EP FUNDAMENTALS OF FIN.MGMT.-MINDTAP
14th Edition
ISBN: 9781305672086
Author: Brigham
Publisher: CENGAGE L
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Chapter 21, Problem 5Q
Summary Introduction
To discuss: The correct position on the argument made by the group of consultants.
Introduction:
A process or an agreement where two or more firms combines together to form one new company is termed as Mergers.
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Are the following statements true or false? Justify your answer.
Mergers inspired by vertical integration motives are very rare nowadays, as transaction costs have decreased substantially since the second merger wave.
“It is always advisable for a company to diversify its activities, in order to limit the risk of being too exposed to one activity”
Firms facing hostile takeovers often take actions to forestall the acquisition.
For instance, a firm could borrow on terms that required immediate repayment if the firm is acquired or it could sell off undervalued assets to make itself a less desirable target. Such tactics are referred to as?
Paul works for an investment bank in the corporate finance division. Along with the typical functions in his job role—such as finding a potential target company for a client which would add synergistic value to the client, finding a potential acquirer for a client, developing defensive tactics, establishing a fair value and financing operations—Paul also works with his team in conducting arbitrage operations.
Based on your understanding of arbitrage operations complete the following sentence:
In recent trade, Paul was assigned to buy 10% of a client’s shares from the open market at $45.50 per share and sell the shares at a price of $46.20 to a private investor, pocketing a return for his firm.…
Suppose you are the CEO of a large firm in a service business and you think that by acquiring a certain competing firm, you can generate growth and profits at a greater rate for the combined firm. Youhave asked some financial analysts to study the proposed acquisition/merger. Do you think valuechain analysis would be useful to them? Why or why not?
Chapter 21 Solutions
EP FUNDAMENTALS OF FIN.MGMT.-MINDTAP
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- WSP Inc. is involved in a wide range of unrelated projects. The company will pursue any project that it thinks will create value for its stockholders. Consequently, the risk level of the company's projects tends to vary a great deal from project to project. If WSP Inc. does not risk-adjust its discount rate for specific projects properly, which of the following is likely to occur over time? Check all that apply. The firm will become more valuable. The firm's overall risk level will increase. The firm could potentially reject projects that provide a higher rate of return than the company requires. Generally, a positive correlation exists between a project's returns and the returns on the firm's other assets. If this correlation is risk will be a good proxy for within-firm risk. Consider the case of another company: □ Chrome Printing is evaluating two mutually exclusive projects. They both require a $1 million investment today and have expected NPVS of $200,000. Management conducted a…arrow_forwardWhich of the following statements is CORRECT? Select one: a. Conflict of interest between shareholders and managers is not possible. b. By definition, the agency problem can only take place in corporations but not in proprietorships and partnerships. c. Conflict of interest between shareholders and bondholders is not possible. d. Managers always work to maximize the long-run value, and therefore the price, of their company stocks. This is exactly what shareholders desire.arrow_forwardWhich of the following does NOT refer to the ways of how a multinational company can reduce political risk? Taking a conservative approach to investment and adjusting NPV of the project by reducing expected cash flows or by increasing the cost of capital in accordance with existing trends. Purchasing insurance policy against political risks. Acquiring minor shares in foreign corporations. Creating a joint venture with local partners or a consortium with other multinational companies.arrow_forward
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