Corporate Finance

Question 1

Categories of Merger

Answer 1

• Statutory: target ceases to exist and all A&L become part of acquirer
• Subsidiary: target becomes sub of acquirer
• Conslidation: both companies cease to exist in their prior form and come together to form a new company

Types:

• Horizontal: firms in similar lines of biz combine
• Vertical: combine either further up or down the supply chain
• Conglomerate: combine firms in unrelated businesses

Question 2

Pre and Post Offer Defense Mechanisms

Answer 2

• PRE
  
  • Poison Pill
  • Poison Put
  • Reincorporating in a state with restrictive takeover laws
  • Staggered board
  • Restricted voting righrts
  • Supermajority voting
  • Fair price amendments
  • Golden parachutes
• POST
  
  • “Just say no” defense
  • Litigation, greenmail
  • Share repurchases
  • Leveraged recapitalizations
  • “Crown jewel” defense
  • “Pac-Man” defense
  • Finding a white knight or white squire

Question 3

Types of Restructuring

Answer 3

• Cash Divestitures - direct sale of division to an outside party for cash
• Equity Carve-outs: create new independent company by giving a proportionate equity interest in a sub to outside S/H through a public offering of stock
• Spin-offs: create new independent company by distributing SHARES to existing shareholders of the parent
• Split-offs: allow S/H to receive new shares of a division of the parent company by exchanging a portion of their parent shares
• Liquidations: break up firm and sell assets piece by piece. most associated with bakruptcy.

Question 4

Depreciable Basis

Answer 4

PP + ( Shipping / handling / installation )

Question 5

Initial Outlay (Expansion)

Answer 5

Price Including S&H & Installation + NWCInv

NWCInv is inventories needed to support the new project

Question 6

NWCInv

Answer 6

( ∆ non-cash current assets) - ( ∆ non-debt current liabilities)

Question 7

After-Tax Operating Cash Flow (Expansion Project)

Answer 7

(sales - cash operating costs - depreciation)(1-T) + depreciation

OR

(S-C)(1-T) + DT

Question 8

TNOCF (Expansion Project)

Answer 8

Sal_T + NWCInv - T(Sal_T - BV_T)

Sal_T = pre-tax proceeds from sale

BV_T = book value of fixed capital sold

Question 9

Initial Outlay (Replacement)

Answer 9

Price (incl S&H&installation) + NWCInv - Sal_Old - T( Sal_Old - BV_Old )

Question 10

After-Tax Operating Cash Flow (Replacement Project)

Answer 10

INCREMENTAL cash flow

( ∆Sales - ∆Opex )( 1 - T) + ∆DT

Question 11

TNOCF (Replacement Project)

Answer 11

INCREMENTAL

∆Sal_{(<span>New - Old)</span>} + NWCInv - T( ∆Sal_{<span>New</span>} - ∆BV_{<span>Old</span>} )

∆Sal_{(<span>New - Old)</span>} = Salvage Value of New Minus Salvage Value of Old

∆Sal_{<span>New</span>} = Sal_New - BV_New

∆BV_{<span>Old</span>} = Sal_Old - BV_Old

Question 12

Economic Income

Answer 12

Cash Flow + Economic Depreciation

Economic Depreciation = END Mkt Value - BGN Mkt Value

Make decisions based on Economic Income, NOT accounting income

Economic ignores interest expense

Question 13

MM Propositions With and Without Taxes

Answer 13

WITHOUT TAXES - capital structure doesnt matter.

1. Capital Structure doesn’t matter. Doesn’t affect market value.
2. Cost of Equity Goes up Linearly as D/E goes up

WITH TAXES - Highest at 100% debt

1. Value is maximized at 100% debt -> Interest is tax-deductible -> tax shield
2. WACC is minimized at 100% debt.

Question 14

Pecking Order Theory

Answer 14

Based on asymmetric info

Management wnats to choose financing source that sends lowest signals

Order:

1. Internally generated equity (R/E)

2. Debt -> mgmt confident the firm can meet obligations

3. External Equity -> negative -> signals maybe stock overvalued

Question 15

Share Repurchase Plans

Open Mkt Transactions

Fixed Price Tender Offer

Dutch Auction

Driect Negotiation

Answer 15

NOTE: main reason for share repurchase is signaling

1. OMT: buy in open market
   
   1. flexible
   2. no obligation to complete
   3. no S/H approval needed
2. Fixed Price Tender Offer
   
   1. predetermined # of shares @ predetermined price (typically premium)
   2. less flexible but quick
3. Dutch Auction
   
   1. firm gies range of prices; min clearing price for a certain # of shares
   2. bids suggested at lowest price first, but the last offer accepted (the highest price) is the price for all shares
   3. quick, but not as quick as tender offer
4. Direct Negotiation
   
   1. purchase @ prem from one major S/H
   2. often greenmail, back when that was a thing

Question 16

Share Repurchase Effects on:

EPS

BVPS

Leverage

Answer 16

1. EPS:
   
   1. always goes down if using internal funds
      
      1. Net Income goes down and shares outstanding go down
2. BVPS
   
   1. If share price > BVPS, BVPS goes DOWN post purchase
   2. If share price < BVPS, BVPS goes UP post purchase
3. Leverage:
   
   1. if using internal funds, leverage goes UP
      
      1. cash goes down, as does shareholders equity
      2. therefore debt to asset and Debt to equity ratios go up -> higher leverage

Question 17

Dividend Coverage Ratio

Answer 17

Net Income

_________________________

Dividends

Question 18

Value of Acquirer Post-Merger

Answer 18

V_Combined = V_{Acquirer +} V_Target + Synergies - Cash pmt to target S/H

NOTE: Iif all stock deal, Cash pmt = 0

Question 19

Gain To Target

Answer 19

Takeover premium

Deal price - target price (pre-takeover)

NOTE: can be per share. divide by target price pre takeover for percentage.

Question 20

Gain to Acquirer

Answer 20

Synergies - Takeover Premium