Exercises Flashcards
Claim: If there is synergy, the value of the combined firm should be greater than the value of the companies operating independently.
True.
Synergy should increase the combined firm value
Claim: Combining two firms with volatile earnings will increase value because earnings will become more stable after the merger.
False.
Investors can diversify their portfolios themselves
Claim: The value of control is greater for a badly managed firm than for a well managed one.
True.
The value of control accrues from the changes that can be made in the firm after taking
control of it
Claim: The empirical evidence suggests that merger gains are often overstated and fail to materialize in practice.
True
Claim: Firms generally become more profitable after mergers relative to other firms in the industry.
False
How do you get the after-tax CoD?
Before tax CoD*(100% - T)
How do you get the r from risk premium in equity?
re = rp + rf
Rather than increasing the debt ratio, the acquirer decides to increase the value of the debt
What is the most that can afford to pay the target?
𝑉 𝐿 = 𝑉 𝑈 + T*𝐷
Trade-off theory (of dept in capital)
Taking more debt decreases the costs of capital up to a point after which costs of financial distress raise costs of capital (risk rises).
Why in FCFF do we add Dep. and Amort. back?
These expenses do not involve actual cash outflows. Therefore, adding them back to net income adjusts for the non-cash nature of these expenses.
Why in FCFF do we remove CAPEX?
In the Free Cash Flow to Firm (FCFF) calculation, capital expenditures (Capex) are deducted because they represent investments made by the firm in its fixed assets or capital assets. FCFF aims to measure the cash generated by the firm’s operations
Beased on the Trade-off theory (of dept in capital) as leverage increases…
…the value of the firm increases as long as the tax benefits outwight the cost of financial deistress. If leverage increases too much the cost of financial ditress strats to domintate and the value of the firm falls.
SOS: Consider the following: DCF analysis works better for investors with long time horizon. Do you aggre?
Yes, because markets can over- or undervalue assets, but sooner or later the value of assets should converge somewhat back to fundamentals
This may take a long time however, so
that even if assets are undervalued, it may take a long time before they’re back at their
fundamental value.
Note that simply noting that DCF takes future values or a terminal
value into account is not correct, as other valuation methods (such as multiples) also
implicitly take these into account.
In M&As, as in most business activities, there are “leaders and followers”. In recalling the first and second formal lectures in this course, and considering the established patterns of “merger waves”, explain how the strategy of game theory comes into play when considering leading, following, success, and failure in the M&A arena.
In M&A activities, akin to other business endeavors, a dynamic of “leaders and followers” emerges, particularly evident in the context of established patterns of “merger waves” discussed in the initial lectures of the course.
Game theory offers insights into the strategic decisions of firms in this arena. Leaders, often possessing superior resources or market positioning, set the pace by initiating mergers, triggering a wave. Followers, observing the outcomes of these initial moves, strategically assess the risks and benefits, deciding whether to participate and, if so, when and with whom.
Success and failure in M&As thus hinge on a complex interplay of strategic calculations, timing, and competitive dynamics, all of which are illuminated through the lens of game theory.
