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31. Calculation of Altman's
Z
-Score: Suppose that the financial ratios of a potential
borrowing firm took the following values:
X1
= Net working capital/Total assets = 0.30,
X2
=
Retained earnings/Total assets = 0.40,
X3
= Earnings before interest and taxes/Total assets =
0.43,
X4
= Market value of equity/Book value of long-term debt = 0.65,
X5
= Sales/Total assets
ratio = 0.95. Calculate the Altman's
Z
-score for this firm.
32. Calculation of Altman's
Z
-Score: Suppose that the financial ratios of a potential
borrowing firm took the following values:
X1
= Net working capital/Total assets = 0.35,
X2
=
Retained earnings/Total assets = 0.50,
X3
= Earnings before interest and taxes/Total assets =
0.60,
X4
= Market value of equity/Book value of long-term debt = 1.50,
X5
= Sales/Total assets
ratio = 3.65. Calculate the Altman's
Z
-score for this firm.
33. Calculation of Bankruptcy Probability Suppose a linear probability model you have
developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt
ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is
estimated as:
PDi = 0.20 (debt ratio) + 0.15 (profit margin)
A firm you are thinking of lending to has a debt ratio of 55 percent and a profit margin of 10
percent. Calculate the firm's expected probability of default, or bankruptcy.
34. Calculation of Bankruptcy Probability Suppose a linear probability model you have
developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt
ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is
estimated as:
PDi = 0.15 (debt ratio) + 0.05 (profit margin)
A firm you are thinking of lending to has a debt ratio of 50 percent and a profit margin of 8
percent. Calculate the firm's expected probability of default, or bankruptcy.
35. Calculation of Bankruptcy Probability Suppose a linear probability model you have
developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt
ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is
estimated as:
PDi = 0.23 (debt ratio) + 0.08 (profit margin)
A firm you are thinking of lending to has a debt ratio of 60 percent and a profit margin of 12
percent. Calculate the firm's expected probability of default, or bankruptcy.
36. Calculation of Bankruptcy Probability Suppose a linear probability model you have
developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt
ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is
estimated as:
PDi = 0.25 (debt ratio) + 0.12 (profit margin)
A firm you are thinking of lending to has a debt ratio of 62 percent and a profit margin of 14
percent. Calculate the firm's expected probability of default, or bankruptcy.
37. Calculation of Average Costs with Economies of Scope Dee's Dry Cleaning is
considering a merger with Larry's Laundry Supply Stores. Dee's total operating costs of producing
services are $600,000 for sales volume of $4 million. Larry's total operating costs of producing
services are $200,000 for a sales volume (J
P
) of $1 million. Calculate the average cost of
production for the Dee's and Larry's firms, respectively.
38. Calculation of Average Costs with Economies of Scope Dee's Dry Cleaning is
considering a merger with Larry's Laundry Supply Stores. Dee's total operating costs of producing
services are $600,000 for sales volume of $4 million. Larry's total operating costs of producing
services are $200,000 for a sales volume (J
P
) of $1 million. For a sales volume of $5 million,
calculate the reduction in production costs the merged firms need to experience such that the
total average cost (
TAC
) for the merged firms is equal to 10 percent.
39. Calculation of Average Costs with Economies of Scope Blinds N Such is considering a
merger with Window Supply Stores. Blinds' total operating costs of producing services are
$750,000 for sales volume of $6 million. Window's total operating costs of producing services are
$100,000 for a sales volume (J
P
) of $1 million. Calculate the average cost of production for the
Blinds and Window firms, respectively.
40. Calculation of Average Costs with Economies of Scope Blinds N Such is considering a
merger with Window Supply Stores. Blinds' total operating costs of producing services are
$750,000 for sales volume of $6 million. Window's total operating costs of producing services are
$100,000 for a sales volume (J
P
) of $1 million. For a sales volume of $7 million, calculate the
reduction in production costs the merged firms need to experience such that the total average
cost (
TAC
) for the merged firms is equal to 12 percent.
41. Calculation of Average Costs with Economies of Scope Jewelry Designs is considering
a merger with Beads Supply Stores. Jewelry's total operating costs of producing services are
$300,000 for sales volume of $2 million. Beads' total operating costs of producing services are
$125,000 for a sales volume (J
P
) of $2.25 million. Calculate the average cost of production for the
Jewelry and Beads firms, respectively.
42. Calculation of Average Costs with Economies of Scope Jewelry Designs is considering
a merger with Beads Supply Stores. Jewelry's total operating costs of producing services are
$300,000 for sales volume of $2 million. Beads' total operating costs of producing services are
$125,000 for a sales volume (J
P
) of $2.25 million. For a sales volume of $4.25 million, calculate
the reduction in production costs the merged firms need to experience such that the total
average cost (
TAC
) for the merged firms is equal to 8 percent.
43. Calculation of Average Costs with Economies of Scope Crib World is considering a
merger with Tots Supply Stores. Crib's total operating costs of producing services are $250,000
for sales volume of $1.25 million. Tots' total operating costs of producing services are $210,000
for a sales volume (J
P
) of $900,000. Calculate the average cost of production for the Crib and Tots
firms, respectively.
44. Calculation of Average Costs with Economies of Scope Crib World is considering a
merger with Tots Supply Stores. Crib's total operating costs of producing services are $250,000
for sales volume of $1.25 million. Tots' total operating costs of producing services are $210,000
for a sales volume (J
P
) of $900,000. For a sales volume of $2.15 million, calculate the reduction in
production costs the merged firms need to experience such that the total average cost (
TAC
) for
the merged firms is equal to 17.5 percent.
45. Calculation of Average Costs with Economies of Scope Baby Supplies is considering a
merger with Tot Toy Stores. Baby's total operating costs of producing services are $450,000 for
sales volume of $2.15 million. Tot's total operating costs of producing services are $250,000 for a
sales volume (J
P
) of $975,000. Calculate the average cost of production for the Baby and Tot Toy
firms, respectively.
46. Calculation of Average Costs with Economies of Scope Baby Supplies is considering a
merger with Tot Toy Stores. Baby's total operating costs of producing services are $450,000 for
sales volume of $2.15 million. Tot's total operating costs of producing services are $250,000 for a
sales volume (J
P
) of $975,000. For a sales volume of $3.125 million, calculate the reduction in
production costs the merged firms need to experience such that the total average cost (
TAC
) for
the merged firms is equal to 19.5 percent.
47. Calculation of Change in the HHI Associated with a Merger The Justice Department
has been asked to review a merger request for a market with the following four firms.
What is the HHI for the existing market?
48. Calculation of Change in the HHI Associated with a Merger The Justice Department
has been asked to review a merger request for a market with the following four firms.
If Firm A acquires Firm D, what is the HHI for the new market?
49. Calculation of Change in the HHI Associated with a Merger The Justice Department
has been asked to review a merger request for a market with the following four firms.
If Firm C acquires Firm D, what is the HHI for the new market?
50. Valuation of a Merger Tim's Fix It Shop, Inc., is asking a price of $50 million to be
purchased by Taylor's Tire Hut Corp. The two firms currently have cumulative total cash flows of
$4 million which are growing at 2 percent annually. Managers estimate that because of synergies
the merged firm's cash flows will increase by an additional 5 percent for the first four years
following the merger. After the first four years cash flows will grow at a rate of 3 percent. The
WACC for the merged firms is 12 percent. Calculate the NPV of the merger. Should Taylor's Tire
Hut Corporation agree to acquire Tim's Fix It Shop, Inc., for the asking price of $50 million?
