Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Question
Chapter 19.1, Problem 2CC
Summary Introduction
To discuss: Whether the acquisition price is a good investment opportunity.
Introduction:
The primary way to estimate the firm’s value can be determined by valuating the comparable. Multiples used in valuing the comparable are ratio of enterprise value to sales and price-earnings ratio.
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Choose the correct. When negotiating a business acquisition, buyers sometimes agree to pay extra amounts to sellers in the future if performance metrics are achieved over specified time horizons. How should buyers account for such contingent consideration in recording an acquisition?a. The amount ultimately paid under the contingent consideration agreement is added to goodwill when and if the performance metrics are met.b. The fair value of the contingent consideration is expensed immediately at acquisition date.c. The fair value of the contingent consideration is included in the overall fair value of the consideration transferred, and a liability or additional owners’ equity is recognized.d. The fair value of the contingent consideration is recorded as a reduction of the otherwise determinable fair value of the acquired firm.
Which ONE of the following is not correct regarding the possible benefits of an acquisition?
Group of answer choices
revenue enhancement
lower taxes
cost reduction
increased capital requirements
Because the cost of buying higher market share through acquisition may far exceed its revenue value, what factors should be considered by the company first.
Chapter 19 Solutions
Corporate Finance
Ch. 19.1 - Prob. 1CCCh. 19.1 - Prob. 2CCCh. 19.2 - Prob. 1CCCh. 19.2 - Prob. 2CCCh. 19.3 - What is a pro forma income statement?Ch. 19.3 - Prob. 2CCCh. 19.4 - Prob. 1CCCh. 19.4 - Prob. 2CCCh. 19.5 - Prob. 1CCCh. 19.5 - Prob. 2CC
Ch. 19.6 - Prob. 1CCCh. 19.6 - Prob. 2CCCh. 19 - Prob. 1PCh. 19 - Prob. 2PCh. 19 - Prob. 3PCh. 19 - Prob. 4PCh. 19 - Prob. 5PCh. 19 - Prob. 6PCh. 19 - Prob. 7PCh. 19 - Prob. 8PCh. 19 - Prob. 11PCh. 19 - Calculate Idekos unlevered cost of capital when...Ch. 19 - Prob. 13PCh. 19 - Prob. 14PCh. 19 - Prob. 15PCh. 19 - Prob. 16P
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Similar questions
- When negotiating a business acquisition, buyers sometimes agree to pay extra amounts to sellers in the future if performance metrics are achieved over specified time horizons. How should buyers account for such contingent consideration in recording an acquisition?a. The amount ultimately paid under the contingent consideration agreement is added to goodwill when and if the performance metrics are met.b. The fair value of the contingent consideration is expensed immediately at acquisition date.c. The fair value of the contingent consideration is included in the overall fair value of the consideration transferred, and a liability or additional owners’ equity is recognized.d. The fair value of the contingent consideration is recorded as a reduction of the otherwise determinable fair value of the acquired firm.arrow_forwardA common mistake that can occur in valuing a target would be: Group of answer choices Applying the acquirer’s growth rate in revenues to the target’s sale levels. Applying the acquirer’s cost of capital in the target’s evaluation equation. Applying the acquirer’s price-earnings ratio to the target’s earnings. All of these choices.arrow_forwardHow might one logically assess whether the acquisition of investment information or advice is economically justified?arrow_forward
- When using the fair value method, we adjust the reported amount of the investment for changes in fair value after its acquisition. How is the change in fair value reflected in the income statement?arrow_forwardExplain how you would evaluate the expected rate of return from the investment (purchasing a company) and the method to evaluate the investment decision. Assess the disadvantages and advantages of the investment method and why the method would provide the most accurate measure for the anticipated rate of return requirement. Justify your recommendation.arrow_forwardIs this statement true or false? And why? The investment in a subsidiary (SME) can be justified when measured against MNC investment standards, as long CSR standards are met too.arrow_forward
- If the asset or disposal group is acquired as part of a business combination, it shall be measured at: A. The lower of “Cost” and “Fair value, less costs to sell’ B. Fair value, less costs to sell C. Cost D. The higher of “Cost” and “Fair value, less costs to sell’arrow_forwardThe more certain a firm is about its sales, costs, and order lead time, the closer the firm can follow the a. speculative current asset investment policy. b. restricted current asset investment policy c. relaxed current asset investment policy. d. moderate current asset investment policy.arrow_forwardPlease explain if the below-mentioned statement is true or false and why, in as much detail as possible. It would be best to answer it with ''It depends on...''. On what does it depend? When is it true, when is it false?Statement: ''The investment in a subsidiary (SME) can be justified when measured against MNC investment standards, as long CSR standards are met too''.arrow_forward
- Which of the following characteristics would an investor place a greater priority on for a short-term investment than for a long-term investment? Tax considerations Liquidity of the investment How often the investment rate compounds Length of the investment periodarrow_forwardWhy would an investor apply the Fama-MacBeth Method in asset pricing assumptions?arrow_forwardDoes GAAP distinguish between fair values that are readily determinable from current market prices versus those needing to be calculated based on the company’s own assumptions? Explain how a user will know about the reliability of the inputs used to determine fair value.arrow_forward
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