PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 31, Problem 14PS
Merger gains and costs Sometimes the stock price of a possible target company rises in anticipation of a merger bid. Explain how this complicates the bidder’s evaluation of the target company.
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Discuss how break risk is calculated in merger arbitrage.
Which of the following correctly, characterizes the risks in merger arbitrage?
O A. The strategy is likely to suffer large losses in market downturns.
O B. The strategy is likely to suffer small losses in market downturns.
Do solve it as soon as possible
Identify which statement is not correct. In a takeover bid to acquire a part or all shares in another company:
Select one:
a.
Friendly merger reduces the chance of overpaying for target’s shares.
b.
Successful acquirer is likely to pay more for target’s shares in scenarios that include multiple rival bidders.
c.
Target company management would not accept an offer where the consideration for target’s shares exceeds the NPV of the merger.
d.
Hostile takeover may result in overpaying for target’s shares.
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- Describe some of the positives and negatives from the point of view of both the acquirer and the target in a merger. What is the usual impact on the stock prices of each?arrow_forwardWhat is the term use to describe making successive offers or asking prices in response to a lack of counteroffer in merger negotiation?arrow_forwardWhy might one company have to complete more due diligence than another in a merger? A. None of these answers B. It is important for a company to know what it is buying C. Acquisitions can be risky D. If there is a large size discrepancy the merger seems more like an aquisarrow_forward
- Discuss how time to completion affects merger arbitrage traders’ returns.arrow_forwardWhy so many mergers fail to produce the expected synergistic gains?arrow_forwardWhat is a typical merger premium paid in a merger or acquisition? What effect does this premium have on the market value of the merger candidate, and when is most of this movement likely to take place?arrow_forward
- Diversification is considered a dubious reason for merger because:Select one: a. Risk reduction is achieved by more by bondholders than stockholders b. Personal diversification is possible by the shareholders themselves c. Diversification only minimizes unsystematic risk d. All of the abovearrow_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_forwardWhy might the portfolio effect of a merger provide a higher valuation for the participating firms?arrow_forward
- When an acquirer chooses between cash offer or stock offer, which of the followings is the least important consideration? Capital structure. O The preference of the target's managers. O Uncertainty of the estimated synergy. Тах.arrow_forwardFind 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.arrow_forwardWhich 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.arrow_forward
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