Merger & Acquisition

Amity Campus
Uttar Pradesh
India 201303
ASSIGNMENTS
PROGRAM: BFIA
SEMESTER-VI
Subject Name:
Study COUNTRY:
Roll Number (Reg. No.):
Student Name:

MERGER & ACQUISITION

SOMALIA
BFIA01512010-2013019
MOHAMED ABDULLAHI KHALAF

INSTRUCTIONS
a) Students are required to submit all three assignment sets.
ASSIGNMENT
Assignment A
Assignment B
Assignment C

DETAILS
Five Subjective Questions
Three Subjective Questions + Case Study
Objective or one line Questions

MARKS
10
10
10

b) Total weight-age given to these assignments is 30%. OR 30

Marks
c) All assignments are to be completed as typed in word/pdf.
d) All questions are required to be attempted.
e) All the three assignments are to be completed by due dates
and need to be submitted for evaluation by Amity University.
f) The students have to attach a scanned signature in the form.

Signature : _________________________
Date: 01 April, 2013
( ) Tick mark in front of the assignments submitted
Assignment A

Assignment B

Assignment C
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MERGER & ACQUISITION

ASSIGNMENT- A
Attempt these five analytical questions
Q: 1). Mention the Difference between - Leverage Buy out, Venture
capital & growth fund?
Answer:
A leveraged buy-out (LBO) is a transaction in which capital borrowed from a
commercial lender is used to fund a large portion of the purchase. Generally,
the loans are arranged with the expectation that the earnings of the business
will easily repay the principal and interest. The LBO potentially has great
rewards for the buyers who, although they frequently make little or no
investment, own the tar- get company free and clear after the acquisition loans
are repaid by the earnings of the business. LBOs are often arranged to enable
the managers of subsidiaries or divisions of large corporations to purchase a
subsidiary or division which the corporation wants to divest, known as an
MBO or management buy-out.
The term venture capital has been defined in many ways, but refers
generally to relatively high-risk, early-stage financing of young, emerging growth
companies. The professional venture capitalist is usually a highly trained
finance professional who manages a pool of venture funds for in- vestment in
growing companies on behalf of a group of passive investors.
The differences between venture capital investing and LBO investing are
obvious to those in the business, but many outside the business are unclear
about the distinctions. Here are eight differences:
1)
Sources of Funds When LBO firms bring money to the closing, it
typically comes from at least two sources. First, the equity is provided by the
LBO firms investors. In addition, senior debt is provided, most likely from a
bank or commercial finance company. In many cases, there is a mezzanine
layer of subordinated debt in addition to the senior debt and equity. Venture
capital investments almost always have just one source of funds: the investors
in the venture capital fund. Although such funds are often invested as
convertible subordinated debentures, in reality this money has equity risk and
demands equity returns. (Sometimes the portfolio company is able to use that
equity cushion to raise some senior debt, but in most cases at best they are
going to raise an asset based loan (based on accounts receivable and perhaps
inventory) and perhaps lease some equipment.)
2)
Uses of Funds Venture capital is invested into the company. VCs go to
great length to make certain that shareholders are not being cashed out. All or
almost all of the funds in a buyout are distributed to shareholders.

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3)
Maturity of Business LBO firms almost always acquire mature
business with excess cash flow. Venture capitalists invest in business that are
much earlier in their life cycle; many VCs, for example, invest in start-ups.
4)
Technology Focus although many venture capitalists are willing to
consider investing in non-technology businesses, the fact is that almost all
venture capital investments are in high technology companies. In order to
generate the high returns VCs require, a potential company must offer the
possibility of very high growth and a high exit multiple. Few non-technology
businesses offer such potential. LBO firms, on the other hand, rarely invest in
high technology companies, due to their high business risk. Combining high
business risk with high financial risk (i.e., a leveraged balance sheet) is very
risky. LBO firms acquire no-technology and low-technology companies. Some,
like Kensington, will acquire medium-technology companies.
5)
Profitability LBO firms usually acquire companies with excess cash
flow that need little or no capital for expansion. Venture capitalists almost
always invest in companies with negative cash flow and which need capital for
expansion (even if such companies are reporting accounting profits); otherwise,
why would the company be raising venture capital?
6)
Participating With Other Firms Venture capitalists typically invest
only in deals where other VC firms have also agreed to invest. A typical proposal
to an entrepreneur is: You need $4 million to start. Ill give you $1.5 million,
and you have to raise the other $2.5 million from at least two other venture
capital firms. The VCs want other VC firms to invest in order to obtain a
second opinion on the desirability of the investment, and to share risk. Buyout
firms rarely share deals with other buyout firms.
7)
Emphasis on Management VC and buyout firms are extremely
concerned about the quality of the management team, but VCs are even more
focused on this than buyout firms are. For a VC, an idea is just an idea; what
really matters is who is going to execute. For a VC, the management team is
usually the most important factor in whether to invest. General Doriot (who
founded American Research & Development) said: I much prefer Grade A men
with grade B ideas than vice versa. Buyout firms also care about management,
but typically look first at the business. Many buyout firms are willing to
consider purchasing companies where the owner/manager will leave a year
after closing, figuring they can find a replacement manager. Some buyout firms,
such as Kensington, have several partners with substantial CEO experience
who can run an acquired company for the first year.
8)
Control VCs are less focused on control (defined as choosing the
Board of Directors) than buyout firms are. VCs figure if the management team
has to be replaced, the investment is probably worthless. Buyout firms almost
always insist on control of the Board of Directors and the right to replace
management if things are not working out. VC typically has negative control
over majority decision through covenants that are included in the Investment
Agreement. Buyout firms typically dont have such covenants because they
know they are going to control the Board of Directors anyway, so they dont
need the contractual protection.
The Difference between Growth and Venture - The classic venture model
presumes that one or two monster hits per fund will make up for mediocre

