PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 31, Problem 1PS
Summary Introduction
To indicate: Whether the transactions are true or false.
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Students have asked these similar questions
General Meters is considering two mergers. The first is with Firm A in its own volatile
industry, the auto speedometer industry, while the second is a merger with Firm B in an
industry that moves in the opposite direction (and will tend to level out performance due to
negative correlation).
\table [[General Meters Merger with Firm A, General Meters Merger with Firm B,], [Possible
Earnings ($ 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 investments
Note: 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 the
higher…
Diversification is often a poor motive for mergers because:
vertical integration is rarely successful.
investors can diversify on their own account.
it does not produce economies of scale.
the increase in taxes overcomes any gains in earnings.
Which of the following statements is most CORRECT?
Oa. Managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification,
including more stable earnings. However, since shareholders are free to diversify their own holdings, and at what's probably
a lower cost, diversification benefits is generally not a valid motive for a publicly held firm.
Ob. The smaller the synergistic benefits of a particular merger, the greater the scope for striking a bargain in negotiations,
and the higher the probability that the merger will be completed.
Oc. Since mergers are frequently financed by debt rather than equity, a lower cost of debt or a greater debt capacity are rarely
relevant considerations when considering a merger.
Od. Operating economies are never a motive for mergers.
Oe. Tax considerations often play a part in mergers. If one firm has excess cash, purchasing another firm exposes the
purchasing firm to additional taxes. Thus, firms with excess…
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