Question 1

The present value of net synergy is the difference between the present value of projected cash flows from sources and destroyers of value.

Accepted Answer

The present value of net synergy is calculated by subtracting the present value of projected cash outflows (destroyers of value) from the present value of projected cash inflows (sources of value).

Question 2

Net synergy may be estimated as the difference between the sum of the present values of the target and acquiring firms, including the effects of synergy, and the value of the target firm including the effects of synergy.

Accepted Answer

Net synergy is estimated as the difference between the sum of the present values of the target and acquiring firms including the effects of synergy, and the sum of the present values of both firms without the effects of synergy.

Question 3

If the acquisition of the target is believed to be very important to implement the acquirer's strategy, the acquirer should be willing to pay up to the maximum purchase price.

Accepted Answer

While the acquisition of the target may be important, the acquirer should not be willing to pay more than the maximum amount they have determined as feasible and beneficial for their overall strategy. Overpaying for a target can lead to negative consequences such as financial strain and missed opportunities for other investments.

Question 4

Cost savings are likely to be greatest when firms with dissimilar operations are consolidated.

Accepted Answer

Cost savings are more likely to be greatest when firms with similar operations are consolidated, as this allows for the exploitation of economies of scale and the elimination of duplicate functions.

Question 5

The current stock price of the acquiring firm may decline in a share for share exchange due to the potential
dilution in earnings per share.

Accepted Answer

In a share for share exchange, the acquiring firm is exchanging its shares for the shares of the target company. As a result, the number of outstanding shares of the acquiring firm may increase, leading to potential dilution in earnings per share. This dilution in earnings per share may cause a decline in the current stock price of the acquiring firm.

Question 6

The share exchange ratio indicates the number of acquirer shares to be exchanged for each share of target stock based on the target firm's current share price.

Accepted Answer

The share exchange ratio is based on the agreed-upon value of the target firm, not necessarily its current share price.

Question 7

Thermo Fisher designed a capital structure for financing the deal that would retain its investment grade credit rating. To do so, it targeted a debt to total capital and interest coverage ratio consistent with the industry average for these credit ratios. What is the potential impact on Thermo Fisher's ability to retain an investment grade credit rating if it had financed the takeover using 100% senior debt? (Hint: In the Sources and Uses section of the Transaction Summary Worksheet, set excess cash, new common shares issued, and convertible preferred shares to zero. Senior debt will automatically increase to 100% of the equity consideration plus transaction expenses.) Explain your answer.

Accepted Answer

The answer of Thermo Fisher designed a capital structure for...

Question 8

Non-compliance with environmental laws, product liabilities, pending lawsuits, poor product quality, patents, poorly written or missing customer contracts, and high employee turnover are all considered destroyers of value.

Accepted Answer

The answer of Non-compliance with environmental laws, product liabilities, pending...

Question 9

The maximum purchase price is the minimum price plus the present value of sources of value.

Accepted Answer

The maximum purchase price is typically considered the maximum amount a buyer is willing to pay for an asset, which may factor in the present value of future benefits (sources of value) but is not simply the minimum price plus these values. It involves a more complex assessment of value, risk, and potential return.

Question 10

The target firm's underutilized borrowing capacity is often considered a source of value.

Accepted Answer

When a target firm has underutilized borrowing capacity, it means that it has the ability to take on more debt and potentially increase its return on equity. This can be viewed as a source of value because it allows the firm to pursue growth opportunities or pay out dividends to shareholders without having to raise additional equity capital. However, it is important for the firm to manage its debt levels and avoid becoming over-leveraged.

Question 11

Minimum purchase price or initial offer price for a target is the target's standalone value or market value.

Accepted Answer

The minimum purchase price or initial offer price for a target is typically the target's standalone value or market value. This is because the acquirer is not willing to pay more than the target's standalone value for the target, and the target's shareholders are not willing to sell the target for less than its market value.

