Study Guide for Test 2
Study Guide for Test 2 Fin 4310
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BUSN 1301 - 006
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This 6 page Study Guide was uploaded by Laura Notetaker on Monday October 5, 2015. The Study Guide belongs to Fin 4310 at University of Texas at El Paso taught by Dr. Oscar Varela in Summer 2015. Since its upload, it has received 100 views. For similar materials see Managerial Finance in Finance at University of Texas at El Paso.
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Date Created: 10/05/15
Study Guide Test 2 Reorganization Formal Reorganization Chapter 11 Pertains to the firm s capital structure 0 The firm has new value on the books and a new mixture of debt and equity claims against its new value 0 The aim is to capitalize the firm at a value as a going concern that is realistic and to distribute the firm s new capitalization in an equitable manner 0 Should have more equity and less debt so as to reduce the financial leverage of the firm o If the bankruptcy was to come in a near future it is better to liquidate than reorganize o It should be fair feasible and worth more alive than dead Example 1 Old New Senior Debt 1000000 Debentures 2000000 1250000 Subordinated Debentures 1500000 1000000 Common stockholder s equity 2500000 1750000 Total liabilities and net worth 7000000 4000000 Settle senior debt first use 1000000 from the new debentures Then settle the debentures use 250000 from the remaining debentures 1000000 from the new subordinated debentures and 750000 from CS equity Then settle subordinated debentures use the remaining 1000000 from CS equity but it will not be fully satisfied Common stockholder s equity will not be satisfied Liquidation Formal liquidation Chapter 7 0 Selling its assets and becoming a shell corporation with only cash among its assets 0 Then using this cash to settle its debts in a prescribed order of priority o It is worth more dead than alive Study Guide Test 2 Example 1 Accounts payable 10000000 Notes payable 10000000 Accrued wages 10000000 Accrued taxes 5000000 Secured bond 10000000 Debenture 35000000 Subordinated debenture 20000000 Proceeds 60000000 30 of the proceeds are legal fees 8 million of the proceeds that came from the real estate were used on the secured bond The first thing you to do is to pay accrued wages and accrued taxes 60000000 Proceeds 18000000 Legal Fees 10000000 Accrued wages 5000000 Accrued taxes 80000000 Real estate 19000000 Remaining proceeds Remaining debts Accounts payable 10000000 19 million 77 million 02468 Notes payable 10000000 Accrued wages Accrued taxes Secured bond 2000000 Debentu re 35000000 Subordinated debenture 20000000 Total 77000000 Multiply the decimal we got by all of the debts be have remaining Accounts payable 10000000 x 02468 2468000 Notes payable 10000000 x 02468 2468000 Secured bond 2000000 X 02468 493600 Debenture 35000000 X 02468 8638000 Subordinated debenture 20000000 x 02468 4936000 Total 77000000 19003600 Study Guide Test 2 The last thing to do is to add the subordinated debentures to the debentures Accounts payable 2468000 Notes payable 2468000 Secured bond 493600 Debenture 13574000 Subordinated debenture Total 19003600 Acquirers and targets A consolidation occurs when two companies combine and form a new company with a new name A merger occurs when one company buys another company with the acquiring firm retaining its name Reasons Synergy combination of the acquiring and target firm produces a value that is greater than the sum of the part the sum of the value of the two firms without a combination Diversification the combination creates a portfolio of firms that diversify the risk of the firms that are combining Purchase of assets below replacement costs Material ego or empire building The spin off gives the existing owners the ownership of the spin off division whereas an equity carve out may have new owners Synergy Occurs when the merged or consolidated firms are worth more together compared to the worth of their individual parts Higher operation revenues more market power Lower operating expenses efficient operations economies of scale Lower financing costs lower risk entity reduce interest expense Tax advantages tax reductions Net present value of a combination 1 Value of the target less the purchase price for the target 2 Synergy less the premium paid Value of the target is the summation of the value of the target as a standalone entity plus the synergy that combining with the target produces Study Guide Test 2 Premium paid for the target is the amount paid for the target its standalone value Example 1 A T Synergy Value 5000000 2000000 500000 50000010 Value of the merger 5 million 2 million 500000 7500000 Value ofT 2 million 500000 2500000 A is giving up 30 of its stock to acquire T 7500000 x 30 2250000 Two different ways to calculate NPV 1 NPV 2500000 2250000 250000 2 NPV 500000 2250000 2000000 500000 250000 250000 Types of mergers Friendly merger target management agrees to the merger and recommends to the stockholders that they tender their shares receiving payment in cash or stock Hostile merger target management opposes the merger Expected greater premium Failure rate for hostile merger is higher Horizontal merger Firms are in the same line of business and stage of production 2004 Bank One and JP MorganChase 1998 DaimlerBenz and Chrysler Vertical merger firms involved in different stages of production Time Warner and Turner Horizontal and vertical mergers were popular in 1880s in the tobacco oil and steel industries and in 1920s autos utilities and communication Conglomerate merger where the lines of business involved are unrelated Popular in 1960s forestall antitrust scrutiny Sherman Antitrust Act 1890 prohibited restraint of trade and monopoly 1996 Walt Disney and Capital Cities ABC Congeneric merger Lines of business are related but are not the same Study Guide Test 2 2000 AOL and Time Warner Regulated AntiTrust legislation Sherman Antitrust Act 1890 Prohibits anticompetitive behavior Clayton Act 1914 Prohibits exclusive dealings tying arrangements price discrimination RobinsonPatman Act 1929 Further price discrimination Williams Act 1968 Regulate tender offers Financial statements Agency costs result when principals hire agents to run the firm Income statement communicate financial position of the firm over time Balance sheet does it but on a given point in time Equity components sale of stock and retained earnings Profitability ratios Examine some measure of profits relative to sales assets or equity Debt management ratios Examine the capital structure of the firm its use of debt and equity in the financing of its assets Financial leverage is the firm s use of debt in its capital structure Insolvent bankruptcy is when the debt ratio is greater than 1 meaning that the firm has more debt than assets These ratios are concerned with the ability of the firm to meet its interest payments or other payments involved in the servicing of debt like contracts Asset management ratios Examine the efficiency of the assets of the firm in sales Liquidity ratios Examine the current position of the firm s balance sheet Du Pont Equation Show the relationship between financial ratios ROA Profit margin on sales x total asset turnover Study Guide Test 2 Modified extended Du Pont ROE ROA 1 debt ratio 1 1 total debt total assets equity multiplier Degree of operating leverage Relationship between total fixed costs to total variable costs DOL AEBIT A Revenues Degree of Financial Leverage Relationship between the use of total debt and total equity in financing its assets DFL A EPS AEBIT
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