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returns or losses on the rest of the portfolio. Venture capital is best suited to
network effect businesses where there will typically be one or two winners in a
particular market segment. Such companies require rapid scaling because
achieving scale is paramount. However, this swing for the fences approach
can frequently lead to overcapitalization and poor returns on capital for
companies that dont fit this particular investment model. Growth equity takes
a more disciplined, capital-efficient approach to supporting company growth.
The Difference between Growth and Buyout - Buyout, on the other hand,
performs best when dealing with mature industries. Generally speaking, buyout
managers seek companies that are earning sub-par returns on capital. Those
companies are purchased using financial leverage, and changes are
implemented to increase the returns on capital. Because buyout funds must
use financial leverage to magnify the returns generated by improving operating
efficiency, buyout funds generally take more financial risk than growth equity
funds.
While growth equity managers share some skills sets with managers at VC and
LBO funds, growth equity managers take less technology and adoption risk
than VCs and less financial and execution risk than buyout investors. Growth
equity provides capital to invest in product development, asset deployment,
sales and marketing and acquisitions for companies as they build market share
throughout the growth cycle. These companies have typically developed
defensible market positions so the capital invested is not open to technology or
customer adoption risk. Growth equity investors strike a balance between
capital discipline and revenue growth.
To investors, growth equity is a distinctly different discipline than venture
capital and buyouts, but brings the benefits of both.
Q: 2). What do you mean by corporate control? Explain the how
shares buy back work out?
Answer:
The term "corporate control" refers to the authority to make the decisions of a
corporation regarding operations and strategic planning, including capital
allocations, acquisitions and divestments, top personnel decisions, and major
marketing, production, and financial decisions. This concept is frequently
applied to publicly traded companies, which may be susceptible to changes in
corporate control when large investors or other companies seek to wrest control
from managers or other shareholders.
The notion of corporate control is similar to that of corporate governance;
however, it is usually used in a narrower sense. Corporate control is concerned
with who hasand, moreover, who exercisesthe ultimate authority over
significant corporate practices. Governance, by contrast, involves the broader
interworking of the day-to-day management, the board of directors, the

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shareholders at large, and other interested parties to formulate and implement

corporate strategy.
How shares buy back work out?
The board of directors for a company will announce that they have decided to
buy back their own shares from the current outstanding shares and then
retiring those shares. A Company may do this for several reasons but the main
reason is to increase the value of the stock price for the shareholders.
If a company has 10 million outstanding shares and a current stock price of
$5/share (keep in mind the market cap would be $50 million). The company
announces that the board has authorized the repurchase of 5 million shares.
Then the company will typically buy those shares back throughout the year (or
whatever time frame) reducing the outstanding shares to 5 million from the
initial 10 million. Let's say that miraculously the company was able to purchase
all 5 million shares at $5/share. So they spend $50 million buying back the
stock. If I was wealthy shareholder and own 1 million shares of the company
then before the buyback I owned 10 %( my shares / total outstanding
shares....1 million/10million) of the company, After the buyback there are now
5 million shares so I own 20% (1 million / 5 million) of the company. If the
stock remains at $10/share after the buyback then the market cap is now 25
million, but if shareholders thought the value of company was worth 50 million
before the only thing that has changed after the buyback is the number of
outstanding shares. So that means the price should increase to make the
market cap go back up. So the idea is when a company buys back stock they
increase the value of each share to the shareholder by increasing their
ownership in the company. In our case the price of the stock should now be
$10/share making the market cap 50 million again ($10/share x 5 million
shares = $50 million). So buybacks are an alternative to dividends as a method
for a company to return value to the shareholders.
Q: 3). Write notes on the following:a) Split off.
b) Amalgamation.
c) Hostile Takeover Bid.
Answer:
a) Split ups are type of demerger which involves the division of parent
company into two or more separate companies where parent company
ceases to exist after the demerger. This involves breaking up of the entire
firm into a series of spin off (by creating separate legal entities). The
parent firm no longer legally exists and only the newly created entities
survive. For instance a corporate firm has 4 divisions namely A, B, C, D.
All these 4 division shall be split-up to create 4 new corporate firms with
full autonomy and legal status. The original corporate firm is to be
wound up. Since de-merged units are relatively smaller in size, they are
logistically more convenient and manageable. Therefore, it is understood

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that spin-off and split-up are likely to enhance shareholders value and
bring efficiency and effectiveness.
b) Amalgamation
Amalgamation is an arrangement or reconstruction. It is a legal process by
which two or more companies are to be absorbed or blended with another. As a
result, the amalgamating company loses its existence and its shareholders
become shareholders of new company or the amalgamated company. In case of
amalgamation a new company may came into existence or an old company may
survive while amalgamating company may lose its existence.
According to Halsburys law of England amalgamation is the blending of two or
more existing companies into one undertaking, the shareholder of each
blending companies becoming substantially the shareholders of company which
will carry on blended undertaking. There may be amalgamation by transfer of
one or more undertaking to a new company or transfer of one or more
undertaking to an existing company.
Amalgamation signifies the transfers of all are some part of assets and liabilities
of one or more than one existing company or two or more companies to a new
company.
The Accounting Standard, AS-14, issued by the Institute of Chartered
Accountants of India has defined the term amalgamation by classifying (i)
Amalgamation in the nature of merger, and (ii) Amalgamation in the nature of
purchase.
1. Amalgamation in the nature of merger: As per AS-14, an amalgamation is
called in the nature of merger if it satisfies all the following condition:
All the assets and liabilities of the transferor company should become, after
amalgamation; the assets and liabilities of the other company.
Shareholders holding not less than 90% of the face value of the equity shares of
the transferor company (other than the equity shares already held therein,
immediately before the amalgamation, by the transferee company or its
subsidiaries or their nominees) become equity shareholders of the transferee
company by virtue of the amalgamation.
The consideration for the amalgamation receivable by those equity shareholders
of the transferor company who agree to become equity shareholders of the
transferee company is discharged by the transferee company wholly by the
issue of equity share in the transferee company, except that cash may be paid
in respect of any fractional shares.
The business of the transferor company is intended to be carried on, after the
amalgamation, by the transferee company.

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No adjustment is intended to be made in the book values of the assets and

liabilities of the transferor company when they are incorporated in the financial
statements of the transferee company except to ensure uniformity of accounting
policies.
Amalgamation in the nature of merger is an organic unification of two or more
entities or undertaking or fusion of one with another. It is defined as an
amalgamation which satisfies the above conditions.
2. Amalgamation in the nature of purchase: Amalgamation in the nature of
purchase is where one companys assets and liabilities are taken over by
another and lump sum is paid by the latter to the former. It is defined as the
one which does not satisfy any one or more of the conditions satisfied above.
As per Income Tax Act 1961, merger is defined as amalgamation under sec.2
(1B) with the following three conditions to be satisfied.
1) All the properties of amalgamating company(s) should vest with the
amalgamated company after amalgamation.
2) All the liabilities of the amalgamating company(s) should vest with the
amalgamated company after amalgamation.
3) Shareholders holding not less than 75% in value or voting power in
amalgamating company(s) should become shareholders of amalgamated
companies after amalgamation
Amalgamation does not mean acquisition of a company by purchasing its
property and resulting in its winding up. According to Income tax Act, exchange
of shares with 90%of shareholders of amalgamating company is required.
c) Hostile Takeover Bid
Hostile Takeover Bid: The acquiring firm, without the knowledge and consent
of the management of the target firm, may unilaterally pursue the efforts to gain
a controlling interest in the target firm, by purchasing shares of the later firm at
the stock exchanges. Such case of merger/acquisition is popularity known as
raid. The caparo group of the U.K. made a hostile takeover bid to takeover
DCM Ltd. and Escorts Ltd. Similarly, some other NRIs have also made hostile
bid to takeover some other Indian companies. The new takeover code, as
announced by SEBI deals with the hostile bids.
An attempt to take over a company without the approval of the company's
board of directors When vying for control of a publicly-traded firm, the acquirer
attempting the hostile takeover may proceed to bypass board approval in one of
two ways typically.
First, the acquirer may attempt to buy enough shares of the company in order
to acquire a controlling interest in the firm. Second, the acquirer may instead
try to persuade existing shareholders to vote in a new board which will accept
the takeover offer.

