General Meters is considering two mergers. The first is with Firm A in its own volatileindustry, the auto speedometer industry, while the second is a merger with Firm B in anindustry that moves in the opposite direction (and will tend to level out performance due tonegative correlation).\table [[General Meters Merger with Firm A, General Meters Merger with Firm B,], [PossibleEarnings ($ in, Possible Earnings ($ in,,,], [millions), Probability,0.20, $20, Probability], [$20, 0.40, 35, 0.15,], [35, 0.40, 50, 0.50,], [50,, 0.35,,]]a. Compute the mean, standard deviation, and coefficient of variation for both investmentsNote: Do not round intermediate calculations. Enter your answers in millions. Round"Coefficient of variation" to 3 decimal places and "Standard deviation" to 2 decimal places.\table[[, Merger A, Merger B], [Mean,,], [Standard deviation,,], [Coefficient of variation,,]]b. Assuming investors are risk-averse, which alternative can be expected to bring thehigher valuation?Merger AMerger B

Step 1:a.Merger with Firm A:Expected Earnings = 0.30 * 60 + 0.20 * 75 + 0.50 * 90Expected Earnings =…

Answered: General Meters is considering two…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter3: Evaluation Of Financial Performance

Section: Chapter Questions

Problem 10P

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Suppose we live in a world with a semi-strong form efficient market. Explain if you could expect to generate excess returns if you make trades based on the following information and why? a. Record earnings information about a stock provided by your broker. b. Rumors about a potential merger of a firm. C. An announcement that came out yesterday about a successful test of a new product.
Suppose you are the CEO of a large firm in a service business and you think that by acquiring a certain competing firm, you can generate growth and profits at a greater rate for the combined firm. Youhave asked some financial analysts to study the proposed acquisition/merger. Do you think valuechain analysis would be useful to them? Why or why not?
(a) Financial engineering deals with the design of new assets. Draw the payoff (at t=1) of the following bull butterfly spread: Purchase 1 call with exercise price a Sell 2 calls with exercise price (atb)/2 Purchase 1 call with exercise price b as a function of the underlying stock price S at t=1 where a=120and b=140. (b) An individual agent thinks that there is a high probability that the Dow Jones will have a payoff (or points) between a=32,000 and b=36,000 at t=1. Design a digital option (see Figure 1) as a sequence of calls on the Dow that converges to a pure bet on getting $1 on the interval [32,000, 36,000], i.e. if the Dow lies between Se[32,000, 36,000] at t=1, then the portfolio of calls pays off exactly $1. The payoff is O otherwise. Figure I (Digital option) payoff a-32,000 b-36,000 Hint: You have to modify the sell strategies of a bull butterfly spread to obtain a payoff as given in Figure 2 and then adjust n and õ appropriately. Figure 2 payoff of portfolio 1-nő a b-8
How is beta affected by mergers in the airline industry. For example, is the beta of merged American Airlines/U.S. Airways higher, lower, or unchanged from their betas as stand-alone companies? Prior to their merger in December 2013, the beta of American was 1.7 and the beta of U.S. Airways was .37. Consider whether the merged company is riskier or less risky than the 2 stand-alone companies.
The following graph represents the Cumulative Average Abnormal Return (CAAR) for the stocks of companies targeted for take-over. Which of the following statements is true? a. In a weak form efficient market, t* is the actual takeover event (i.e. the time when the legal takeover transaction is completed) b. In a semi-strong form efficient market, t* is the takeover announcement event c. In a strong form efficient market, t* is the acquiring company takeover decision event (i.e. the time when an acquiring company decides to launch a takeover) d. (a) & (b) e. (b) & (c)
Look at a recent example of a merger announcement, and log on to the website of the acquiring company. What reasons does the acquirer give for buying the target? How does it intend to pay for the target—with cash, shares, or a mixture of the two? Can you work out how much the target’s shareholders will gain from the offer? Is it more or less than would be the case for an average merger? Now log on to finance.yahoo.com and find out what happened to the stock price of the acquiring company when the merger was announced. Were shareholders pleased with the announcement?
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Which of the following statements is most CORRECT? Oa. The primary rationale for most operating mergers is synergy. Ob. In most mergers, the benefits of synergy and the premium the acquirer pays over the market price are summed and then divided equally between the shareholders of the acquiring and target firms. Oc. Financial theory says that the choice of how to pay for a merger is really irrelevant because, although it may affect the firm's capital structure, it will not affect its overall required rate of return. Od. The basic rationale for any financial merger is synergy and, thus, the estimation of pro forma cash flows is the single most important part of the analysis. Oe. The acquiring firm's required rate of return in most horizontal mergers will not be affected, because the 2 firms will have similar betas.
The DuPont ldentity holds that ROE = PM x T/A T/O x EM. However, after doing some quick algebra, ROE still equals net income divided by owner's equity. What does the DuPont Identity accomplish with its expansion of the ROE into profit margin, total asset turnover and equity multiplier components? O The identity allows expanding the ROE into the aftertax income. O The identity uses the ROE in describing such things as the costs of Obamacare. O The identity can reveal the impact of new borrowing on employee morale. O The identity separates the ROE into operating, capital budgeting and capital structure components. O The identity is used by bankers in meeting capital requirements under the Dodd Frank Act.
Using the data in the following table for a number of firms in the same industry, dothe following:•a. Compute the total asset turnover, the net profit margin, the equity multiplier, andthe return on equity for each firm.b. Evaluate each firm’s performance by comparing the firms with one another.Which firm or firms appear to be having problems? What corrective actionwould you suggest the poorer performing firms take? Finally, what additional data would you want to have on hand when conducting youranalyses?Firm (in million Dollars A B C D Sales $20 $10 $15 $25 Net Income after sales 3 0.5 2.25 3 Total Assets 15 7.5 15 24 Stockholders’ Equity 10 5 14 10
Suppose you a stock analyst are performing a ratio analysis and comparing a discount merchdiser with a high end merchandiser. Suppose further that both companies have identical ROE. IF You apply the dupont equation to both firms, would you expect the three components to be the same for both companies? If not, explain what balance balance sheet and income statements might lead to the differences in the Dupont equation components.

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