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Question
An LBO transaction makes sense from the viewpoint of all investors if the present value (of the cash flows to the firm or enterprise value, discounted at the weighted-average cost of capital, equals or exceeds the total investment consisting of debt, common equity, and preferred equity required to buy the outstanding shares of the target company. True or False
Answer
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Related questions
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Should CNNOC have been permitted to buy Unocal? Why? Why not?
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Both firms were pursuing a similar strategy of expanding their geographic reach. Does this strategy make sense? Why/why not? What are the risks associated with this strategy?
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Compare and contrast the Chesapeake and Unocal transactions. Be specific.
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What real options (see Chapter 8) might be implicit in CNNOC’s investment in Chesapeake? Be specific.
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Which of the following is not true of exporting as a market entry strategy?
a. Exporting does not require the expense of establishing local operations
b. Exporters do not need to establish some means of marketing and distributing their products at the local level
c. Exporters incur high transportation costs
d. Exporters may be adversely impacted by exchange rate fluctuations
e. Exporters may be adversely impacted by tariffs placed on imports into the local country
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Local country firms may be interested in alliances for which of the following reasons?
a. To gain access to the technology
b. To gain access to a widely recognized brand name
c. To gain access to innovative products
d. A, B, and C
e. A and B only
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Which of the following represent common international market entry strategies?
a. Mergers and acquisitions
b. Licensing
c. Exporting
d. Greenfield or solo ventures
e. All of the above
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If individual countrys capital markets are segmented, the global capital asset pricing model must not be adjusted to reflect the tendency of investors in individual countries to hold local country rather than globally diversified equity portfolios. True or False
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Some analysts suggest that the problem of a variable discount rate can be avoided by separating the value of a firm's operations into two components: the firm's value as if it were debt free and the value of interest tax savings. True or False
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Because the firm's cost of equity changes over time, the firm's cumulative cost of equity is used to discount projected cash flows. This reflects the fact that each period's cash flows generate a different rate of return. True or False
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If the debt-to-equity ratio is expected to fluctuate substantially during the forecast period, applying conventional capital budgeting techniques that discount future cash flows with a constant weighted average cost of capital (CC) is appropriate. True or False
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The adjusted present value method values firm without debt and then subtracts the value of future tax savings resulting from the tax-deductibility of interest. True or False
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What criteria did Pacific Investors (PI) use to select California Kool (CK) as a target for an LBO? Why were these criteria employed?
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Based on the information given it the case, determine the amount of the price reduction Home Depot accepted for HD Supply and the amount of cash the three buyout firms put into the transaction?
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In your opinion, was the buyout proposal presented by Ross Johnsons management group in the best interests of the shareholders? Why? / Why not?
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How did Time Warners entry into the bidding affect pace of the negotiations and the relative bargaining power of MGM, Time Warner, and the Sony consortium?
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Having pledged not to engage in aggressive cost cutting, how do you think HCA and its financial sponsor group planned on paying off the loans?
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In what ways is this transaction similar to and different from those that were common in the 1980s? Be specific.
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Describe the firms strategy to finance the transaction?
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The management team of a privately held firm found a lender who would lend them 90 percent of the purchase price of the firm if they pledged the firms assets as well as their personal assets as collateral for the loan. This purchase would best be described by which of the following terms?
a. Merger
b. Leveraged buyout
c. Joint venture
d. Tender offer
e. Consolidation
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Which of the following is not typically true of LBOs?
a. Managers are generally also owners
b. Most employees are given the opportunity to participate in profit sharing plans
c. The focus tends to be on improving operational efficiency though cost cutting and improving productivity
d. R&D budgets following the creation of the LBO are always increased significantly
e. All of the above
Q:
Which of the following are commonly used sources of funding for leveraged buyouts?
a. Secured debt
b. Unsecured debt
c. Preferred stock
d. Seller financing
e. All of the above
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Speculate as to the purpose of the share swap between BP and Resnoft.
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JV and alliance agreements often limit how and to whom parties to the agreement can transfer their interests. These limitations include which of the following mechanisms?
a. Tag-along provisions
b. Drag-along provisions
c. Put provisions
d. A, B, and C
e. A and B only
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An alliance whose purpose is to commercialize products developed by the partners generally should be broadly defined in specifying what products or services are to be offered, to whom, in what geographic areas, and for what time period. True or False