Fundamentals of Financial Management (MindTap Course List)
15th Edition
ISBN: 9781337395250
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Question
Chapter 14, Problem 10Q
Summary Introduction
To identify: Whether the optimal capital structure after the breakup is same as the pre-breakup optimal capital structure.
Introduction:
Capital Structure:
Capital structure refers to the securities or debt included in the total capital of the firm. Optimum capital structure is required for the optimum utilization of funds.
Answer:
No, the optimal capital structure after the breakup is not same as the pre-breakup optimal capital structure.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
When the Bell System was broken up, the old AT&T was split into a new AT&T and seven regional telephone companies. The specific reason for forcing the breakup was to increase the degree of competition in the telephone industry. AT&T had a monopoly on local service, long distance, and the manufacture of all equipment used by telephone companies; and the breakup was expected to open most of those markets to competition. In the court order that set the terms of the breakup, the capital structures of the surviving companies were specified and much attention was given to the increased competition telephone companies could expect in the future. Do you think the optimal capital structure after the breakup was the same as the pre-breakup optimal capital structure? Explain your position
Charging Corporation and Sparking Electrical Company are competitors in the business of electrical components distribution. Sparking is the smaller firm and has attracted the attention of the management of Charging, for Sparking has taken away market share from the larger firm by increasing its sales force over the past few years. Charging is considering a takeover offer for Sparking and asked you to serve on the acquisition valuation team that will turn into due diligence team if an offer is made and accepted. Given the financial information and proposal assumptions that follows, how would you respond to (a) and (b)?
Sparking Electrical Company
Condensed Income Statement
Previous five years (in $ million)
2009
2008
2007
2006
2005
Revenues
1,626.50
1614.10
1485.20
1380.50
1373.40
– Cost of goods sold
1,488.10
1490.90
1359.50
1271.40
1268.00
Gross profits
138.40…
King Company is contemplating the purchase of a smaller company, which is a distributor of King's products. Top management of King is convinced that the acquisition will result in significant synergies in its selling and distribution functions. The financial management group (of which you are a part) has been asked to prepare some analysis of the effects of the acquisition on the combined company's financial statements. This is the first acquisition for King, and some of the senior staff insist that based on their recollection of goodwill accounting, any goodwill recorded on the acquisition will result in a “drag” on future earnings for goodwill amortization. Other younger members on the staff argue that goodwill accounting has changed. Your supervisor asks you to research this issue.
Instructions
If your school has a subscription to the FASB Codification, log in and prepare responses to the following. Provide Codification references for your responses.
a. Identify the accounting…
Chapter 14 Solutions
Fundamentals of Financial Management (MindTap Course List)
Ch. 14 - Changes in sales cause changes in profits. Would...Ch. 14 - Would each of the following increase, decrease, or...Ch. 14 - Discuss the following statement: All else equal,...Ch. 14 - Prob. 4QCh. 14 - Prob. 5QCh. 14 - Why do public utilities generally use different...Ch. 14 - Why is EBIT generally considered independent of...Ch. 14 - Is the dept level that maximizes a firms expected...Ch. 14 - If a firm goes from zero dept to successively...Ch. 14 - Prob. 10Q
Ch. 14 - A firm is about to double its assets to serve its...Ch. 14 - BREAK-EVEN ANALYSIS A company's fixed operating...Ch. 14 - OPTIMAL CAPITAL STRUCTURE Terrell Trucking Company...Ch. 14 - Prob. 3PCh. 14 - UNLEVERED BETA Hartman Motor has. 18 million in...Ch. 14 - FINANCIAL LEVERAGE EFFECTS Firms HL and LL are...Ch. 14 - Prob. 6PCh. 14 - Prob. 7PCh. 14 - HAMADA EQUATION Situational Software Co. (SSC) is...Ch. 14 - RECAPITALIZATION Tartan industries currently has...Ch. 14 - BREAKEVEN AND OPERATING LEVERAGE a. Given the...Ch. 14 - RECAPITALIZATION Currently, Forever Flowers Inc....Ch. 14 - BREAKEVEN AND LEVERAGE Wingler Communications...Ch. 14 - FINANCING ALTERNATIVES The Severn Company plans to...Ch. 14 - WACC AND OPTIMAL CAPITAL STRUCTURE Elliott...Ch. 14 - Prob. 1TCLCh. 14 - Exploring the Capital Structures for Four...