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Q: 4). Explain the Net Asset Value method of valuation of firm?

Answer:
Valuation means the intrinsic worth of the company. There are various methods
through which one can measure the intrinsic worth of a company, such as Net
Asset Value (NAV)
NAV or Book value is one of the most commonly used methods of valuation. As
the name suggests, it is the net value of all the assets of the company. If you
divide it by the number of outstanding shares, you get the NAV per share.
NAV is the sum total of value of asserts (fixed assets, current assets, investment
on the date of Balance sheet less all debts, borrowing and liabilities including
both current and likely contingent liability and preference share capital).
Deductions will have to be made for arrears of preference dividend, arrears of
depreciation etc. However, there may be same modifications in this method and
fixed assets may be taken at current realizable value (especially investments,
real estate etc.) replacement cost (plant and machinery) or scrap value (obsolete
machinery). The NAV, so arrived at, is divided by fully diluted equity (after
considering equity increases on account of warrant conversion etc.) to get NAV
per share.
The three steps necessary for valuing share are:
1) Valuation of assets
2) Ascertainment of liabilities
3) Fixation of the value of different types of equity shares.
One way to calculate NAV is to divide the net worth of the company by the total
number of outstanding shares. Say, a companys share capital is Rs. 100 crores
(10 crores shares of Rs. 10 each) and its reserves and surplus is another Rs.
100 crores. Net worth of the company would be Rs. 200 crores (equity and
reserves) and NAV would be Rs. 20 per share (Rs. 200 crores divided by 10
crores outstanding shares).
NAV can also be calculated by adding all the assets and subtracting all the
outside liabilities from them. This will again boil down to net worth only. One
can use any of the two methods to find out NAV.

Q: 5). Mention the types of merge & acquisition?

Answer:

There are four types of merger are as follows:

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1) Horizontal merger:
It is a merger of two or more companies that compete in the same industry. It is
a merger with a direct competitor and hence expands as the firms operations in
the same industry. Horizontal mergers are designed to produce substantial
economies of scale and result in decrease in the number of competitors in the
industry. The merger of Tata Oil Mills Ltd. with the Hindustan lever Ltd. was a
horizontal merger.
In case of horizontal merger, the top management of the company being meted
is generally, replaced, by the management of the transferee company. One
potential repercussion of the horizontal merger is that it may result in
monopolies and restrict the trade.
2) Vertical merger:
It is a merger which takes place upon the combination of two companies which
are operating in the same industry but at different stages of production or
distribution system. If a company takes over its supplier/producers of raw
material, then it may result in backward integration of its activities. On the
other hand, Forward integration may result if a company decides to take over
the retailer or Customer Company.
Vertical merger may result in many operating and financial economies. The
transferee firm will get a stronger position in the market as its
production/distribution chain will be more integrated than that of the
competitors. Vertical merger provides a way for total integration to those firms
which are striving for owning of all phases of the production schedule together
with the marketing network (i.e., from the acquisition of raw material to the
relating of final products).

A takeover of merger is vertical where one of two companies is an actual or

potential supplier of goods or services to the other, so that the two companies
are both engaged in the manufacture or provision of the same goods or services
but at the different stages in the supply route (for example where a motor car
manufacturer takes over a manufacturer of sheet metal or a car distributing
firm). Here the object is usually to ensure a source of supply or an outlet for
products or services, but the effect of the merger may be to improve efficiency
through improving the flow of production and Reducing stock holding and
handling costs, where, however there is a degree of concentration in the
markets of either of the companies, anti-monopoly problems may arise.
3) Congeneric Merger:
In these, mergers the acquirer and target companies are related through basic
technologies, production processes or markets. The acquired company
represents an extension of product line, market participants or technologies of
the acquiring companies. These mergers represent an outward movement by
the acquiring company from its current set of business to adjoining business.

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The acquiring company derives benefits by exploitation of strategic resources

and from entry into a related market having higher return than it enjoyed
earlier. The potential benefit from these mergers is high because these
transactions offer opportunities to diversify around a common case of strategic
resources.
Western and Mansinghka classified congeneric mergers into product extension
and market extension types. When a new product line allied to or
complimentary to an existing product line is added to existing product line
through merger, it defined as product extension merger, Similarly market
extension merger help to add a new market either through same line of
business or adding an allied field . Both these types bear some common
elements of horizontal, vertical and conglomerate merger. For example, merger
between Hindustan Sanitary ware industries Ltd. and associated Glass Ltd. is a
Product extension merger and merger between GMM Company Ltd. and Xpro
Ltd. contains elements of both product extension and market extension merger.
4) Conglomerate merger:
These mergers involve firms engaged in unrelated type of business activities i.e.
the business of two companies are not related to each other horizontally ( in the
sense of producing the same or competing products), nor vertically (in the sense
of standing towards each other on the relationship of buyer and supplier or
potential buyer and supplier). In a pure conglomerate, there are no important
common factors between the companies in production, marketing, research and
development and technology. In practice, however, there is some degree of
overlap in one or more of this common factors.
Conglomerate mergers are unification of different kinds of businesses under one
flagship company. The purpose of merger remains utilization of financial
resources, enlarged debt capacity and also synergy of managerial functions.
However these transactions are not explicitly aimed at sharing these resources,
technologies, synergies or product market strategies. Rather, the focus of such
conglomerate mergers is on how the acquiring firm can improve its overall
stability and use resources in a better way to generate additional revenue. It
does not have direct impact on acquisition of monopoly power and is thus
favored throughout the world as a means of diversification.
Q: 6). What are the advantage of disinvestment in the Public Sector
Units?
Answer:
Disinvestment refers to sale of Government equity, either wholly or partially to
private sector.. Disinvestment is the process in which certain percentage of
shares of public sector units is disinvested to private sector. It is also known as
privatization. Through disinvestment government can withdraw its resources
invested in public sector undertaking (PSUs) and can use such resources for

