Financial Management: Theory & Practice (MindTap Course List)
15th Edition
ISBN: 9781305632295
Author: Eugene F. Brigham, Michael C. Ehrhardt
Publisher: Cengage Learning
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Chapter 22, Problem 1MC
Summary Introduction
Case summary:
Company HH is a regional hardware chain which is considering acquiring LL. The boss of the company asked to place a value on target.
Interest is included in existing debt of $55 million @9% in LL and new debt will be issued after some time to help the expansion with respect to finance with in the new L division. If it is acquired, then the Company LL will face 40% of tax.
Beta will be 1.3 for LL’s stock with risk free rate 7% and market risk premium is 4%.
The acquisition will not change the LL company’s structure it will remain at 20% debt.
Person Z estimates that after 2020 the company will grow at 6%.
The management of the company HH is asking various questions about mergers and also asking to perform merger analysis based on the given details of Company LL.
Characters in the case:
To justify: Whether the given reasons are economically justifiable and the one which fits the situation.
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Students have asked these similar questions
which of the following are potential areas for cost reduction with a merger or acquisition? (Check all that apply)
A) economies of sale
B) economies of vertical integration
C) complementary resources
D) reduction in EPS
E) higher transaction costs
Find a recent merger transaction that failed due to regulatory concerns over market share concentration and reduction of consumer alternatives. Do you support the regulatory concerns? Explain briefly the transaction and your reasoning.
“Merger may be profitable but are they good for the economy?” Explain your answer towards this statement.
Chapter 22 Solutions
Financial Management: Theory & Practice (MindTap Course List)
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Similar questions
- The following are sensible motives for mergers EXCEPT: a. Economies of scope b. Reducing firm risk through diversification c. Reducing competition d. Eliminating inefficiencies e. All of the abovearrow_forwardIs synergy a valid rationale for mergers?arrow_forward“On an international scale, tax authorities and international organisations increasingly scrutinize and penalizemultinational corporations for misusing transfer pricing.” In light of this statement, critically evaluate why MNCsstill engage in transfer pricing.=arrow_forward
- Discuss the pros and cons of diversification as a rationale for mergers.arrow_forwardExplain why diversification, per se, is probably not a good reason for merger.arrow_forward12. Which of the following point is not consistent with the decision of undertaking a merger and acquisition? Select one: a. Reducing operational synergies b. Capturing tax benefits c. Taking advantage of economies of scale d. Improving target managementarrow_forward
- Transfer pricing is a significant area of concern for taxing authorities and multinational entities (MNE). (1) Examine at least two potential transfer pricing issues that create concern for both the İnternal Revenue Service (IRS) and MNES and (2) provide an example that demonstrates the effects of the issues.arrow_forwardDo mergers create value? If so, who profits from this value?arrow_forwardWhy so many mergers fail to produce the expected synergistic gains?arrow_forward
- Discuss the underlying theories and empirical evidence on the value creation from horizontal mergers. How do other firm- and deal- characteristics interact with the valuation effects of such mergers?arrow_forwardIs there a rational set of criteria in deciding whether (or not) to outsource?arrow_forwarda) What is a conglomerate merger and why are they more likely to be approved? b) Limit pricing is a strategy where a firm sets a low, but profitable, price to discourage entry. How does that differ from predatory pricing? c) What is "Share the gain, share the pain" theory?arrow_forward
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