Ch 3 Deck 7

Question 1

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

Answer 1

Stand alone valuation

Question 2

When doing a stand alone valuation, you are only valuing

Answer 2

the target corporation

Question 3

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

Answer 3

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

Question 4

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

Answer 4

Comparable company analysis

Question 5

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

Answer 5

Comparable company analysis

Question 6

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

Answer 6

A precedent transaction analysis

Question 7

a precedent transaction analysis looks at

Answer 7

the prices paid by purchasers of similar companies under comparable circumstances

Question 8

Precedent transactions analysis is usually used

Answer 8

to analyze a possible merger or acquisition

Question 9

Precedent transactions analysis usually analyzes

Answer 9

a group of comparable acquisitions

Question 10

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

Answer 10

Discounted cash flow method

Question 11

an acquisition funded with debt

Answer 11

leveraged buyout

Question 12

These types of businesses may not be appropriate for leveraged buyouts

Answer 12

small or cyclical businesses

Question 13

A good LBO candidate is

Answer 13

a corporation
predictable cash flow
well established
leader in industry

Question 14

The formula for expected earnings per share in an acquisition is

Answer 14

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

Question 15

Method for calculating expected earnings per share in an acquisition

Answer 15

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

Question 16

The pre-merger P/E multiple is calculated by

Answer 16

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

Question 17

The purchase price premium is calculated as follows

Answer 17

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

Question 18

The Exchange Ratio for an Acquisition is the

Answer 18

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

Question 19

during mergers, a rating agency may

Answer 19

place a company on credit watch

Question 20

ratings agencies may put companies on credit watch during mergers because

Answer 20

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.

Question 21

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

Answer 21

evaluate the terms and price of the merger

Question 22

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

Answer 22

fairness committee

Question 23

job of a fairness committee is

Answer 23

to evaluate all aspects of the merger

Question 24

Fairness opinion is drafted by

Answer 24

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

Question 25

fairness opinion states whether

Answer 25

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

Question 26

Fairness opinion is not detailed but is based on

Answer 26

detailed financial information

Question 27

The fairness opinion is rendered to

Answer 27

the board of directors

Question 28

Board of directors uses the fairness opinion to

Answer 28

decide whether to approve the merger as it stands or not

Question 29

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.

Answer 29

fairness opinion