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Chapter 5: Q2DQ. (page 647)

What is the difference between a merger and a consolidation?

Short Answer

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Answer

Merger is the process of combining two or more companies together, in which resulting company holds the name of the acquiring company. Whereas in case of consolidation, new company is formed after combination.

Step by step solution

01

Step-by-Step-SolutionStep 1: Explanation on Merger

Merger results in combination of two or more companies, in which one company acquires another company and the resultant company runs in the name of the acquirer.

For Example: Company X acquires Company Y, theresultant company is named as Company X.

02

Explanation on Consolidation

Consolidation results in combination of two or more companies, and runs in the name of new company.

For Example: Company X combines with Company Y, theresultant company is named as Company XY.

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Most popular questions from this chapter

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?

The Clark Corporation desires to expand. It is considering a cash purchase of Kent Enterprises for \(3 million. Kent has a \)700,000 tax loss carryforward that could be used immediately by the Clark Corporation, which is paying taxes at the rate of 30 percent. Kent will provide $420,000 per year in cash flow (aftertax income plus depreciation) for the next 20 years. If the Clark Corporation has a cost of capital of 13 percent, should the merger be undertaken?

A Peruvian investor buys 150 shares of a U.S. stock for \(7,500 (\)50 per share). Over a year, the stock goes up by \(4 per share.

  1. If there is a 10 percent gain in the value of the dollar versus the Peruvian nuevo sol, what will be the total percentage return to the Peruvian investor? First, determine the new dollar value of the investment and multiply this figure by 1.10. Divide this answer by \)7,500 and get a percentage value, and then subtract 100 percent to get the percentage return.
  2. Instead assume that the stock increases by $7, but that the dollar decreases by 10 percent versus the nuevo sol. What will be the total percentage return to the Peruvian investor? Use 0.90 in place of 1.10 in this case.

What factors beyond the normal domestic analysis go into a financial feasibility study for a multinational firm?

Why might the portfolio effect of a merger provide a higher valuation for the participating firms?

See all solutions

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