Chapter 23: Corporate Restructuring
49. Whipple Industries is considering the acquisition of the Blanchard Company in a stock-for stock exchange.
Selected financial data for the two companies is shown below. No synergy is expected in this merger.
Whipple
Blanchard
Sales (millions)
$150
$30
Net income (millions)
25
3.5
Common shares outstanding (millions)
8
2
Earnings per share
$3.12
$1.75
Dividends per share
$1.50
$0.75
Common stock price per share
$40
$19.50
Determine the post-merger earnings per share if the Blanchard company shareholders accept an offer of $22
per share in a stock-for-stock exchange.
a. $2.85
b. $3.175
c. $3.13
d. $1.75
50. Sunlite is considering a merger with Velo Blind by offering the equivalent of $21 a share in a stock-for-stock
transaction. Sunlite’s current common stock price is $30 a share and Velo’s is $17. Other financial data on the
two firms is as follows:
Sunlite
Velo Blind
Sales (millions)
$100
$20
Net income (millions)
10
3
No. shares outstanding (millions)
8
1.2
Earnings per share
$1.25
$2.50
Assuming no economies of scale or synergistic benefits, what will be the post-merger earnings per share?
a. $1.47
b. $1.41
c. $1.50
d. $1.25
Chapter 23: Corporate Restructuring
51. Quarter Staff is being liquidated under Chapter 7 of the bankruptcy code. When it filed for bankruptcy, its
balance sheet (in millions) was as follows:
Assets
Liabilities & Capital
Current assets
Accounts payable
$ 4.6
Land & buildings
Accrued wages
0.1
Equipment
Accrued taxes
0.4
Total assets
Notes payable
5.0
Mortgage bonds
5.2
Stockholders’ equity
15.6
Total liabilities & equity
$30.9
The notes payable are an unsecured bank loan and the mortgage bond is secured by the land and building. The
proceeds from the liquidation of the company’s assets are as follows:
Current assets
$ 7.2
Land & building
4.5
Equipment
2.1
Total
$13.8
If the bankruptcy administration charges were $500,000, what dollar amount will the trade creditors (accounts
payable) receive in the liquidation?
a. $1.65 million
b. $3.71 million
c. $4.60 million
d. $2.55 million
Chapter 23: Corporate Restructuring
52. Buggy Whip Industries is being liquidated under Chapter 7 of the bankruptcy code. When it filed for
bankruptcy, its balance sheet was a follows:
Assets
Liabilities and Equity
Current assets
$22,000,000
Accounts payable
$18,000,000
Fixed assets
Accrued taxes
3,000,000
Land and buildings
9,000,000
Notes payable (bank)*
3,000,000
Equipment
11,500,000
Total current liabilities
$24,000,000
Total assets
$42,500,000
Mortgage bonds**
8,000,000
Debentures
4,000,000
Stockholders’ equity
Total liabilities
and equity
6,500,000
$42,500,000
*Bank loan is unsecured
**Mortgage bonds are secured by land and buildings
Assume that the liquidation is a voluntary petition, that no unpaid contributions to employee benefit plans
exist, and that no customer layaway deposits are involved. The proceeds from the liquidation of the company’s
assets are as follows:
Current assets
$12,000,000
Land and buildings
5,000,000
Equipment
7,500,000
Total
$24,500,000
Bankruptcy administration charges are $2,500,000. Determine the amount that the mortgage bondholders will
receive in this liquidation.
a. $5,000,000
b. $6,500,000
c. $8,000,000
d. $10,500,000
Chapter 23: Corporate Restructuring
53. Endevco is considering the acquisition of Geothermal Resources in a stock-for-stock exchange. Assume no
immediate synergistic benefits are expected. Selected financial data on the two companies are shown below:
Endevco
Geothermal
Sales (millions)
$720
$140
Net income (millions)
$58
$16
Common shares outstanding (millions)
10
3
Earnings per share
$5.80
$5.33
Common stock (price per share)
$70.00
$48
If Endevco is not willing to incur an initial dilution in its EPS, and if Endevco also feels that it will have to
offer Geothermal shareholders a minimum of 20% over Geothermal’s current market price, what is the
maximum price per share that Endevco will have to pay for Geothermal’s stock?
a. $57.60
b. $64.33
c. $52.23
d. $60.00
54. Linpro Industries is considering the acquisition of Odetics, Inc. in a stock-for-stock exchange. Assume no
immediate synergistic benefits are expected. Selected financial data on the two companies are shown below:
Linpro
Odetics
Sales (millions)
$480
$90
Net income (millions)
$38
$10.4
Common shares outstanding (millions)
10
2.1
Earnings per share
$3.80
$4.95
Common stock (price per share)
$45.60
$74.25
Calculate Linpro’s postmerger EPS if the Odetics shareholders accept an offer of $90 a share in a stock-for-
stock exchange.
a. $4.38
b. $4.29
c. $3.42
d. $3.81
Chapter 23: Corporate Restructuring
55. Morgan Foods is considering the acquisition of Old Spaghetti Warehouse Inc. in a stock-for-stock exchange.
Selected financial data for the two companies is shown below. An immediate synergistic earnings benefit of
$1.5 million is expected in this merger, due to cost savings.
