EBK CORPORATE FINANCE
4th Edition
ISBN: 9780134202785
Author: DeMarzo
Publisher: VST
expand_more
expand_more
format_list_bulleted
Question
Chapter 28, Problem 11P
Summary Introduction
To assess whether the CEO would be better off or worse off, given that he owns 3% of GF and is considering an acquisition. Post acquisition, the market capitalization of GF would suffer a loss of $50 million and the
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
You are invested in GreenFrame, Inc. The CEO owns 3% of GreenFrame and is considering an acquisition. If the acquisition destroys $60 million of GreenFrame's value, but the present value of the CEO's compensation increases by $6.5 million, will he be better or worse off?
The CEO will be ____because his wealth has changed by $ million.
You have estimated the current-year EBITDA of Mallock Transportation for a potential buyer of the firm, and you have discovered that the CEO of Mallock, who owns 90% of the firm, is taking a salary that is at least $100,000 higher than the cost of an outsider that could be hired to run the firm. The CEO will retire upon the sale, and the firm expects no loss in revenue since clients have signed long-term contracts that will be difficult to cancel. You adjust EBITDA to account for the CEOs replacement. The adjustment is called:
a.
Fraud
b.
Business judgment
c.
Accounting under GAAP
d.
Normalizing EBITDA
e.
None of the above
A. What are the advantages and disadvantages of changing the company organization from a sole proprietorship to an LLC? What are the advantages and disadvantages of changing the company organization from a sole proprietorship to a corporation?
B. Your mother is about to retire. Her firm has given her the option of retiring with a lump sum of $30, 000 or an annuity of $3,500 for 15 years. Which is worth more now, if an interest rate of 5 percent is used for the annuity?
Please please anwser that
Chapter 28 Solutions
EBK CORPORATE FINANCE
Ch. 28.1 - Prob. 1CCCh. 28.1 - Prob. 2CCCh. 28.2 - On average, what happens to the target share price...Ch. 28.2 - Prob. 2CCCh. 28.3 - What are the reasons most often cited for a...Ch. 28.3 - Prob. 2CCCh. 28.4 - Prob. 1CCCh. 28.4 - What do risk arbitrageurs do?Ch. 28.5 - Prob. 1CCCh. 28.5 - Prob. 2CC
Ch. 28.6 - Prob. 1CCCh. 28.6 - Prob. 2CCCh. 28 - What are the two primary mechanisms under which...Ch. 28 - Prob. 2PCh. 28 - What are some reasons why a horizontal merger...Ch. 28 - Prob. 4PCh. 28 - Prob. 5PCh. 28 - Prob. 6PCh. 28 - How do the carryforward and carryback provisions...Ch. 28 - Diversification is good for shareholders. So why...Ch. 28 - Your company has earnings per share of 4. It has 1...Ch. 28 - If companies in the same industry as TargetCo...Ch. 28 - Prob. 11PCh. 28 - Prob. 12PCh. 28 - Prob. 13PCh. 28 - Lets reconsider part (b) of Problem 99. The actual...Ch. 28 - ABC has 1 million shares outstanding, each of...Ch. 28 - Prob. 16PCh. 28 - How does a toehold help overcome the free rider...Ch. 28 - Prob. 18P
Knowledge Booster
Similar questions
- You are an accountant for Davanzo Company. The president of the company calls you into her office and says, “I want to ask you about two issues. First, we need to sell one of our investments to raise $1 million because I think I have found a better investment. We could sell the bonds of Company X, which are currently worth $1 million even though they have an amortized cost basis of $950,000. But I don’t want to sell them because I like the steady stream of cash flow we get related to interest. Or we could sell the bonds in that dog, Company Z. These bonds are also worth $1 million, but they cost us $1.2 million. I hate to admit we made such a big mistake, and if they can somehow avoid bankruptcy, we may actually recover our investment. And then there’s that loss. I don’t want to report that. Second, I am going to use the $1 million to buy about 20% of the shares of Company M, but I seem to remember that there is some accounting rule that might affect how much we buy. I was also…arrow_forwardBenjamin Garcia’s start-up business is succeeding, but he needs $200,000in additional funding to fund continued growth. Benjamin and an angelinvestor agree the business is worth $800,000 and the angel has agreed toinvest the $200,000 that is needed. Benjamin presently owns all 40,000shares in his business. What is a fair price per share and how many additional shares must Benjamin sell to the angel? Because the stock will besold directly to an investor, there is no spread; the other flotation costsare insignificant.arrow_forwardSuppose the CEO of a $750 million all-equity firm personally owns $15 million in company stock. Assume that the risk-neutral CEO makes investment decisions based strictly on the change in value (or expected change in value for risky investments) of her personal holdings, plus private benefits (if any) she gets from the investment. a) Suppose the CEO is considering a risky investment that will generate a gain with a present value of $100 million with 50% probability, but a loss of $150 million (present value) with 50% probability. Will she invest in the risky project? b) Now, suppose that the firm recapitalizes by borrowing $700 million and pays a special dividend of $700 million, and suppose that the CEO reinvests her $14 million dividend back into the recapitalized firm. (In answering this question, ignore any change in the overall value of the firm resulting from the recapitalization.) Given the same assumptions as in (i) above, will she invest in the risky project?arrow_forward