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development of the economy. When a PSU is disinvested government usually

keeps strategic control in to strategic and nonstrategic areas.
Some of the advantages of disinvestment in Public Sector Units are:
1. Releasing large amount of public resources: the primary objective of
disinvestment is to release public resources for deployment in areas that are
much higher on the social priority, such as, basic health, family welfare,
primary education and social and essential infrastructure.
2. Get rid off bureaucratic set up: Management of public sector does not have
the independence to take decision. Most of decision of PSE is taken by the
ministers. Their decisions are politically motivated and are delayed. As a result,
production capacity is not fully utilized and there is fall in productivity.
3. Get rid off uneconomic price policy: price of public utility services like
electricity, irrigation, transport, water, etc. are determined on the basis of
political, social, and other non-economic consideration rather than on the basis
commercial principles. In some cases, prices are deliberately kept less than the
cost of production. Privatization is advocated to avoid such losses.
4. Reduce burden on the government: at least 53 public sector units are
running at loss. This creates unnecessary economic burden on the government.
The management and any other person are indifferent to profit earned or losses
incurred. So government has promoted privatization for reducing its economic
burden.
5. Avail benefit of capitalism: capitalism is very successful countries like
Japan, USA, Hong Kong, Singapore, Korea etc. considering the benefits of
capitalism like increase in competition, increase in technology advancement,
increase deficiency the government has decided to adopt privatization.
6. To Solve financial crisis of government: Government is falling shorts of
funds to develop infrastructure. This finance crisis could be solved by selling
part of government equity at remunerative prices and thereby getting funds
from their sale.
7. For Promoting Industrial Growth: Government thought that public sector
will not be able to bear the burden of developing basic and heavy industries
alone, because of shortage of funds. So privatization was promoted to increase
industrial growth
8. For promoting Globalization: Globalization can only be promoted through
privatization, because foreign entrepreneurs prefer to join hands with private
sector. By globalization benefits of foreign investment and foreign technology
can be availed.

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Assignment B
Q: 1). Explain the Discounted Cash Flow method in details, with the
help of suitable example?
Answer:

Discounted cash flow (DCF) is the most commonly used valuation method for
determining the price of a company. In a DCF valuation, projections of the
target companys future free cash flow are discounted to the present and
summed to determine the current value. The implication of a DCF valuation is
that when ownership of the target company changes hands, the buyer will own
the cash flows created by continued operations of the target. Key elements of
the DCF model are financial projections, the concepts of free cash flow, and the
cost of capital used to calculate an appropriate discount rate.
The first step in a DCF valuation is developing projections of the target
companys financial statements. Intimate knowledge of the target companys
operations, historical financial results, and numerous assumptions as to the
implied future growth rate of the company and its industry are key elements of
grounded financial projections. In addition, it is necessary to determine a
reasonable forecast horizon, which depending on industry and company stage,
can range between five and ten years.
The next step in a DCF valuation is determining the target companys future
free cash flows. The most basic definition of free cash flows is cash that is left
over after all expenses (including cost of goods sold, operating and overhead
expenses, interest and tax expenses, and capital expenditures) have been
accounted for; it is capital generated by the business that is not needed for
continued operations and accordingly, it is the capital available to return to
shareholders without impairing the future performance of the business.
Determining the free cash flows of a business is a function of understanding
and utilizing the basic financial data provided in the targets projected financial
statements. That being said it is extremely important in determining a
companys free cash flows to have both general knowledge of financial
statements and a thorough understanding of the target companys accounting
practices as projections are often heavily influenced by historical financial
statement data.
After determining the free cash flows for the target over the designated forecast
period (typically five years), a terminal value is as- signed to all future cash
flows (everything post five years), which should be consistent with both industry
growth rates and inflation predications. (Note: During the Internet bubble,
optimistic entrepreneurs often made the mistake of assuming their companys
growth rate would forever exceed that of the U.S. economy, yielding sizeable yet
unrealistic valuations). Two primary methods are used for assigning a terminal
value:

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1) Perpetual growth, which assumes that the targets free cash flow
will grow indefinitely at a given rate, and
2) Exit multiples implied by comparable company or transaction
multiples described in previous sections.
Perhaps the most crucial concept of the discounted cash flow valuation method
is that of a discount rate. As future free cash flows occur in the future and the
target business is being valued today, it is necessary to adjust future inflows of
capital to todays dollars.
This discount rate encapsulates the idea the money today is worth more than
money in future. If given the choice between $100 today and $100 two years
from now, most people would choose the former as they would have the
opportunity to invest that money and reasonably expect to receive more than
$100 two years from now. This same concept, the time value of money, is used
to apply an appropriate discount rate to the future free cash flows and the
terminal value of a target business.
Finally, after discounting all future cash flow to todays dollar, the target
companys cash flows can be summed to yield a final implied valuation.
Unfortunately, like the other valuation methods described, the DCF valuation
method has its flawsthe most prominent being that it is grounded in
assumptions and financial projections that are prone to human error.
Discounted Cash Flow Example
Since the discounted cash flow is used primarily in real estate, let's use an
example of a hypothetical construction company. Let's say a construction
company is evaluating two projects. Below are the scenarios for each project.
Project A - small apartment complex
o
o
o

8 million in costs
10 million sales price
1 year to complete the project

Project B - retail office

o
o
o

12 million in costs
16 million sales price
3 years to complete project

In Project A the future cash flow is 2 million. This means that over the course of
the year the return would be 2M/8M = 25%. We now have to discount this
value to reflect how the cash could have been used over the same period. Let's
assume the 10 million could have been invested in Treasury Notes at a per
annum rate of 6%. This would represent $600,000 dollars worth of interest
made over the year. So in order to get the present value of the investment, we

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would take 10M - $600,000 for a total of $9,400,000. Then we subtract the
$940,000,000 - $800,000,000 (initial investment) to get the true value of
$1,400,000 for Project A. This represents a 17.5% return on the initial
investment.
Project B is 4M which is double the money of Project A. The return on the
project is 4M/16M = 25%, which is the same rate of return for Project A. Now
let's again assume that if the company did not have to take this project on, they
could invest $16M in Treasury Notes at 6% over three years. This would
represent 3M dollars worth of interest over the 3 year period. So, in order to get
the present value of the investment, we would take 16M - 3M for a total of 13M.
Once we subtract 13M - 12M (initial investment) the true value of the deal is
1M. This represents a return on the initial investment of 1M/12M = 8.33%.
Project B returns 8.33%, but this return is over a 3 year period, which is
roughly 2.77% return per year. So, while Project A is a smaller deal, it is a
better business deal because the return on the initial investment is far greater
on a per year basis.
Q: 2). What do you mean by Leverage Buy out (LBO)? How Leverage
Buy Out deals take place?
Answer:
A leveraged buy-out (LBO) is an acquisition of a public or private company in
which the takeover is financed predominantly by debt with minimum equity
investment. The debt is typically structured to include a combination of bank
loans, loans from other financial institutions and bonds with below investmentgrade credit ratings, referred to as high-yield bonds. Assets of the acquired
company act as collateral for the debt and interest and principal obligations are
met through cash flows of the refinanced company.
Basically a leveraged buyout transaction is funded through a mix of equity and
debt, but usually debt will make up the larger part. Debt can be in the form of
traditional bank financing, bond offerings, seller financing and loans from
specialized funds. During the LBO boom of 1980's, the debt portion was
normally as low as 10%. But nowadays, it has increased to up to 40% of the
total value of the transaction.
Takeover of a company or controlling interest in a company, using a significant
amount of borrowed money. Often the target company's assets serve as
collateral for the borrowed money.
Leveraged buyout is a tactic through which control of a corporation is acquired
by buying up a majority of their stock using borrowed money. A leveraged
buyout may also be referred to as a hostile takeover, a highly-leveraged
transaction, or a bootstrap transaction.

