BUSI 323
HOMEWORK: CONSOLIDATIONS, MERGERS, AND CAPITAL FORMATION
ASSIGNMENT INSTRUCTIONS
OVERVIEW
The homework assignment will contain a variety of short answer and essay questions focusing
on various theories/topics, assessing students’ recollection, understanding, and analysis of the
material covered.
INSTRUCTIONS
Chapters 20–21
1. Suppose that HCA and Tenet were to merge. Ignoring potential antitrust problems, how
would this merger be classified? horizontal
2. List some reasons that are good motives for mergers.
Economies of scale
Operating economies
Synergy
Growth
Diversification
Utilization of tax shields
Increase in value
Elimination of compeititon
Better financial planning
Economic necessity
Use the following data for a home health firm to answer questions 3-4.
3. What is the current value of free cash flow? 200,000
4. Using a 20 EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization),
what is the value of the firm's equity?35,000,000
Use the following data to answer questions 5-7.
Dublin Medical (DM), a large established corporation with no growth in its real earnings, is
considering acquiring 100% of the shares of Arlington Corporation, a young firm with a high
growth rate of earnings. The acquisitions analysis group at DM has produced the following
table of relevant data:
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BUSI 323
DM's analysts estimate that investors currently expect growth of about 6% per year in
Arlington's earnings and dividends. They assume that with the improvements in
management that DM could bring to Arlington, its growth rate would be 10% per year
beginning one year from now with no additional investment outlays beyond those already
expected.
5. What is the expected gain from the acquisition? 20,000,000
6. What is the net present value (NPV) of the acquisition to DM shareholders if it costs an
average $30 per share to acquire all of the outstanding shares? -107,017,543.86
7. Would it matter to DM's shareholders whether the shares of Arlington stock are acquired
by paying cash or DM stock? yes
8. Explain the difference between a joint venture and a merger.
Joint venture is a partnership of two companies that share a common goal who maintain
their own finances,risks etc., merger is combination of two companies who become a
single company who then share finances, risks etc.
9. Explain the difference between a horizontal merger and a vertical merger.
Horizontal is when two competing companies become a single company, vertical merger
is when two companies are in different stages of production and form a single company.
10. What are the four sources of long-term debt financing?
Treasury/government bonds, corporate bonds, bank loans, issue of debentures
11. What avenues are available for not-for-profit healthcare providers to increase their equity
position?
Internal funds, philanthropy, government grants, sale of real estate
12. What avenues are available for for-profit healthcare providers to increase their equity
position?
Internal funds and stock issuances
13. What are the advantages to a tax-paying entity in issuing debt as opposed to equity?
Interest on bonds is deductible,stockholder interest in corporation isn’t diluted
14. Does adding debt increase or decrease the flexibility of a healthcare provider? Why?
Decrease flexibility, creates financial obligations and limits provider ability to invest
15. A basis point equals how much? How many basis points are there between 6 5/8 % and 6
3/4%? 0.01%, 125
16. What are the five characteristics of long-term debt financing?
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BUSI 323
Higher principal balance, lower interest rates, collateral requirement, longer loan
period,more significant impact on monthly cash flow
17. What factors might cause a facility to call in its bond? Name at least two.
Interest rates, time and call protection
18. You wish to retire a $10,000,000 bond that can be called in 5 years for 110% of par
value, or $11,000,000. You also need to make year-end interest payments of $700,000
per year in each of the next five years. If you can invest money at 8%, how much money
must you set aside today to meet these obligations? 7,491,000
19. You have decided to advance refund $10,000,000 of outstanding debt that is callable in
five years. The interest rate on these bonds is 8%. You can issue new bonds at 6%. For
every dollar of new debt issued, you will incur a 5% issuance cost. Interest payments on
the present issue are $800,000 per year with no scheduled principal payments. How much
new debt needs to be issued to realize defeasance of the present issue? 11,381,580
Answer the questions above and submit the Microsoft Word document to Canvas.
Note: Your assignment will be checked for originality via the Turnitin plagiarism tool.
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