Morgan
Old Spaghetti
Sales (millions)
$360
$80
Net income (millions)
$30
$8
Common stock outstanding (millions)
10
2
Earnings per share
$3.00
$4.00
Common stock (price per share)
$36.00
$44.00
Calculate the postmerger EPS if the Old Spaghetti shareholders accept an offer of $54 per share in a stock-for-
stock exchange.
a. $3.04
b. $2.92
c. $3.29
d. $3.17
56. Koala Technologies is considering the acquisition of Laser Industries in a stock–for–stock exchange. Selected
financial data for the two companies is shown below. An immediate synergistic earnings benefit of $2.5
million is expected in this merger.
Koala
Laser
Sales (millions)
$90
$10
Net income (millions)
$9.4
$1.2
Common shares outstanding (millions)
4.0
0.8
Earnings per share
$2.35
$1.50
Common stock (price per share)
$35.00
$27.00
Calculate the postmerger EPS if the Laser shareholders accept an offer of $33.25 a share in a stock-for-stock
exchange.
a. $2.21
b. $2.25
c. $2.75
d. $2.23
Chapter 23: Corporate Restructuring
57. The most correct method of valuing a merger candidate is:
a. adjusted book value method
b. discounted cash flow method
c. pooling of interests method
d. comparative price-earnings ratio method
58. The is the number of acquiring company shares received per share of acquiring company stock owned.
a. stock equity ratio
b. exchange ratio
c. dividend exchange ratio
d. interest parity ratio
59. A firm is technically insolvent when: it is unable to meet it current obligations and:
a. the value of its assets exceeds the value of its liabilities.
b. the value of its assets is less than the value of its liabilities.
c. it files a bankruptcy petition.
d. it merges with another firm.
60. A plan of reorganization must be all of the following EXCEPT:
a. feasible
b. fair
c. a plan that allows the firm a chance to reestablish successful business operations
d. a plan whereby the creditors that are due the most money are paid first.
61. Which of the following about an asset purchase merger transaction is/are correct?
I. Only the assets are purchased.
II. The buying firm receives 100% of the assets and incurs only 50% of the liabilities.
a. Only statement I is correct
b. Only statement II is correct
c. Both statements I and II are correct
d. Neither statement I nor II is correct
Chapter 23: Corporate Restructuring
62. One reason for a company to spin-off a division is to:
a. consolidate expenses.
b. remove an underperforming unit.
c. create a better distribution unit.
d. achieve synergy.
63. An alternative to a spin-off is a(n) which allows a large company to capture the value of a high-growth
business buried within the organization.
a. equity carve out
b. holding company
c. tracking stock
d. stock synergy
64. An example of a passive institutional investor is a:
a. pension fund
b. private equity investor
c. parent company
d. third party administrator
65. Which of the following would be considered a reason for corporate restructuring?
I. Availability of credit
II. Low cost of credit
a. Only statement I is correct
b. Only statement II is correct
c. Both statements I and II are correct
d. Neither statement I nor II is correct
66. An anti-takeover measure that is inserted in the corporate charter stating that 80% of the stock shares must
approve the takeover proposal is a(n):
a. Golden parachute
b. Supermajority voting rules
c. Poison puts
d. Standstill agreement
Chapter 23: Corporate Restructuring
67. An antitakeover measure that is employed after the takeover has been initiated is:
a. Golden parachute
b. Staggered board
c. White knight
d. Poison put
68. An antitakeover measure where a company attempts to buy back its shares of stock at a premium from the
company or investor who initiated the unfriendly takeover is:
a. pacman defense
b. boardmail
c. white squire
d. greenmail
69. Explain the motivation for a company to divest through a spin-off or equity carve-out.
70. What are some informal alternatives for salvaging a failing business?
Chapter 23: Corporate Restructuring
71. Explain the difference between a stock purchase and an asset purchase in a merger transaction. Which is
preferred and why?
72. A new takeover defense is boardmail. How does it work?
73. There are three methods for valuing merger candidates. Briefly explain each of them.
74. Explain a form of business combination called a holding company and how the combination is achieved.
Chapter 23: Corporate Restructuring
75. How does a joint venture differ from a holding company?