Page 15 of 31

A leveraged buyout (LBO) occurs when a financial sponsor acquires a

controlling interest in a company's equity and where a significant percentage of
the purchase price is financed through leverage (borrowing). The assets of the
acquired company are used as collateral for the borrowed capital, sometimes
with assets of the acquiring company. The bonds or other paper issued for
leveraged buyouts are commonly considered not to be investment grade
because of the significant risks involved.
Companies of all sizes and industries have been the target of leveraged buyout
transactions, although because of the importance of debt and the ability of the
acquired firm to make regular loan payments after the completion of a leveraged
buyout, some features of potential target firms make for more attractive
leverage buyout candidates, including:
o
o
o
o
o

Low existing debt loads;

A multi-year history of stable and recurring cash flows;
Hard assets (property, plant and equipment, inventory, receivables) that
may be used as collateral for lower cost secured debt;
The potential for new management to make operational or other
improvements to the firm to boost cash flows;
Market conditions and perceptions that depress the valuation or stock
price.

The LBO transaction will generally take one of two basic forms: the sale of
assets or the cash merger. Under the cash merger format, the acquired
company disappears upon merger into the acquiring company and its
shareholders receive cash for their shares.
Under the sale of assets format, on the other hand, the operating assets become
part of the buying company but the selling company will generally be given the
option of either receiving cash or continuing to hold their shares in the selling
company.
Typically, leveraged buyout uses a combination of various debt instruments
from bank and debt capital markets.
And the assets of the acquired company are used as collateral for the borrowed
capital.
Q: 3). What are the reason of Merger & Acquisition?
Answer:
There are several reasons for merger and acquisition that include:
1) Economies of large scale business: One of the most important reasons
for M&A is that a large-scale business organization enjoys both internal and
external economies which generally lead to reduction in cost and increase in
profits. Motives for Mergers & acquisitions.

Page 16 of 31

2) Elimination of competition: This is also one of the motivating factors

for M&A because it eliminates severe, intense and wasteful expenditure by
different competing organizations.
3) Adoption of modern technology: The adoption of modern scientific
technology by a corporate organization requires large resources which may
be out of reach of an individual firm. This may induce M&A of different
firms.
4) Lack of technical and managerial talent: In the developing countries at
the earlier stages of industrialization, scarcity of entrepreneurial, managerial
and technical talent is also one of the important factors that leads to M&A.
5) Effect of Trade Cycles: Trade cycles are the periods of ups and downs
in an economy. Ups are the periods of boom when production is on large
scale, profits are more, employment is maximum and new firms crop up
indiscriminately in all directions. This situations creates unhealthy
competition and acts as a motivating factors for M&A. on the other hand,
downs are the period of depression when economic activity reaches to its
lowest point. During depression, only efficient and large firms manage to
survive and inefficient firms, to reduce the risk of failures, preferred to be
merged or acquired by strong firms.
6) Desire to enjoy monopoly power: M&A leads to monopolistic control in
the market. In the situation of monopoly, a firm can easily make adjustment
in the supply and price of products and can also increase the profit of the
firm.
7) Patent rights: The exclusive right to use the invention of any new
machines, method or idea is one of the reasons favoring M&A. Patents have
given monopoly position to many firms in the market at national and
international levels.
8) Desire to unified control and self-sufficiency: Firms which depends on
other units for their raw material requirements or which are engaged in
different process of product for ensuring uninterrupted supply of raw
materials are encouraged and benefited by M&A. By bringing such firms
under unified control, their dependence on other firms can be avoided.
9) Personal Ambition- One of the factors favoring M&A is personal
ambition of becoming the chief of a personal empire. The desire of a person
to increase profits and enlarge his own industrial empire is the factor at the
back of many M&A.
10)
Government Pressure: Whenever the government of a country
feels that the competition among firms is providing harmful to the country
or it want to improve overall efficiency of industrial undertakings, it can
pressurize for M&A through legislation.
11)
Strategic benefits: A company may go into acquisition or merger
in order to change strategic direction or expand in a particular industry. In
doing so, it is prudent to acquire a company already engaged in that
industry, rather than dependence on internal expansion. This may offer
several strategic advantages such as a pre-emptive move it can prevent a
competitor from establishing a similar position in that industry.
12)
Complementary resources: Two firms may also merge in order to
have complementary resources. For example, a small firm with an innovative
product may need the engineering capability and marketing reach of a big
firm. With the merger of the two firms, they will better able to manufacture

Page 17 of 31

and market the innovative product to the maximum point due to the firms
complementing each other from the resources they both have. Hence, the
two firms will be able to conduct business more efficiently and effectively
than if they were to stay separately from each other.
13)
Tax shield: When a firm with accumulated losses and/or
unabsorbed depreciation merges with a profit making firm, tax shields are
utilized better.
14)
Utilization of surplus funds: In a matured industry, you have
firms that generate a lot of cash but unable to make profitable investment
decisions. In such as case the firm ought to distribute generous dividends
and even buy back its shares, to the same is possible. But most
management has a tendency to make further investments, even though they
may not be profitable. In this case the investment decision should be a
merger with another firm involving cash compensation which often
represents a more efficient utilization of surplus funds.
15)
Managerial effectiveness: One of the potential gains of merger is
an increase in managerial effectiveness. This may occur if the existing
management team, which is performing poorly, is replaced by a more
effective management team. Most often than not, a firm may be suffering
from managerial inadequacies and inefficiencies, can gain immensely from
the superior management that is likely to emerge as a result of the merger.
16)
Diversification: A commonly stated motive for mergers is to
achieve risk reduction through diversification.
But all what we are discussed may be contained in this three major
reasons of merger and acquisition:
o
o
o

Synergy: 2+2=5, total value of firms after M&A is greater than their
simple arithmetic sum
Strategic fit: To improve the position in the market To fill the large gap
of planned and achieved growth going abroad
Basic Business Reason: More feasible than internal investment
Diversification.

