SOLVED

11) Shareholders of a company being merged with another may take bonds from the acquiring company in exchange for their shares instead of common shares in the new company. What advantage does this have for the acquired company shareholders? A) Even in periods of low earnings, interest charges must be paid to lenders, dividends can be withheld from shareholders. B) The return from holding debt is usually higher than from holding equity. C) Interest from debt is only tax deferred until the instrument is sold and dividends are taxed in the year they are issued, providing greater net return from debt. D) If the new company fails, all of the debt principle will be refunded. E) Payout to common share holders is always capped at a maximum level. The amount of interest paid to lenders increases with company profitability. 12) Which group most consistently benefits from the process of one business acquiring another business? A) The shareholders of the company being taken over. B) The shareholders of the bidding company. C) The senior managers of the company being taken over. D) The senior managers of the bidding company. E) The customers/clients of the bidding company. 13) Live in Colour! Inc. is a steadily growing regional company-owned chain of home decorating stores with two million shares outstanding. Its share price at the start of the year was $31.50 with a P/E of 10. The founder and president, an award winning designer, retained 15% of the shares. The rest traded sporadically on the TSX and were held principally in lots of less than 500 by small investors. Peri Paint and Wallpaper is a US-based chain looking for entry into Canada and at Live in Colour!’s mall locations. It purchased 20% of Live In Colour! shares causing a flurry on the TSX and a price gain to $42.25 a share. Live in Colour!’s president purchased another 100,000 shares and gained assurances from shareholders who own another 15% of shares that they would not sell or vote out the current Board of Directors who are opposed to the takeover. Assuming analysts are right and they believe that the P/E ratio will go to 25 before ownership of the company is decided, what would the maximum cash outlay that a white squire would have to be prepared to pay? A) $47.25 million B) $78.75 million C) $13.52 million D) $102.48 million E) $23.60 million 14) What is the business strategy involving a defensive tactic against a hostile takeover where severance packages involving enormous sums are approved by the Board of Directors to be paid to senior managers in the event of dismissal because of a takeover known as? A) Poison pill B) White knight C) Golden parachute D) Pac-man defense E) Boomerang Liability 15) Central Electric Ltd. (CEL), cost of capital of 9%, net income after tax of $140 million and 10 million common shares outstanding. It wishes to spin off its higher risk Wi-Fi business unit. Earnings from the business unit represent 20% of CEL net income. The Wi-Fi unit has a cost of capital of 12% and would issue one million common shares. To accomplish the spin-off, what will CEL most likely have to do? A) Provide one share for every 10 shares they hold in CEL. B) Sell the business to a new set of shareholders for cash. Cash may be retained or distributed as dividends to CEL shareholders. C) Provide current shareholders with one share from the new business for each of the shares they hold in CEL. D) Provide one share from the new business for every five shares they hold in CEL. E) Provide one share from the new business for every four shares they hold in CEL to cover their increased risk. 16) What is the Balance Sheet Method of business valuation most useful in determining? A) The fair market value of the business. B) The value that maximizes shareholder wealth. C) The minimum value of the share price. D) The highest realizable value of the business. E) The most realistic value of the business. 17) Bryceland Market Garden has current assets of $900,000, capital assets of $6 million, accumulated depreciation of $1.5 million, intangible assets of $250,000, current liabilities of $500,000, a mortgage for $1 million and a bank loan of $150,000. Common shares, at an issue price of $20 a share, provided $4 million of cash. Using the balance sheet (or net book value) method, what is the value of the business per share? A) $14.25 B) $20.00 C) $18.78 D) $22.50 E) $16.75 18) What is a disadvantage associated with replacement cost method of business valuation? A) It does not realistically reflect the market value of the assets. B) It does not account for intangible assets such as brand equity. C) It does not impose an upper limit on the value of the business. D) It does not always provide accurate costs for older assets. E) It does not allow for a comparison between similar businesses. 19) Assiniboine Mills, incorporated ten years ago, shows on its year-end balance sheet net total assets of $30 million, current liabilities of $5 million, long term liabilities of $13 million and paid-in capital from common shares of $12 million at $15.00 each, now selling for $19.50. Of the assets, net realizable value of current assets and liabilities is 90% of book values, $9 million and $5 million, respectively. Land with a book value of $5 million, has appreciated steadily, averaging a 6% increase year-over-year. Building and equipment can be sold at net book value. Assiniboine issued 15-year bonds five years ago at par with an annual coupon rate of 6% and a face value of $12 million. Current interest rates are at 8%.What is the liquidation value per common share? A) $7.53 B) $15.00 C) $19.50 D) $21.46 E) $22.71 20) Victorian Antiques Ltd. has a price/earnings ratio of 22 and is selling for $32.00 a share. Smith and Sons is a family held business not traded on the stock exchange. Which of the following characteristics of Victorian Antiques must be identical to Smith and Sons to allow a comparison with Victorian Antiques to determine the valuation of the unlisted company? A) Accounting practices. B) Earnings and tax rate. C) Risk level and growth rate. D) The value of total assets and liabilities. E) Timing of fiscal year end.