PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 31, Problem 6PS
Merger motives Suppose you obtain special information-information unavailable to investors-indicating that Backwoods Chemical’s stock price is 40% undervalued. Is that a reason to launch a takeover bid for Backwoods? Explain carefully.
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Students have asked these similar questions
The following graph represents the Cumulative Average Abnormal Return (CAAR) for the stocks of companies targeted for take-over.
Which of the following statements is true?
a.
In a weak form efficient market, t* is the actual takeover event (i.e. the time when the legal takeover transaction is completed)
b.
In a semi-strong form efficient market, t* is the takeover announcement event
c.
In a strong form efficient market, t* is the acquiring company takeover decision event (i.e. the time when an acquiring company decides to launch a takeover)
d.
(a) & (b)
e.
(b) & (c)
Hi. Need help with verifying if answers are correct please. Thank you!
A company has recently purchased some stock of a competitor as part of a long-term plan to acquire the competitor. However, it is somewhat concerned that the market price of this stock could decrease over the short run. The company could hedge against the possible decline in the stock’s market price by
a. Purchasing a call option on that stock.
b. Purchasing a put option on that stock.
c. Selling a put option on that stock.
d. Obtaining a warrant option on that stock.
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- Which of the following statements regarding merger deals is (are) correct? Choose all correct answer(s) On average, the price of the target increases substantially, while the price of the bidder does not increase by much. If the premium paid by the bidder exceeds the expected additional value to be created through the merger, the bidder's share price is likely to drop on the announcement of the bid. A bidder can often acquire a public-listed company for less than its current market value. Synergies are by far the most common justification that bidders give for the premium they pay for a target.arrow_forwardLook at a recent example of a merger announcement, and log on to the website of the acquiring company. What reasons does the acquirer give for buying the target? How does it intend to pay for the target—with cash, shares, or a mixture of the two? Can you work out how much the target’s shareholders will gain from the offer? Is it more or less than would be the case for an average merger? Now log on to finance.yahoo.com and find out what happened to the stock price of the acquiring company when the merger was announced. Were shareholders pleased with the announcement?arrow_forwardWhich is the best anti-hostile takeover strategy that can be made by an entity when there is a high chance that current holders of convertible bonds may use their right and increase their holdings in the firm?a. Staggered board of directorsb. Lobster trapc. Greenmaild. Nancy Reagan defensearrow_forward
- 6. IPO price stabilization Which of the following strategies can underwriters use to prevent institutional investors from flipping? Check all that apply. They can require an overallotment clause in the underwriting agreement of the IPO. They can agree to make more shares of future IPOS available to investors that hold on to the initial shares for a relatively long period of time. They can require a lockup clause in the underwriting agreement of the IPO. They can agree to sell the shares in the IPO at a lower price than suggested by their bookbuilding analysis.arrow_forwardWhat are disadvantages for a company to go public by issuing equity in an initial public offering (IPO)? Question 16 options: a) It reduces information asymmetry for competitors b) Class action lawsuits can occur following large stock price drops c) It can attract analyst following resulting in myopic decisions d) All of the above are disadvantages of an IPO e) None of the above are disadvantages of an IPOarrow_forwardWhich of the following does not apply to secondary markets? Group of answer choices Many investors might be unwilling to provide resources to corporations if there is no available mechanism for the future sale of their stocks and bonds to others. Transactions help to establish market prices for additional shares that may be issued in the future. Transactions are important to the efficient allocation of resources in our economy. New resources are provided when shares of stock are sold by the corporation to the initial owners.arrow_forward
- Which of the following should lead to a lower share price: (as the result of a mechanical effect, not due to signaling) 1. firm does a stock split 2. firm pays dividends 3. firm repurchases shares 4. firm issues shares 5. firm issues debt 6. firm makes an acquisition at a fair price, with negligible synergies O 1,2,3 0 23 O 1,2,3,4,5,6 O 2,3,5,6 O 1,2,3,5 0 1,2 O 2,3,5arrow_forwardIf an acquisition does not create value and the market is smart, then the: Multiple Choice earnings per share of the acquiring firm must be the same both before and after the acquisition. earnings per share can change but the stock price of the acquiring firm should remain constant. price per share of the acquiring firm should increase because of the growth of the firm. earnings per share will most likely increase while the price-earnings ratio remains constant. price-earnings ratio should remain constant regardless of any changes in the earnings per share.arrow_forwardWhich one of the following is true regarding the methods of issuing new equities? Issuing firms bear the risk of not able to sell entire shares in Firm Commitment method. Issuing firms bear risk of not able to sell entire shares in Best Effort method. Investment banks bear risk of not able to sell entire shares in Dutch Auction method. Investment banks bear risk of not able to sell entire shares in Best Effort method. None of the above.arrow_forward
- For Question 1, 2, and 3, use the following information: 1.) Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that both firms have no debt outstanding. Firm B Firm T Shares outstanding 6,500 1,500 Price per share $ 45 $ 15 Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $10,600. If Firm T is willing to be acquired for $20 per share in cash, what is the NPV of the merger? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Please round to the nearest dollar and format as "X,XXX" 2.) Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that both firms have no debt outstanding. Firm B Firm T Shares outstanding 6,500 1,500 Price per share $ 45 $…arrow_forwardWhich of the following statements is correct? O Flotation costs under a best-efforts arrangement typically are less for a given new equity issue than the costs associated with an underwritten offering, and the corporation is more certain of getting the needed funds under a best-efforts offering. This is why best efforts deals are most common. O If a firm decides to issue securities through a direct (or private) placement, then the underwriting syndicate that is formed to distribute the securities to the public may. at its discretion, decide either to guarantee or not to guarantee the sale of the securities. O If the demand curve for a firm's stock is relatively flat. the firm will havea more difficult time raising a large amount of new equity funds for expansion than would be true if this demand curve were steeper. OIt is possible for a firm to go public, and yet not ralse any additional capital. O None of these.arrow_forward1.What type of trading order are you likely to give your broker in each of the three circumstances below? a. You want to buy shares of company ABC to diversify your portfolio. You believe the share price is good and you want the trade done very quickly and cheaply. b. You want to buy shares of ABC into your portfolio of investment, but your analysis shows that the current stock price is too high given the firms prospects. You would like to purchase the shares at a price about 10% lower than the current market price. c. You are planning to purchase a brand-new car sometime in the next month or two and will sell your shares of ABC to provide the funds for your own down payment. You believe that the share price of ABC will rise in the coming few weeks. However, if you are wrong and the share price should drop suddenly you will not be able to afford to purchase the car. Therefore, you want to hold on to the shares for as long as possible, but still protect yourself against the risk of a…arrow_forward
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