Page 18 of 31

CASE STUDY
Tata Motors: Acquisition of Jaguar & Land Rover
Ford Motors Company
Location: Dearborn, Michigan; Founded: 1903 by Henry Ford; Competitors:
General Motors, Toyota;
Brand names: Lincoln, Mercury, Volvo, Mazda, Jaguar and Land Rover, CEO:
Alan Mulally.
1913 - Assembly Line: low priced, mass-produced automobile with standard
interchangeable parts. Hiring of African Americans, Virtual manufacturing,
focus on safety, Advantage through fuel efficiency.
Jaguar: The ups and downs:
1922
1960
1975
1984
1990

Founded in Blackpool as Swallow Sidecar Company

Jaguar name first appeared in 1935
Nationalized in due to financial difficulties
Floated off as a separate co in the stock market
Taken over by Ford

A statement of ultra-luxury, Holds Royal warrants, Rarely advertised Fords

formula one entry since 1990s.
1948:
1976:
1994:
2000:

Land Rover is designed by the Rover Car co

One millionth Land Rover leaves the production line
Rover Group is taken over by BMW
Sold to Ford for 1.8 billion.

The case of Land Rover:

Known for superior off-road performance, Used by military for projects and
expeditions, Safe but less reliable, Makeover in recent times
Key issues:
Ford acquired Jaguar for $2.5 billion in 1989.
Ford acquired Land Rover for $2.75 billion in 2000.
But the US auto major put the two marquees on the market in 2007 after
posting losses of $12.6 billion in 2006 - the heaviest in its 103-year history.
The Deal Process: - 12/06/2007- Announcement from Ford that it plans to
sell Land Rover and Jaguar.
August 2007 - Major bidders are identified

Page 19 of 31

Likely buyers: Tata Motors, M&M, Ceribrus capital Management, TPG Capital,
Apollo Management
Indias Tata Motors and M&M arrive as top bidders ($ 2.05b & $ 1.9b)
03/01/2008 Ford announces Tatas as the preferred bidders
26/03/2008 - Ford agreed to sell their Jaguar Land Rover operations to Tata
Motors.
02/06/2008 The acquisition is complete
TATA MOTORS A SNAPSHOT
TATA GROUP is 150 year old, Previously Tata Engineering and Locomotive
Company, Telco.
Tata Motors s break-even point for capacity utilization is one of the best in the
industry worldwide
Listed on the New York Stock Exchange in 2004.
Making Waves Internationally
NANO will mark the advent of India as a global centre for small-car
production and represent a victory for those who advocate making cheap goods
for potential customers at the 'bottom of the pyramid' in emerging markets.
International praise came from Standard & Poors, which in December 2006
expressed the view that the policy to support its companies and the improved
financial profile of its entities also enhances the overall financial flexibility of
Tata Motors.
Why is Ford selling?
Reports said losses at Jaguar stood at USD 715 million in 2006. Jaguar has
been a dog i.e. it has not been able to provide any profit for ford because of the
high manufacturing costs provided in the United Kingdom.
The strong boy Land Rover's profit, on the other hand, was driven by the
record sale of 2.26 lakh vehicles, an 18% YoY growth in 2007..
Bringing down production costs and turning around the company
successfully will be the challenge, analysts said. Its a test that Ford failed.
Ford is combining both the brands since the products and manufacturing of
vehicles for Land Rover and Jaguar is so intertwined.
Ratan Tata says?
We aim to support their growth, while holding true to our principle of allowing
the management and employees to bring their experience and expertise to bear
on the growth of the business.

Page 20 of 31

 'We have enormous respect for the two brands and will endeavor to preserve
and build on their
Heritage and competitiveness, keeping their identities intact,' he said in a
statement.
Advantages to acquire JLR?
Long term strategic commitment to automotive sector.
Opportunity to participate in two fast growing auto segments.
Increased business diversity across markets and products.
Land rover provides a natural fit for TML s suv segment.
Jaguar offers a range of performance/luxury vehicles to broaden the brand
portfolio.
Benefits from component sourcing, design services and low cost engineering
Tata and the dream
NEED FOR GROWTH
In the past few years, the Tata group has led the growing appetite among
Indian companies to acquire businesses overseas in Europe, the United States,
Australia and Africa - some even several times larger - in a bid to consolidate
operations and emerge as the new age multinationals.
Tata Motors is India's largest automobile company, with revenues of $7.2
billion in 2006-07. With over 4 million Tata vehicles plying in India, it is the
leader in commercial vehicles and the second largest in passenger vehicles.
COMPETITIVE ADVANTAGE
Tata Motors is vulnerable to greater competition at home. Foreign vehicle
makers including Daimler, Nissan Motor, Volvo and MAN AG have struck local
alliances for a bigger presence.
Tata Motors, which has a joint venture with Fiat for cars, engines and
transmissions in India, is also facing heat from top car maker Maruti Suzuki
India Ltd, Hyundai Motor, Renault and Volkswagen.
Analysts pick
Analysts indicate that Tata Motors can comfortably finance the acquisition of
Jaguar and Land Rover.
The Indian automaker is sitting on a cash pile of over Rs 6,000 crore and
generated free cash of over Rs 1,000 crore during FY07. It can easily use these
reserves to raise more funds without endangering its finances. At the end of last
financial year, Tata Motors debt-to-equity ratio was a low 0.56, giving it ample
head room to raise more funds.

Page 21 of 31

 Over the next 3-4 years, Tata Motors plans to invest Rs 12,000 crore in setting
up new units for a small car, trucks and SUVs and also to expand the capacity
of its existing units.
Challenge for Tata Motors. These marquee brands have very high production
costs and require phenomenally high engineering and research capabilities as
they compete with likes of BMW and Audi.
Taking over the brand is easy, bringing down production costs and turning
around the company successfully, will be the challenge, analysts said. Its a
test that Ford failed.
WHAT IS TATA PAYING FOR????

