Session 9 - Corporate Finance

Question 1

Herfindahl - Hirschman Index (HHI)

Answer 1

Key measurement of market power for determining potential antitrust violations.
=(market share % x 100)² x # of firms w/ that % + all market participants

1,000 - 1,800 = moderate concentration
1,800 + = highly concentrated

Question 2

Net Interest After Tax

Answer 2

(interest expense - interest income)(1 - marginal tax rate)

Question 3

Unlevered Net Income

Answer 3

= NI + net interest after tax

Question 4

Net Operating Profit Less Adjusted Taxes (NOPLAT)

Answer 4

= unlevered NI +/- Δ in deferred taxes

Question 5

Free Cash Flow (FCF)

Answer 5

= NOPLAT
+ net non-cash charges
+/- Δ’s in NWC
- Capex

Question 6

DCF Analysis

Answer 6

• Calculate FCF
• Discount FCF to the present at appropriate rate
• Calculate terminal value and discount
• Add the discounted FCF and terminal value together = value of firm

Question 7

Post-merger value of Acquirer

Answer 7

= pre-merge target value
+ pre-merge acquirer value
+ (S) synergies created
- (C) cash paid to target shareholders

Question 8

Gains Accrued to the Target

Answer 8

= takeover premium

= price paid - pre-merge value of target

Question 9

Gains Accrued to the Acquirer

Answer 9

Synergies - take over premium

Question 10

Equity Carve-outs

Answer 10

Create a new, independent company by giving an equity interest in a subsidiary to outside shareholders.
Shares of the subs. are issued in a public offering, and the subs. becomes a new legal entity

Question 11

Spin-offs

Answer 11

• Create new, independent company
• Shares are not issued to public, but instead distributed proportionately to the parent company’s shareholders.
• No cash for parent in the transaction.

Question 12

Split-offs

Answer 12

Allow shareholders to receive new shares of a division of the parent company in exchange for a portion of their shares in the parent company.

Shareholders are giving up a portion of their ownership in the parent company to receive the new shares of stock in the division.

Question 13

Statutory Merger

Answer 13

Acquiring company acquires all of the target’s assets and liabilities. As a result, the target company ceases to exist as a separate entity.

Question 14

Subsidiary Merger

Answer 14

The target company becomes a subsidiary of the purchaser. Most often occurs when the target has a well-known brand that the acquirer wants to retain.

Question 15

Consolidation

Answer 15

Both companies cease to exist in their prior form, and they come together to form a completely new company.

Question 16

1. Horizontal Merger VS. 2. Vertical Merger

Answer 16

1. The businesses operate in same/similar industry

2. Acquirer seeks to move up or down the product supply chain

Question 17

Conglomerate Merger

Answer 17

The companies operate in completely separate industries.

Question 18

Bootstrapping

Answer 18

A way of packaging the combined earnings from 2 companies after a merger so that the merger generates an increase in the EPS of the acquirer, even when no real economic gains have been achieved.

Question 19

1. Tender Offer VS. 2. Proxy Battle

Answer 19

1. Acquirer offers to buy the shares directly from the target shareholders, and each individual shareholder either accepts or rejects the offer.
2. Acquirer seeks to control the target by having shareholders approve a new “acquirer approved” BOD.

Question 20

Target Payout Ratio

Answer 20

= increase in dividends / (increase in earnings x adjustment factor)