create $8 million in incremental cash flows for Smart each year for the first six years. Smart Products plans to divest Snazzy Snaps at the end of the sixth year for $112,500,000. Smart’s beta (?) is 1.2, and is expected to remain so after the acquisition. The risk free rate is 5 percent and the expected return on the market is 16 percent. Smart Products has a 100 percent equity capital structure which will be maintained post-acquisition.
2.Refer to Smart Acquires Snazzy. What is Smart Products’ cost of equity?
a.24.2%
b.18.2%
c.16.0%
d.11.0%
3.Refer to Smart Acquires Snazzy. If Smart Products’ beta (?) falls to 0.95 post-acquisition, what would its weighted average cost of capital be?
a.9.05%
b.18.2%
c.12.10%
d.15.45%
4.What is the maximum price Smart Products can pay for Snazzy Snaps?
a.$30,153,951
b.$69,090,200
c.$102,729,660
d.$48,257,950
5.Suppose Smart Products’ stock price is $40 per share, and there are 12,000,000 shares outstanding. How many new shares must Smart issue to acquire Snazzy Snaps at the maximum price?
a.6,534,325
b.2,568,242
c.1,727,255
d.4,639,773
Needsalift, Inc.
You are analyzing the potential acquisition of Nothing Better! Ice Creams, Inc. by your firm, Needsalift, Inc. The ice cream firm is a wholly owned subsidiary of Grand Lake Investments, which has set a firm selling price of $10,000,000. From your work you estimate that Nothing Better! will generate the following incremental cash flows for Needsalift:
Year Incremental Cash Flow
1$1,000,000
2$1,500,000
3$3,000,000
4$4,000,000
5$4,500,000
To fund the $10 million price, Needsalift can use $2 million from internal sources (retained earnings) with a required return of 15 percent, while the rest would come from a new debt issue yielding 10 percent. Needsalift’s tax rate is 40 percent.
6.What is the required return on the acquisition of Nothing Better! for Needsalift?
a.15.0%
b.10.5%
c.7.8%
d.11.0%
7.What is the value of the proposed acquisition to Needsalift?
a.$9,771,379
b.$10,666,344
c.$8,500,678
d.$10,596,175
8.If the cost of debt increases to 12 percent, should Needsalift proceed with the acquisition?
a.No, with the debt cost at 12 percent, the value of the acquisition falls below $10 million by $853,000.
b.No, with the debt cost at 12 percent, the value of the acquisition falls below $10 million by $680,518.
c.Yes, since the increased cost of debt does not affect the value of the acquisition to Needsalift.
d.Yes, with the debt cost at 12 percent the value of the acquisition exceeds $10 million by $335,374.
9.If the project were financed completely with equity (retained earnings) and the required return remained unchanged post-acquisition, what is the most Needsalift would be willing to pay for Nothing Better! Ice Creams?
a.$9,319,482
b.$8,500,638
c.$10,000,000
d.$9,771,379