FINANCING WAYS
Low leverage of the auto biz provides funding flexibility
Currently financed the purchase through a $3bn, 15month bridge loan
It intends to refinance the loan through long-term funds
valuable stakes in group companies
owns $400m of Tata Steel at current prices
owns stake in Tata Sons (Tata Group s holding company) worth at least
$600m

Page 22 of 31

2. Tata Group has multiple levers

Tata Auto Comp (TACO) - TATA group has a a rich ecosystem of JVs with
leading players in Auto ancillary space held through TACO.
TCS, Corus and Tata Technologies have varied competencies in the Auto
space
We believe an improvement of 50-70bps in EBITDA margin possible in JLR
over the next 2 years (current EBITDA margin)
- We estimate CY2007 EBITDA margin of JLR at around 6.5% This could
make the acquisition
PAT accretive in CY2009/FY10E
TAMO + JLR: Leverage and Valuation ratios
Leverage increases but coverage ratios reasonable
Headline Debt/Equity of TAMO would increase to 2.5x from 1x
Excluding the vehicle finance biz, leverage would go to 1.2x
EBITDA/Interest remains at 5.0
TAMO is trading inline/modest discount to global peers
EV/Sales (1-yr forward) of 0.5x against 0.4x for global peers
P/E (1-yr forward) of 6.5x against 8.5x for global peers
Q: 1).
a) Write your observation regarding the JLR deal? Mention its
advantages & disadvantages of this deal?
Answer:
Although Tata Motors has proven excellence over the years through continuous
strong financial results market expansion, acquisition, joint ventures and
improvement and introduction of new products, it seems to have a promising
future. But it failed the expectation as the company was in trouble right after
the acquisition of jaguar and land Rover (JLR) in June 2008, due to arrival of
global financial crisis.
And as the nature of any financial deal there is an advantage which is the
desirable of the deal and disadvantage which the deal may came up with, and
this is some of the advantage and disadvantage of Tata JLR deal:
Advantage
o
o

Global image: Tata Motors decision to acquire JLR will facilitate to the
company to go global by acquiring famous international brand to
increase its global image.
By acquiring JLR, Tata Motors able to obtain intellectual property rights
related to the technologies from JLR at the meantime improve
corporations image and increase its public reputation.

Page 23 of 31

o
o
o

Increased business diversity across markets and products

Improved corporations image and increased its public reputation
Opportunity to participate in two fast growing auto segments to fulfill
part of Tata groups ongoing strategy of internationalization.

Disadvantage of the JLR deal

o
o

High cost Manufacturing: These two brands need high production and
manufacturing costs, analysts said. Its a test that Ford failed
FALL IN SHARE PRICE: Companys share prices dropped in the market
after JLR deal because of the investor perception that it was not the right
time to invest in JLR deal, when TATA had recently undergone huge
capital expenditure for other automobile industry projects like {Tata
Nano}
Facing a hard competition with big automobile brands in the global
market: after JLR acquisition TATA motors should go to compete with
global automobile giants like Mercedes, BMW, Lexus and infinity.

b) Why Ford Sell out these two iconic brands? Mention the reasons?
Answer:
o

These two iconic brands have very high production costs and require
high engineering and research capabilities to compete with the big
brands in car industry and that is way ford need to sell these two high
cost manufacturing brands to bring down its production costs.
Also Jaguar was not performing well as it was unable to provide any
profit for Ford due to high manufacturing costs in the United Kingdom,
and in this context Jaguar Faced a losses which stood at USD 715
million Due to 2006 report.

c) What are the consequences of this deal financing on TATA group and
its market position?
Answer:
JLR TATA deal coincidentally met with a global financial crisis, due to this bad
situation many questions arrived at the front, whether TATA Motors able to
repay the bridge loan? Will it be able to build up investors confidence and
increase sales in the future? Could TATA Motors survive or going under
bankruptcy. And because of that all the points below emerged as consequence
of financing this deal

Lack of access to credit to repay the bridge loan of US$ 3 billion

Share price dropped drastically and affect its global image.
Tata motors may also face a greater risks due to this facts :
o
Global financial crisis has severely impacted the global automobile
industry especially the luxury cars segment.
o
Increasing materials and fuel prices have slowed the demand of
vehicles.

Page 24 of 31

ASSIGNMENT C
MULTIPLE CHOICE QUESTIONS
Q: 1).
________ is equal to the total market value of the firm's
common stock divided by (the replacement cost of the firm's assets
less liabilities).
a)
b)
c)
d)
e)

Book value per share

Liquidation value per share
Market value per share
Tobin's Q ()
None of the above.

Q: 2).
High P/E ratios tend to indicate that a company will _______,
ceteris paribus.
a)
b)
c)
d)
e)

grow quickly ()
grow at the same speed as the average company
grow slowly
not grow
none of the above

Q: 3).
________ are analysts who use information concerning current
and prospective profitability of a firms to assess the firm's fair market
value.
a)
b)
c)
d)
e)

Credit analysts
Fundamental analysts ()
Systems analysts
Technical analysts
Specialists

Q: 4).
_______ is the amount of money per common share that could
be realized by breaking up the firm, selling the assets, repaying the
debt, and distributing the remainder to shareholders.
a)
b)
c)
d)
e)

Book value per share

Liquidation value per share ()
Market value per share
Tobin's Q
None of the above

Q: 5).
The ______ is a common term for the market consensus value
of the required return on a stock.
a)
b)
c)
d)
e)

dividend payout ratio

intrinsic value
market capitalization rate ()
plowback rate
none of the above

Page 25 of 31

Q: 6).

Net profit is equal to:

a)
b)
c)
d)

Q: 7).

Sales less cost of sales and operating expenses

Gross profit less operating expenses
Sales less operating expenses
Both (a) & (b) ()
In the long run, a successful acquisition is one that:

a) Enables the acquirer to make an all-equity purchase, thereby

avoiding additional financial leverage.
b) Enables the acquirer to diversify its asset base.
c) Increases the market price of the acquirer's stock over what it
would have been without the acquisition ().
d) Increases financial leverage.
Q: 8).

A tender offer is
a) A goodwill gesture by a "white knight."
b) A would-be acquirer's friendly takeover attempt.
c) A would-be acquirer's offer to buy stock directly from
shareholders ()
d) Viewed as sexual harassment when it occurs in the workplace.

Q: 9).
You are considering acquiring a common stock that you would
like to hold for one year. You expect to receive both $2.50 in dividends
and $28 from the sale of the stock at the end of the year. The
maximum price you would pay for the stock today is _____ if you
wanted to earn a 15% return.
a)
b)
c)
d)
e)

$23.91
$24.11
$26.52
$27.50
none of the above ()

Q: 10). The public sale of common stock in a subsidiary in which the

parent usually retains majority control is called
a)
b)
c)
d)
Q: 11).
a)
b)
c)
d)

A pure play.
A spin-off.
A partial sell-off.
An equity carve-out ().
One means for a company to "go private" is
Divestiture.
The pure play.
The leveraged buyout (LBO) ().
The prepackaged reorganization.

Page 26 of 31

Q: 12).
a)
b)
c)
d)

Hindrance for going in the international business is known as

Synergy
Turn key point
Trade barrier ()
Minority interest

Q: 13). ___________________ is the combination of at least two firms

doing similar businesses at the same market level.
a)
b)
c)
d)

Diversified activity Merger

Horizontal Merger ()
Joint Venture
Vertical Merger.

