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Week 4
Homework Problems Chapter 22 and
23
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.
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.
Chapter 23
Week 4
1. Which
of the following are NOT ways risk management can be used to increase the value
of a firm?
a. Risk
management can help a firm maintain its optimal capital budget.
b. Risk
management can reduce the expected costs of financial distress.
c. Risk
management can help firms minimize taxes.
d. Risk
management can allow managers to defer receipt of their bonuses and thus
postpone tax payments.
e. Risk
management can increase debt capacity.
2. Which
of the following statements about interest rate and reinvestment rate risk is
CORRECT?
a.
Interest rate price risk exists because fixed-rate debt securities lose value
when interest rates rise, while reinvestment rate risk is the risk of earning less
than expected when interest payments or debt principal are reinvested.
b.
Interest rate price risk can be eliminated by holding zero coupon bonds.
c.
Reinvestment rate risk can be eliminated by holding variable (or floating) rate
bonds.
d.
Interest rate risk can never be reduced.
e.
Variable (or floating) rate securities have more interest rate (price) risk
than fixed rate securities.
3. A
swap is a method used to reduce financial risk. Which of the following
statements about swaps, if any, is NOT CORRECT?
a. The
earliest swaps were currency swaps, in which companies traded debt denominated
in different currencies, say dollars and pounds.
b. Swaps
are very often arranged by a financial intermediary, who may or may not take
the position of one of the counterparties.
c. A
problem with swaps is that no standardized contracts exist, which has prevented
the development of a secondary market.
d. A
company can swap fixed interest payments for floating interest payments.
e. A
swap involves the exchange of cash payment obligations.
4. Which
of the following statements is most CORRECT?
a.
Futures contracts generally trade on an organized exchange and are marked to
market daily.
b. Goods
are never delivered under forward contracts, but are almost always delivered
under futures contracts.
c. There
are futures contracts for currencies but no forward contracts for currencies.
d.
Futures contracts don't have any margin requirements but forward contracts do.
e. One
advantage of forward contracts is that they are default free.
5. A
commercial bank recognizes that its net income suffers whenever interest rates
increase. Which of the following strategies would protect the bank against
rising interest rates?
a.
Entering into an interest rate swap where the bank receives a fixed payment
stream, and in return agrees to make payments that float with market interest
rates.
b.
Purchase principal only (PO) strips that decline in value whenever interest
rates rise.
c. Enter
into a short hedge where the bank agrees to sell interest rate futures.
d. Sell
some of the bank's floating-rate loans and use the proceeds to make fixed-rate
loans.
e.
Buying inverse floaters.
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