Knowledge Booster
Similar questions
- King Company is contemplating the purchase of a smaller company, which is a distributor of King's products. Top management of King is convinced that the acquisition will result in significant synergies in its selling and distribution functions. The financial management group (of which you are a part) has been asked to analyze the effects of the acquisition on the combined company's financial statements. This is the first acquisition for King, and some of the senior staff insist that based on their recollection of goodwill accounting, any goodwill recorded on the acquisition will result in a “drag” on future earnings for goodwill amortization. Other younger members on the staff argue that goodwill accounting has changed. Your supervisor asks you to research this issue. Instructions Access the IFRS authoritative literature at the IASB website. When you have accessed the documents, you can use the search tool in your Internet browser to respond to the following questions. (Provide…arrow_forwardWoorley Corporation needs to determine whether the disposal of its Tools Division qualifies as a discontinued operation. The Tools Division is one of Woorley's three major business segments. Its recent financial performance has been strong, yet Woorley believes that this segment will contract over the next three to five years. Woorley has developed a plan to dispose of the Tools Division and focus on its other two operating segments going forward. Does the disposal of the Tools Division qualify as a discontinued operation under IFRS? Use the table below to identify the criteria under IFRS for classifying a discontinued operation and whether the Tools Division disposal meets them. Criteria for Determining a Discontinued Operation What is a discontinued operation? Does the discontinued portion of the business meet the definition of a component of an entity to be considered a discontinued operation? Does the discontinued operation represent a strategic shift that has or will have a major…arrow_forwardPhoenix Inc., a cellular communication company, has multiple business units, organized as divisions. Each division’s management is compensated based on the division’s operating income. Division A currently purchases cellular equipment from outside markets and uses it to produce communication systems. Division B produces similar cellular equipment that it sells to outside customers—but not to division A at this time. Division A’s manager approaches division B’s manager with a proposal to buy the equipment from division B. If it produces the cellular equipment that division A desires, division B will incur variable manufacturing costs of $60 per unit. Relevant Information about Division B Sells 90,000 units of equipment to outside customers at $130 per unit Operating capacity is currently 80%; the division can operate at 100% Variable manufacturing costs are $70 per unit Variable marketing costs are $8 per unit Fixed manufacturing costs are $900,000 Income per Unit for Division A…arrow_forward
- ABC Corporation is the sole_providerof a particular service.in-the country.The government has-opened themarket for another competitorthrough an anti-monopoly law. Whatshould ABC-do? A. Assess how this would affect the business and determine whether it can improve production processes, lower costs, and improve its service.B. Purchase all available raw materials and prevent the competitor from having smooth operations.C. Identify its rights in the constitution to prevent the new competitor to exist.D. Reduce negative environmental and community impact through corporate social responsibility and persuade the government to not implement the law.arrow_forwardThe board of directors of Purdido Corporation have just directed Purdido’s officers to abandon further efforts to complete an acquisition of all the outstanding common stock of Sontee Company in a business combination that would have resulted in a parent company–subsidiary relationship between Purdido and Sontee. After learning of the board’s decision, Purdido’s chief financial officer instructed the controller, a CPA who is a member of the AICPA, the FEI, and the IMA (see Chapter 1), to analyze the out-of-pocket costs of the abandoned proposed combination. After some analysis of Purdido’s accounting records, the controller provided the following summary to the CFO:PURDIDO CORPORATIONOut-of-Pocket Costs of Abandoned Business CombinationApril 17, 2005Legal fees relating to proposed business combination ………………………………$120,000Finder’s fee relating to proposed business combination …………………………………….0*Costs associated with proposed SEC registration statement forPurdido common stock to have been…arrow_forwardAhorita Company manufactures wireless transponders for satellite applications. Ahorita has recently acquired Zelltech Company, which is primarily known for its software communications development but also manufactures a specialty transponder under the trade name “Z-Tech” that competes with one of Ahorita’s products. Ahorita will now discontinue Z-Tech and projects that its own product line will see a market share increase. Nonetheless, Ahorita’s management will maintain the rights to the Z-Tech trade name as a defensive intangible asset to prevent its use by competitors, despite the fact that its high-est and best use would be to sell the trade name. Ahorita estimates that the trade name has an internal value of $1.5 million, but if sold would yield $2 million. Answer the following with supporting citations from the FASB ASC:a. How does the FASB ASC Glossary define a defensive intangible asset?b. According to ASC Topic 805, “Business Combinations,” what is the measurement principle…arrow_forward