Question 12

The share exchange ratio is defined as offer price divided by the target firm's current share price. True or False

Accepted Answer

The share exchange ratio is defined as the number of acquiring firm's shares offered for each share of the target firm, not the offer price divided by the target firm's current share price.

Question 13

Mark Fisher, CEO of Thermo Fisher, asked rhetorically what if synergy were not realized as quickly and in the amount expected. How patient would shareholders be if the projected impact on earnings per share was not realized? Assume that the integration effort is far more challenging than anticipated and that only one-fourth of the expected SG&A savings, margin improvement, and revenue synergy are realized. Furthermore, assume that actual integration expenses (shown on Newco's Assumptions Worksheet) due to the unanticipated need to upgrade and co-locate research and development facilities and to transfer hundreds of staff are $150 million in 2014, $150 million in 2015, $100 million in 2016, and $50 million in 2017. The model output resulting from these assumption changes is called the Impaired Integration Case.
What is the impact on Thermo Fisher's earning per share (including Life Tech) and the net present value of the combined firms? Compare the difference between the model "Base Case" and the model output from the "Impaired Integration Case" resulting from making the changes indicated in this question. (Hints: In the Synergy Section of the Acquirer (Thermo Fisher) Worksheet, reduce the synergy inputs for each year between 2014 and 2016 by seventy-five percent and allow them to remain at those levels through 2018.
 $$\begin{array}{c}
\text { New Synergy Inputs }\
\begin{array} { | c | c | c | c | } 
\hline \text { Year } & \text { SG\&A Synergies } & \begin{array} { c } 
\text { Gross Nargin } \
\text { Improvement }
\end{array} & \begin{array} { c } 
\text { Incremental Sales } \
\text { Revenue }
\end{array} \
\hline 2014 & 2.5 & 18.75 & 1.25 \
\hline 2015 & 5.0 & 50.0 & 5.0 \
\hline 2016 & 6.25 & 56.25 & 6.25 \
\hline
\end{array}
\end{array}$$ On the Newco Assumptions Worksheet, change the integration expense figures to reflect the new numbers for 2014, 2015, 2016, and 2017.).

Accepted Answer

The answer of Mark Fisher, CEO of Thermo Fisher, asked...

Question 14

Assuming Thermo Fisher would have been able to purchase the firm in a share for share exchange, what would have happened to the EPS in the first year? (Hint: In the form of payment section of the Acquirer Transaction Summary Worksheet, set the percentage of the payment denoted by "% Stock" to 100%. In the Sources and Uses Section, set excess cash, new common shares issued, and convertible preferred shares to zero.)

Accepted Answer

The answer of Assuming Thermo Fisher would have been able...

Question 15

Net synergy is the difference between the present value of the estimated sources of value and destroyers of
value. True of False

Accepted Answer

Net synergy is the positive difference between the present value of estimated sources of value and estimated destroyers of value.

Question 16

The effects of synergy resulting from combining the acquirer and target firms do not affect the acquirer's ability to finance the transaction.

Accepted Answer

The effects of synergy can affect the acquirer's ability to finance the transaction, as synergies can result in cost savings or increased revenues, which could improve the financial position of the combined firm and make it easier to secure financing.

Question 17

In determining the initial offer price, the acquirer must decide how much of the anticipated synergy to share with the target firm's shareholders.

Accepted Answer

The acquirer must decide how much of the anticipated synergy to share with the target firm's shareholders when determining the initial offer price.

Question 18

Pro forma financial statements are frequently used to show what the acquirer and target's combined financial statements would look like if they were merged.

Accepted Answer

This statement is true. Pro forma financial statements are often used in the context of mergers and acquisitions to provide an estimate of what the combined financial statements of the acquirer and target would look like after the transaction is completed.

Question 19

The acquiring firm's existing loan covenants need not be considered in determining the feasibility of acquiring the target firm.

Accepted Answer

The answer of The acquiring firm's existing loan covenants need...

Question 20

A target firm's high employee turnover is often considered a destroyer of value.

Accepted Answer

The answer of A target firm's high employee turnover is...

Quiz 14: Applying Financial Modeling