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Chapter 5: Q10DQ (page 680)
What is a letter of credit?
A letter of credit is the document issued by the bank on behalf of the buyer that promises a specified amount of payment to the seller.
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What is the difference between horizontal integration and vertical integration? How does antitrust policy affect the nature of mergers?
The Hollings Corporation is considering a two-step buyout of the Norton Corporation. The latter firm has 2.5 million shares outstanding and its stock price is currently \(40 per share. In the two-step buyout, Hollings will offer to buy 51 percent of Norton’s shares outstanding for \)62 per share in cash and the balance in a second offer of 840,000 convertible preferred stock shares. Each share of preferred stock would be valued at 40 percent over the current value of Norton’s common stock. Mr. Green, a newcomer to the management team at Hollings, suggests that only one offer for all Norton’s shares be made at $59.25 per share. Compare the total costs of the two alternatives. Which is better in terms of minimizing costs?
General Meters is considering two mergers. The first is with Firm A in its own
volatile industry, the auto speedometer industry, while the second is a merger
with Firm B in an industry that moves in the opposite direction (and will tend to
level out performance due to negative correlation).
General Meters Merger
with Firm A
General Meters Merger
with Firm B
Possible
Earnings
(\( in millions) Probability
Possible
Earnings
(\) in millions) Probability
\(40 ........... 0.30 \)40 ........... 0.25
60 ........... 0.40 60 ........... 0.50
80 ........... 0.30 80 ........... 0.25
aCompute the mean, standard deviation, and coefficient of variation for both
investments (refer to Chapter 13 if necessary).
b.Assuming investors are risk-averse, which alternative can be expected to
bring the higher valuation?
Why might the portfolio effect of a merger provide a higher valuation for the participating firms?
What is the purpose(s) of the two-step buyout from the viewpoint of the acquiring company?
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