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Study Session 8: Corporate Finance: Financing and Control Issues

Corporate Finance

For the practice problem 23rd from the curriculum, the answer says Repurchasing shares or paying a dividend would increase the debt weight, which would reduce the WACC. How does this happen? I mean if you repurchase shares, it would increase debt only is you use debt financing. What if you use your excess cash? How will that reduce WACC? And, how does paying a dividend increase debt??
Also, does repurchasing shares decrease equity by the repurchased amount? 

R26 - M&A (Corporate Finance) - Example 10

Hi, 

Can anybody explain the conclusion drawn from example 10 of the curriculum.

1.  Cash option  -   premium 60 million

2.  Stock Option -  premium is 67 million

3.  Mixed option -  premium is 64 million

Still the conclusion drawn is for stock option why the acquirer pay the high premium.

Pac-Man Defense (M&A)

There is a sentence in the schweser material that I do not get,

“In practice, the Pac-Man defense is rarely used because it means a smaller company would have to acquire a larger company”

Topic Test - Value of a target company

Hi,

I have a very elementary question! Does the value of a company include debt or exclude it, and why (i am leaning towards EV where we include debt). Specifically, i am referring to this question:

Exhibit 4: Estimates and Assumptions of Mike Noth Used in Valuing National Plastics as of January 2013

($ millions except WACC)

 

2013

2014

2015

2016

Schweser Practice Exams V1 Exam 2 Morning - Question 9 - Post-merger valuation (stock offer)

I might be missing something here, but… It is about the calculation of the economic impact for the target shareholders after a stock offer for an acquisition.

Their solution is as follows:

Value of Fedora and Ubunta post cash acquisition (given) = $135 million.

Value of Fedora and Ubunta post stock acquisition = $135 million + $90 million cash = $225 million.

Number of shares outstanding post stock acquisition = 5 + 3 = 8 million.

Value of shares received based on their likely post-acquisition price = [(225m) / 8m] × 3m = $84,375,000.

Corp Finance - Merger - gain accrued to acquirer shareholders

Debian’s management announced in the last conference call that a potential buyer, Fedora, Inc., is interested in buying Ubuntu, one of Debian’s divisions. Fedora has offered to pay $90 million cash to buy Ubuntu. Relevant information is provided in Exhibit 1.

Exhibit 1

Value of Ubuntu as a stand-alone business
$78 million

Value of Ubuntu to Debian
$85 million

Value of Fedora (5 million shares, $10 par)
$132 million

Value of Fedora and Ubuntu as a combined entity
$135 million

Valuing a Target Company

According to CFA book, when valuing a target company using discounted cash flow method, FCFF is used. But when acquiring a company’s stock, do we suppose to discount FCFE to get the value of the target equity, not to discount FCFF to get the value of the whole firm? Because you are only acquiring the equity of the firm, not the whole firm (debt + equity).

Ex-dividend stock price

Hello, 

I would like to know if it is possible to know exactly the effect of the dividend payment on a stock… For example, for a tax rate on dividends of 50% and a capital gain tax rate of 0% :

If the market anticipates that all the earnings will be paid out as dividends, then the price of the stock should be quoted as an “after-tax on dividend stock price”. (you accept to buy $1 for a stock that gives you a $2 dividends * (1 - 0.50) = $1 net after tax gain dividends

CFAI EOC

I get only 1 out of 6 questions right when I do the end of chapter practice problems. I read the Schweser notes fast, write up summary notes and then do the end of chapter problems - still get 20-50% right. It is really discouraging. 

Any tips or suggestions as to how I can improve?