Ch 3 Deck 7 Flashcards

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1
Q

valuation that does not include any of the cost reductions (synergies) expected from the acquisition

A

Stand alone valuation

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2
Q

When doing a stand alone valuation, you are only valuing

A

the target corporation

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3
Q

in a standalone valuation, the most appropriate cost of capital to use is

A

the target’s WACC (Weighted Average Cost of Capital)

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4
Q

method of analysis where the value of a company is determined by comparing it with relevant peers

A

Comparable company analysis

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5
Q

valuation method built on the idea that similar companies should have similar valuation multiples.

A

Comparable company analysis

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6
Q

performed to help understand the value of the companies in light of current transactions

A

A precedent transaction analysis

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7
Q

a precedent transaction analysis looks at

A

the prices paid by purchasers of similar companies under comparable circumstances

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8
Q

Precedent transactions analysis is usually used

A

to analyze a possible merger or acquisition

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9
Q

Precedent transactions analysis usually analyzes

A

a group of comparable acquisitions

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10
Q

The weighted average cost of capital (WACC) is used to calculate the present value of a set of forecasted free cash flows.

A

Discounted cash flow method

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11
Q

an acquisition funded with debt

A

leveraged buyout

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12
Q

These types of businesses may not be appropriate for leveraged buyouts

A

small or cyclical businesses

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13
Q

A good LBO candidate is

A

a corporation
predictable cash flow
well established
leader in industry

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14
Q

The formula for expected earnings per share in an acquisition is

A

(buyer’s net income + target’s net income)/total number of new shares

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15
Q

Method for calculating expected earnings per share in an acquisition

A

Step 1: offer price/buyer’s price = exchange ratio.
Step 2: exchange ratio * Target’s shares outstanding = amount of new shares to be issued.
Step 3: new shares + buyer’s old shares = total new shares.
Step 4: (buyer’s net income + Target’s net income)/total new shares = expected earnings per share

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16
Q

The pre-merger P/E multiple is calculated by

A

dividing the buyer’s price per share by the pre- merger earnings per share.

17
Q

The purchase price premium is calculated as follows

A

(offer price – Target’s price)/Target’s price

18
Q

The Exchange Ratio for an Acquisition is the

A

Buyer’s Offer for Target stock/Buyer’s Market Price

19
Q

during mergers, a rating agency may

A

place a company on credit watch

20
Q

ratings agencies may put companies on credit watch during mergers because

A

The rating agency may be looking for how the merger is being financed, which might result in a question about the ability of the new company to repay debt.

21
Q

common for the board of directors of a company involved in a merger to hire an investment banking firm to

A

evaluate the terms and price of the merger

22
Q

board of directors of a company involved in a merger may put together a

A

fairness committee

23
Q

job of a fairness committee is

A

to evaluate all aspects of the merger

24
Q

Fairness opinion is drafted by

A

Either the fairness committee or the investment banking firm, or both

25
Q

fairness opinion states whether

A

the offer is in a range that they believe is fair and accurate

26
Q

Fairness opinion is not detailed but is based on

A

detailed financial information

27
Q

The fairness opinion is rendered to

A

the board of directors

28
Q

Board of directors uses the fairness opinion to

A

decide whether to approve the merger as it stands or not

29
Q

paid evaluation made by a third party (usually an investment bank) as to the fairness of the terms of a merger, acquisition, or other specified transaction.

A

fairness opinion