1
Stockholders like mutual funds; therefore, they will pay a premium for the shares of a firm that is a conglomerate because the firm is essentially a mutual fund.
A) True
B) False 2
A spin-off involves the distribution of shares in a subsidiary to existing parent company stockholders.
A) True
B) False 3
The possible benefits of an acquisition include revenue enhancement and cost reductions.
A) True
B) False 4
A joint venture is a formal arrangement where two separate firms put up money to establish a new firm.
A) True
B) False 5
Which of the following is (are) accurate with regards to advantages or disadvantages in using a merger as a method of acquisition?
I. An advantage of a merger is that it is legally complex.
II. A disadvantage of a merger is that it requires the approval of the shareholders of each firm.
III. An advantage of a merger is that there is no need to transfer title to the individual assets of the acquired firm to the acquiring firm.
A) I only B) III only C) I and II only D) II and III only E) I, II, and III 6
_____ it is impossible for a tax-free acquisition to take place.
A) If an acquisition is for business purposes
B) If the purchasing firm exchanges its own stock for the selling firm's equity C) If an acquisition is being undertaken with the express purpose of avoiding taxes
D) If the stockholders in the target firm will retain an equity interest in the bidder
E) If the selling shareholders will be considered to have exchanged their old shares for new ones of equal value
7
In a(n) _____, the managers of the firm purchase the outstanding shares and take the firm private.
Suppose you have the following information concerning an acquiring firm (Firm A) and a target firm (Firm B). Neither firm has any debt. The incremental value of the acquisition is estimated to be $250,000. Firm B is willing to be acquired for $540,000 worth of Firm A's stock. Firm A has 50,000 shares outstanding, Firm B has 18,000. The price per share of Firm A's stock is $50 and the price per share of Firm B's stock is $22.50. What is the value of Firm B to A in this case?
Firm A has 10,000 shares of stock outstanding, each with a market price of $25 per share.
Firm B has 7,500 shares of stock outstanding, each with a market value of $10 per share.
Firm A can acquire Firm B for $82,500 in either cash or stock. Both firms are totally financed with equity. Total synergy from the acquisition is $12,500. What is the merger premium over B's stock price?
A) 8.50 percent
Firm A has 10,000 shares of stock outstanding, each with a market price of $25 per share.
Firm B has 7,500 shares of stock outstanding, each with a market value of $10 per share.
Firm A can acquire Firm B for $82,500 in either cash or stock. Both firms are totally financed with equity. Total synergy from the acquisition is $12,500. What is the NPV of acquiring Firm B with stock?
A) $3,746
B) $3,925
C) $4,122
D) $5,000
E) $5,510
Explanation: To begin, you must first find the new price per share (it is
$25.38) and the number of new shares that must be issued (3,300). Use this information along with the value of Firm B to Firm A to compute the NPV.
Leasing
1
According to IRS regulations, the existence of a bargain purchase option will not affect the ability of the lessee to deduct the lease payments from taxable income.
A) True
B) False 2
Bondo Manufacturing has just signed a lease agreement with MIPS Computers. Bondo agreed to pay $15,000 per month for 12 months. The purchase price of the equipment is
$400,000. According to the lease agreement, MIPS will pay property taxes and insurance on the equipment. This lease is most likely a financial lease.
A) True
B) False 3
The decision to lease or purchase an asset is best characterized as a financing decision rather than an investment decision.
A) True
B) False 4
A tax-oriented lease is a financial lease in which the lessor is the owner for tax purposes.
A) True
B) False 5
A sale and leaseback is a:
A) lease in which the lessor borrows a large fraction of the cost of the leased asset.
B) long-term, fully amortized lease in which the lessee is responsible for asset upkeep.
C) lease in which a firm sells an asset to the lessor and then leases it back.
D) short-term lease in which the lessor is responsible for the insurance, taxes and upkeep.
E) lease in which the lessee borrows a substantial portion of the lease payments.
6
Which of the following statements are good reasons for leasing?
I. Taxes may be reduced by leasing.
II. Leasing transfers uncertainty about the future value of the leased asset to the lessor.
III. Leasing may encumber fewer assets than borrowing.
IV. Leasing may incur less transaction costs than buying.
A) I and II only
Poncho Parts, Inc. manufactures reproduction parts for classic cars. The firm needs a computer-operated turret lathe that costs $440,000. It can borrow at 9.5 percent. The lathe will be used for six years, after which it will be worthless. Enterprising Leasing, Inc. will lease the equipment to the firm for $100,000 per year. The firm's tax rate is 34 percent.
Using straight-line depreciation, what is the net advantage to leasing (NAL)?
A) -$3,379
Dog Chew Products needs to replace its rawhide tanning and molding equipment. It can be used for four years and will have no salvage value. The equipment costs $930,000.
The firm can lease it for $245,000 a year, or it can borrow the money to purchase the equipment at 9 percent. The firm's tax rate is 39 percent. The three year ACRS
depreciation schedule is: year 1 = 33.33 percent, year 2 = 44.44 percent, year 3 = 14.82 percent, and year 4 = 7.41 percent. What is the depreciation tax shield for year 3?
A) $26,876 B) $53,752 C) $62,023 D) $84,074 E) $120,888 9
Dog Chew Products needs to replace its rawhide tanning and molding equipment. It can be used for four years and will have no salvage value. The equipment costs $930,000.
The firm can lease it for $245,000 a year, or it can borrow the money to purchase the equipment at 9 percent. The three year ACRS depreciation schedule is: year 1 = 33.33 percent, year 2 = 44.44 percent, year 3 = 14.82 percent, and year 4 = 7.41 percent.
Assume your company will not pay taxes for the next four years. Now what is the net advantage to leasing?
A) $79,102 B) $88,132 C) $136,269 D) $138,706 E) $152,062 10
Dog Chew Products needs to replace its rawhide tanning and molding equipment. It can be used for four years. The equipment costs $930,000. The firm can lease it for $245,000 a year, or it can borrow the money to purchase the equipment at 9 percent. The firm's tax rate is 39 percent. The three year ACRS depreciation schedule is: year 1 = 33.33 percent, year 2 = 44.44 percent, year 3 = 14.82 percent, and year 4 = 7.41 percent. The equipment will be worth $100,000 in four years. What is the net advantage to leasing?
A) $29,843 B) $31,132 C) $36,269 D) $138,706 E) $152,062