- You're a CEO and you currently own 0.5% of a $1 billion company. You are consideringhaving the firm take a project that you personally enjoy as much as you would enjoy$100,000 in wealth. The project does not affect your salary or your future careerprospects. The project costs $200 million and pays $300 million in one year with 20%probability, $150 million with 60% probability, and $0 with 20% probability. What is the minimum ownership at which the CEO won’t be motivated to take thisproject?arrow_forwardKiller Shark Inc. makes a surprise cash offer of $22 a share for Goldfish Industries. Before the offer, Goldfish was selling for $18 a share. Goldfish has 1 million shares outstanding. What must Killer Shark believe about the present value of the improvement it can bring to Goldfish’s operations?arrow_forwardBenjamin Garcia's start-up business is succeeding, but he needs $208,000 in additional funding to fund continued growth. Benjamin and an angel investor agree the business is worth $832,000 and the angel has agreed to invest the $208,000 that is needed. Benjamin presently owns all 41,000 shares in his business. Because the stock will be sold directly to an investor, there is no spread; the other flotation costs are insignificant. What is a fair price per share? Do not round intermediate calculations. Round your answer to the nearest cent. How many additional shares must Benjamin sell to the angel? Do not round intermediate calculations. Round your answer to the nearest whole number. sharesarrow_forward
- Your uncle is ready to retire and head for the hills, so he says to you: “Look, I own 500 shares of stock in Startup, Inc. I’m ready to cash out, so I’ll sell it to you for the very same $25,000 I paid for it back in 2012. And, by the way, it’s qualified small business stock, so you’re completely protected on the downside – even if the company went under, you would get 100% tax cushion for the loss! What do you say…???” On its face, what’s wrong with this offer?arrow_forwardYou work for a leveraged buyout firm and are evaluating a potential buyout of Associated Steel. Associated Steel's stock price is $20 and it has 10 million shares outstanding. You believe that if you buy the company and replace its management, its value will increase by 100%. You are planning on doing a leveraged buyout of Associated Steel, and will offer $20 per share for control of the company. Assuming that you use equity (your own money) to pay for this deal, what will be your gain from the deal? What about other shareholders? Now assume you use debt to finance the deal. How does this change your gains vs. other shareholders when compared to part (B)?arrow_forwardAssume you owns stock in a local publicly traded company. Assume also that the stock price has declined since it was purchased two years ago, and you like the long-term prospects for the company. Assume you sel the stock to your sister because you need cash for a down payment on a new home: Would the loss be deductible for you? Assuming you are correct and the stock price increases in the future, how would your sister's gain be computed if she sells the stock? This is a discussion question for Federal Taxation Business Entitiesarrow_forward
- Suppose the compensation committee for a corporation is preparing to hire a new CEO and debating which of two pay packages to offer. Package A includes an annual salary of $1 million plus 1000 shares of stock. Package B also has a salary of $1 million, but has 10,000 options to purchase the company at its current price of $50. a) Draw a graph showing the relationship between the CEO’s total compensation (vertical axis) and the stock price (horizontal axis) for the two pay schemes. Clearly label the two compensation methods in your graph. b) Discuss how a switch from the stock to stock option plan would alter CEO behavior. c) Discuss how a switch from the stock to stock option plan would affect the type of CEO that would be willing to accept the job.arrow_forwardAllan Holdings Corporation will be acquiring 100% ownership of Mark Corporation. The average annual historical return of the latter is 25% while the required rate of return was 23%. Mark will continue to have 5 years left to operate and expects earnings to accrue evenly. *If the current value of the equity is P5,000,000 and the resulting acquisition would lower the required rate of return to 20%, what would the value of control over Mark be for Allan Corporation?arrow_forwardYour employer, a midsized human resources management company, is considering expansion into related fields, including the acquisition of Temp Force Company, an employment agency that supplies word processor operators and computer programmers to businesses with temporarily heavy workloads. Your employer is also considering the purchase of Biggerstaff & McDonald (B&M), a privately held company owned by two friends, each with 5 million shares of stock. B&M currently has free cash flow of $24 million, which is expected to grow at a constant rate of 5%. B&M’s financial statements report short-term investments of $100 million, debt of $200 million, and preferred stock of $50 million. B&M’s weighted average cost of capital (WACC) is 11%. Answer thefollowing questions:a. Describe briefly the legal rights and privileges of common stockholders.b. What is free cash flow (FCF)? What is the weighted average cost of capital? What is the free cash flow valuation model?c. Use a pie…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
