Calculating Post-money Valuation and Implied Share Price Exercise Solutions

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Questions and Answers

What is the marginal federal, state, and local tax rate?

  • 30%
  • 40% (correct)
  • 45%
  • 35%

What is the beta for publicly traded firms in the restaurant industry?

  • 2.5
  • 2 (correct)
  • 3
  • 1.5

What is the business's target debt-to-equity ratio?

  • 1 (correct)
  • 2
  • 1.5
  • 0.5

What is the liquidity-risk premium for the restaurant business?

<p>15% (C)</p> Signup and view all the answers

What is the investor's willingness to pay a premium to reflect the value of control?

<p>10% (B)</p> Signup and view all the answers

What is the pre-money valuation of the company after the share capital increase?

<p>$1,500,000 (B)</p> Signup and view all the answers

How many new shares did the investment fund purchase?

<p>2,000 (A)</p> Signup and view all the answers

What is the implied share price after the share capital increase?

<p>$150 (B)</p> Signup and view all the answers

If the company is sold for $6,000,000 after 4 years, how much will the investment fund receive?

<p>$1,800,000 (B)</p> Signup and view all the answers

What is the Internal Rate of Return (IRR) of the investment fund's investment, assuming a $6,000,000 sale after 4 years?

<p>45% (C)</p> Signup and view all the answers

What does the acronym FCFF stand for?

<p>Free cash flow to the firm (B)</p> Signup and view all the answers

How is the maximum purchase price (PVMAX) calculated?

<p>PVMAX = (PVMIN + PVNS)(1 + CP%)(1 - LD%) (C)</p> Signup and view all the answers

If LGI wants to acquire a controlling interest in Acuity Lighting, what is the estimated standalone equity value of Acuity?

<p>$18,699,493 (B)</p> Signup and view all the answers

What is the present value of synergies that LGI believes can be achieved by acquiring Acuity Lighting?

<p>$2,250,000 (A)</p> Signup and view all the answers

What is the maximum control premium that LGI is willing to pay to acquire a controlling interest in Acuity Lighting?

<p>10% (C)</p> Signup and view all the answers

How does LGI adjust the liquidity discount for Acuity Lighting?

<p>LGI reduces the median 20% liquidity discount by 4% to reflect Acuity's high financial returns and cash flow growth rate. (A)</p> Signup and view all the answers

What is the key characteristic of privately held U.S. firms?

<p>Their shares are heavily concentrated among a few owners (A)</p> Signup and view all the answers

What percentage of firms with employees in the U.S. have 99 or fewer employees?

<p>98% (A)</p> Signup and view all the answers

Which of the following is a challenge in analyzing and valuing privately held firms?

<p>Lack of external audits (D)</p> Signup and view all the answers

How may privately held firms manipulate their reported income?

<p>By understating revenue and overstating expenses (A)</p> Signup and view all the answers

What is the first step involved in valuing a privately held business?

<p>Adjust the target firm data to reflect true current profitability and cash flow (D)</p> Signup and view all the answers

What is the primary reason for the high concentration of mergers and acquisitions (M&A) among smaller, family-owned firms in the U.S.?

<p>The M&amp;A market in the U.S. is concentrated among smaller, family-owned firms (C)</p> Signup and view all the answers

What is the goal of an event study?

<p>To measure the effect of an economic event on firm value (D)</p> Signup and view all the answers

How is the abnormal return calculated in an event study?

<p>Abnormal return = Event-driven return - Normal return (B)</p> Signup and view all the answers

What is the normal return generating process used in the Danone and WhiteWave Foods acquisition case study?

<p>Market Model (C)</p> Signup and view all the answers

What is the length of the event window used in the Danone and WhiteWave Foods acquisition case study?

<p>11 days centered on the announcement date (C)</p> Signup and view all the answers

What is the cumulated abnormal return (CAR) used to measure in an event study?

<p>The sum of abnormal returns over the event window (D)</p> Signup and view all the answers

In the Total SA and Saft merger case study, what is the market value of Total SA on April 9th, 2016?

<p>$98.626 billion (A)</p> Signup and view all the answers

What is the total value received by the manager based on the information provided?

<p>$330,400 (D)</p> Signup and view all the answers

How is the value received by the Investment Fund calculated in the text?

<p>$1,269,600 (A)</p> Signup and view all the answers

In which year did the Investment Fund's IRR reach $1,152,000 according to the text?

<p>2016 (B)</p> Signup and view all the answers

What was the Convertible Bonds value in 2012 according to the provided data?

<p>$5,000 (D)</p> Signup and view all the answers

What is the 20% compensation based on for the Investment Fund?

<p>Shares in Equity2016 (A)</p> Signup and view all the answers

What does the text suggest about valuing privately owned companies as compared to publicly traded firms?

<p>Valuing privately owned companies is more complex than publicly traded firms. (B)</p> Signup and view all the answers

Why is it often more challenging to determine the value of privately owned companies compared to publicly traded firms?

<p>Privately owned companies lack a liquid market for their shares, making valuation more difficult. (A)</p> Signup and view all the answers

Why is it important for an acquirer to restate financial statements provided by the target firm?

<p>To ensure comparability and accuracy of financial information for valuation purposes. (D)</p> Signup and view all the answers

How can an analyst determine if a target firm's costs and revenues are understated or overstated?

<p>By comparing the target firm's financial ratios with industry benchmarks. (D)</p> Signup and view all the answers

What is a common valuation approach used for small, privately owned firms due to data limitations?

<p>The Capitalization (Multiples) Method. (B)</p> Signup and view all the answers

Why might an acquirer prefer using the Discounted Cash Flow (DCF) approach over the Relative or market-based approach for valuing a target firm?