Q: 14). Which of the following is NOT recognized as a misconception

about entrepreneurship?
a)
b)
c)
d)
Q: 15).
is
a)
b)
c)
d)
Q: 16).
a)
b)
c)
d)
Q: 17).
a)
b)
c)
d)

Entrepreneurship is found only is small businesses.

Entrepreneurship is easy.
Successful entrepreneurship needs only a great idea.
Entrepreneurial ventures and small businesses are different ()
An entrepreneurs primary motivation for starting a business
To make money
To be independent ().
To be famous
To be powerful
Entrepreneurs typically form
Service businesses
Manufacturing companies
Constructive companies
A variety of ventures ().
Joint ventures have been used by entrepreneur:
When the entrepreneur wants to purchase local knowledge
When rapid entry in to the market is needed
Both of the options given ().
None of the above

Q: 18). The _________ of a venture could be that the company has

experience in related business.
a)
b)
c)
d)

Strength ().
Weakness
Opportunity
Threat

Page 27 of 31

Q: 19).

Franchising is :-

a) Purchase all part of company.

b) Allowing another party to use a product or services under the
owners name ().
c) Joining two or more companies.
d) A company acquiring another company against its will.
Q: 20). Many mergers begin through a series of negotiations between
the two companies. If the two companies decide to seriously
investigate the possibility of a merger, they will launch Phase II Due
Diligence and execute a:
a)
b)
c)
d)

Post-Merger Contract
Formal Joint Conference
Merger & Acquisition Agreement
Letter of Intent ().

Q: 21). Either party in a merger and acquisition may be entitled to

indemnification
because
of
a
significant
misrepresentation.
Indemnification is usually not due until a certain threshold has been
reached. This threshold amount is often called the:
a)
b)
c)
d)

Reciprocal Amount
Basket Amount
Striking Price ().
Closing Rate

Q: 22). On March 3, 1998, Miser Steel made a tender offer to acquire

Reliance Steel. Miser's tender offer is set to expire on March 23, 1998.
On March 21, 1998, another company called Ohio Steel made a tender
offer to acquire Reliance Steel. Based on consideration of Ohio Steel's
tender offer, the closing date for Miser Steel's tender offer is:
a)
b)
c)
d)

March 21, 1998

March 23, 1998 ().
March 25, 1998
March 31, 1998

Q: 23). Due diligence requires the collection of a lot of information.

Which of the following information types would be least important for
due diligence to work properly?
a)
b)
c)
d)

Employment Records of Target Company ().

Property Records of Competing Companies
Financial Records of Target Company
Property Records of Target Company

Page 28 of 31

Q: 24). Due diligence will attempt to restate financial statements in

relation to what will take place after the two companies merge. One
area of particular concern as it relates to the Balance Sheet is:
a)
b)
c)
d)

Proper Valuation of Cash

Par Value Assigned to Stock
Selection of Depreciation Methods
Possible Understatement of Liabilities ().

Q: 25). Due diligence is particularly important in the case of a reverse

merger since it is necessary to "clean the Shell Company." One
important aspect of cleaning the Shell Company is to:
a)
b)
c)
d)
Q: 26).
except:
a)
b)
c)
d)
Q: 27).
a)
b)
c)
d)

Confirm ownership of the Shell Company ().

Identify cultural and social issues
Plan for long-term integration
Evaluate human resource capital
The following are examples of changes in corporate control
Merger & Acquisition
Leverage Buy Out (LBOs)
Proxy fights ()
Spin-Off & carve-outs
Leveraged buyouts (LBOs) almost always involve:
AAA grade debt
Issuance of new shares of stock to many investors.
Junk grade debt ()
All of the above

Q: 28). Which of the following tactics completely eliminates the

possibility of a takeover via tender offer?
a)
b)
c)
d)
Q: 29).
a)
b)
c)
d)

Leverage Buy Out (LBOs) ()

Exclusionary sekf-tender
Targeted repurchase
Super majority amendment.
Big gainers from LBOs were:
Junk bond holder
Raiders
Selling stockholders ().
Investment banking firm.

Page 29 of 31

Q: 30).
a)
b)
c)
d)
Q: 31).

Junk bonds are bonds with:

AAA or Aaa ratings
BBB or Baa ratings
BB or Ba ratings ().
D rated bonds.
In case of carve-outs:

a) Shares of the new company are given to the shareholders of the

parent company
b) Shares of the new company are sold in a public offering ()
c) Shares of the new company are bought by borrowing or issuing
junk bonds
d) None of the above.
Q: 32).
a)
b)
c)
d)

A privatization is a:
Sale of a government-owned company to private investor ()
Sale of private companies to the government.
Sale of a publicly traded company to private investors.
None of the above.

Q: 33). Which of the following statements regarding spin-offs and

carve-outs is not true?
a) Spin-offs are not taxed if the shareholders of the parent
company are given a majority of shares in the new company
().
b) Spin-offs are not taxed if the shareholders of the parent company
are given at least 80% of the shares in the new company.
c) Gains or losses from carve-outs are taxed at the corporate tax
rate.
d) None of the above.
Q: 34).
a)
b)
c)
d)
Q: 35).
a)
b)
c)
d)

The following are important motives for privatization except:Revenue for the government.
Increased efficiency.
Conglomerate merger ().
Privatization.
"Effective" control of a firm requires approximately:
100% ownership.
51% ownership.
50% ownership.
20% ownership ().

Page 30 of 31

Q: 36). Suppose that the market price of Company X is $45 per share
and that of Company Y is $30. If X offers three-fourths a share of
common stock for each share of Y, the ratio of exchange of market
prices would be:
a)
b)
c)
d)
Q: 37).

.667
1.0
1.125 ()
1.5.
The restructuring of a corporation should be undertaken if

a) The restructuring can prevent an unwanted takeover.

b) The restructuring is expected to create value for shareholders
()
c) The restructuring is expected to increase the firm's revenue.
d) The interests of bondholders are not negatively affected.
Q: 38).

The "information effect" refers to the notion that

a) A corporation's actions may convey information about its

future prospects ().
b) Management is reluctant to provide financial information that is
not required by law.
c) Agents incur costs in trying to obtain information.
d) The financial manager should attempt to manage sensitive
information about the firm.
Q: 39).

In the long run, a successful acquisition is one that:

a) Enables the acquirer to make an all-equity purchase, thereby

avoiding additional financial leverage.
b) Enables the acquirer to diversify its asset base.
c) Increases the market price of the acquirer's stock over what it
would have been without the acquisition ().
d) Increases financial leverage.
Q: 40). Bidding companies often pay too much for the acquired firm.
The hubris hypothesis explains this by suggesting that the bidders
a) Have too little information to make an optimal decision.
b) Have big egos and this impedes rational decision-making ().
c) Have difficulty in thinking strategically over the long-term.
d) Are overly influenced by the tax consequences of an acquisition.

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