- Ahorita Company manufactures wireless transponders for satellite applications. Ahorita has recently acquired Zelltech Company which is primarily known for its software communications development, but also manufactures a specialty transponder under the trade name “Z-Tech” that competes with one of Ahorita’s products. Ahorita will now discontinue Z-Tech and projects that its own product line will see a market share increase. Nonetheless, Ahorita’s management will maintain the rights to the Z-Tech trade name as a defensive intangible asset to prevent its use by competitors, despite the fact that its highest and best use would be to sell the trade name. Ahorita estimates that the trade name has an internal value of $1.5 million, but if sold would yield $2 million. a. How does the FASB ASC glossary define a defensive intangible asset? b. According to ASC Topi 805 Business Combinations, what is the measurement principle that an acquirer should follow in recording identifiable assets…arrow_forwardSome years ago T-Mobile (cell phone service provider) and Sprint (another cell phone service provider) merged (the current T-Mobile is the result of that merger). (a) Was this merger a horizontal merger or a vertical merger? Please give an explanation. (b) Why do the merger were for the two companies)? Please give an explanation. you think T-Mobile and Sprint decided to merge (what do you think the benefits ofarrow_forwardAhorita Company manufactures wireless transponders for satellite applications. Ahorita has recently acquired Zelltech Company which is primarily known for its software communications development, but also manufactures a specialty transponder under the trade name “Z-Tech” that competes with one of Ahorita’s products. Ahorita will now discontinue Z-Tech and projects that its own product line will see a market share increase. Nonetheless, Ahorita’s management will maintain the rights to the Z-Tech trade name as a defensive intangible asset to prevent its use by competitors, despite the fact that its highest and best use would be to sell the trade name. Ahorita estimates that the trade name has an internal value of $1.5 million, but if sold would yield $2 million. Answer the following with supporting citations from FASB ASC a. How does the FASB ASC glossary define a defensive intangible asset? b. According to ASC Topi 805 Business Combinations, what is the measurement principle…arrow_forward
- BMW Motors Corp. wants to acquire all the assets of MWB Corp. BMW plans to pay for the assets by issuing its own corporate stock. BMW’s board of directors has already approved the merger. In what circumstances would the approval of BMX’s shareholders be required for this merger?Is the approval of MWB’s shareholders necessary? Explain.arrow_forwardChoose all that are not appropriate statements regarding business combinations and divestures. 1. A businesses that is in an industry where economies of scale is observed have an incentive to enlarge its operation through a merger. 2. A corporation is sometimes forced to divest a part of its business due to its excessive market power. 3. Two corporations that are planning to merge as equal partners should create a new legal entity (a "business combination") because that would be less costly than absorbing one corporation into another (an "absorption"). 4. A corporation seeking to acquire another corporation can do so by buying shares of the target through the open market. 5. The board of a corporation that have agreed to merge with another corporation should categorically reject a merger offer from another corporation because that would result in a breach of contract for the first merger agreement.arrow_forwardBased on a cost-benefit analysis, management at First CommunityBank decided to contract with Technology Solutions, a local data center operator, tohost all of the bank’s financial reporting applications. To avoid the significant costsof developing and maintaining its own data center, First Community contracts withTechnology Solutions to provide IT server access in a highly secure, environmentallycontrolled data center facility owned by Technology Solutions. Similar to First Community,other businesses also contract with Technology Solutions to host applications at the samedata center.The bank is directly linked through highly secure telecommunication lines to the datacenter, which allows bank personnel to transmit data to and from the data center as if thedata center was owned by First Community. For a monthly fee, Technology Solutionssupports the server hardware in an environment with numerous backup controls in theevent power is lost or other hardware failures occur. Bank personnel…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Business Its Legal Ethical & Global EnvironmentAccountingISBN:9781305224414Author:JENNINGSPublisher:Cengage
Business Its Legal Ethical & Global Environment
Accounting
ISBN:9781305224414
Author:JENNINGS
Publisher:Cengage