<p>DCF approach accounts for the target firm's specific risk and cash flow projections. (B)</p> Signup and view all the answers

What makes analyzing and valuing a privately held firm different from analyzing and valuing a publicly traded firm?

<p>Privately held firms have limited market data available compared to publicly traded firms. (C)</p> Signup and view all the answers

What is a common challenge when valuing privately held firms?

<p>Lack of externally generated information (D)</p> Signup and view all the answers

What is a common form of manipulating reported income in privately held firms?

<p>Understating revenue and overstating expenses (C)</p> Signup and view all the answers

What is the first step in valuing a privately held business?

<p>Adjust target firm data to reflect true profitability (C)</p> Signup and view all the answers

Which valuation approach is commonly used for privately held firms?

<p>All of the above (D)</p> Signup and view all the answers

What is a key difference between valuing publicly traded and privately held firms?

<p>Publicly traded firms have more externally generated information (D)</p> Signup and view all the answers

What is a common issue when restating financial statements for an acquirer?

<p>Lack of adequate documentation of key intangible assets (D)</p> Signup and view all the answers

What is the key reason for the improvement in profit margin after the merger between Firm A and Firm B?

<p>The combined firm can achieve economies of scale by spreading fixed costs over a larger volume of output. (A)</p> Signup and view all the answers

What is the primary motivation behind the merger between Firm A and Firm B based on the information provided?

<p>Achieving operating synergies through economies of scale. (C)</p> Signup and view all the answers

What is the key benefit of the data processing center consolidation after the merger between Firm A and Firm B?

<p>Reduced direct labor costs in the combined data processing operations. (A)</p> Signup and view all the answers

What is the primary reason for the high concentration of mergers and acquisitions (M&A) among smaller, family-owned firms in the U.S. according to the text?

<p>The text does not provide any information about the reasons for the high concentration of M&amp;A among smaller, family-owned firms. (D)</p> Signup and view all the answers

Which of the following is a common challenge in analyzing and valuing privately held firms compared to publicly traded firms?

<p>All of the above are common challenges in valuing privately held firms. (D)</p> Signup and view all the answers

What is a common form of manipulating reported income in privately held firms according to the text?

<p>The text does not mention any common forms of income manipulation in privately held firms. (D)</p> Signup and view all the answers

What is the primary purpose of event studies in finance and accounting?

<p>To measure the impact of corporate events on stock prices (B)</p> Signup and view all the answers

Which type of market efficiency is associated with security prices reflecting all publicly available information?

<p>Semi-strong form efficiency (B)</p> Signup and view all the answers

What is a common challenge in analyzing and valuing privately held firms compared to publicly traded firms?

<p>All of the above (D)</p> Signup and view all the answers

Which of the following is a common application of event studies in the field of law and economics?

<p>Both a and b (D)</p> Signup and view all the answers

What is the key characteristic of privately held U.S. firms mentioned in the text?

<p>They have a higher percentage of family-owned businesses (D)</p> Signup and view all the answers

What is the primary reason an acquirer might prefer using the Discounted Cash Flow (DCF) approach over the Relative or market-based approach for valuing a target firm?

<p>The DCF approach provides a more accurate valuation (C)</p> Signup and view all the answers

What is the purpose of Exercise 1 in the tutorial session?

<p>To demonstrate the distribution of equity within a family-owned company. (D)</p> Signup and view all the answers

What aspect of corporate restructuring is emphasized in Session 2 of the tutorial?

<p>Sharing of value. (C)</p> Signup and view all the answers

In the provided scenario, what is the significance of the PE fund's negotiation with the family owning DUPLAT?

<p>To secure external equity financing for significant development projects. (A)</p> Signup and view all the answers

What does the distribution of shares among the family members of DUPLAT illustrate?

<p>The distribution of power within a family-owned company. (D)</p> Signup and view all the answers

What is a key theme discussed in Session 3 of the tutorial on M&As and Corporate Restructuring?

<p>Measuring shareholders' wealth creation. (B)</p> Signup and view all the answers

Based on the scenario, what would be a likely next step following the negotiation between the DUPLAT family and the PE fund?

<p>Finalizing agreements for external equity financing for development projects. (A)</p> Signup and view all the answers

Which of the following is NOT a motivation for mergers and acquisitions (M&A) mentioned in the text?

<p>Market saturation (D)</p> Signup and view all the answers

What is the term used in the text to describe the phenomenon where the acquirer overpays due to overconfidence?

<p>Hubris (C)</p> Signup and view all the answers

What is a key difference between valuing publicly traded and privately held firms?

<p>Availability of financial data (D)</p> Signup and view all the answers

What is the term used in the text to describe the excess returns earned by acquirer and target shareholders due to a takeover?

<p>Abnormal returns (D)</p> Signup and view all the answers

What is the purpose of an event study mentioned in the text?

<p>To measure the impact of an event on firm value (D)</p> Signup and view all the answers

What is the maximum purchase price the investor should be willing to pay for a 50.1% stake in the target firm?

<p>$468,936 (B)</p> Signup and view all the answers

What is the expected annual growth rate of the restaurant's operating income according to the text?

<p>4% (D)</p> Signup and view all the answers

What is the purpose of the liquidity discount mentioned in the text?

<p>To account for the lack of marketability of the target firm's shares (A)</p> Signup and view all the answers

What is the primary reason for the high concentration of mergers and acquisitions (M&A) among smaller, family-owned firms in the U.S.?

<p>Smaller, family-owned firms are more likely to be sold due to succession planning issues (B)</p> Signup and view all the answers

Which valuation approach is commonly used for privately held firms according to the text?

<p>Discounted Cash Flow (DCF) (D)</p> Signup and view all the answers

What is the key characteristic of privately held U.S. firms mentioned in the text?

<p>They have 99 or fewer employees (A)</p> Signup and view all the answers

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