FIN 540 – Homework Chapter 22
.
FIN 540 Homework Chapter 22
Page 1 of 2
Directions: Answer the following five questions on a separate document. Explain how you reached the
answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using
the assignment link in the course shell. Each question is worth five points apiece for a total of 25 points
for this homework assignment.
1. Which of the following statements is most CORRECT?
a. 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.
b. 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.
c. 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.
d. Operating economies are never a motive for mergers.
e. 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
cash rarely undertake mergers.
2. Which of the following statements is most CORRECT?
a. 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.
b. 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.
c. 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.
d. The primary rationale for most operating mergers is synergy.
e. The acquiring firm’s required rate of return in most horizontal mergers will not be affected,
because the 2 firms will have similar betas.
3. Which of the following statements about valuing a firm using the APV approach is most
CORRECT?
a. The horizon value is calculated by discounting the free cash flows beyond the horizon
date and any tax savings at the cost of debt.
b. The horizon value is calculated by discounting the expected earnings at the WACC.
c. The horizon value is calculated by discounting the free cash flows beyond the horizon
date and any tax savings at the WACC.
d. The horizon value must always be more than 20 years in the future.
e. The horizon value is calculated by discounting the free cash flows beyond the horizon
date and any tax savings at the levered cost of equity.
FIN 540 – Homework Chapter 22
FIN 540 Homework Chapter 22
Page 2 of 2
4. Which of the following statements about valuing a firm using the APV approach is most
CORRECT?
a. The value of equity is calculated by discounting the horizon value, the tax shields, and
the free cash flows at the cost of equity.
b. The value of operations is calculated by discounting the horizon value, the tax shields,
and the free cash flows before the horizon date at the unlevered cost of equity.
c. The value of equity is calculated by discounting the horizon value and the free cash flows
at the cost of equity.
d. The APV approach stands for the accounting pre-valuation approach.
e. The value of operations is calculated by discounting the horizon value, the tax shields,
and the free cash flows at the cost of equity.
5. Which of the following statements is most CORRECT?
a. A defensive merger is one where the firm’s managers decide to merge with another firm
to avoid or lessen the possibility of being acquired through a hostile takeover.
b. Acquiring firms send a signal that their stock is undervalued if they choose to use stock to
pay for the acquisition.
c. Cash payments are used in takeovers but never in mergers.
d. Managers often are fired in takeovers, but never in mergers.
e. If a company that produces military equipment merges with a company that manages a
chain of motels, this is an example of a horizontal merger.
"96% of our customers have reported a 90% and above score. You might want to place an order with us."
