Vignette: Miguel Valdez is a mergers and acquisitions analyst at Helado LLP analyzing the textile industry. Valdez has the following basic data for two companies that have been discussed in the trade press as potential merger candidates:
Wooten Inc.
Wallingford Co.
Earnings per share
$2.00
$1.00
Dividend per share
$0.50
$0.70
Number of shares
1,000,000
300,000
Stock price
$45
$14
Valdez estimates that investors currently expect a steady growth rate of about 3% in earnings and dividends for Wallingford Co. Under new management, this growth rate will increase to 5% per year, without any additional capital investment required.
Proposed acquisition: Wooten pays $35 in cash for each share of Wallingford. Or, Wooten offers one share of Wooten, Inc. for every three shares of Wallingford.
Question: What is the cost of the acquisition if Wooten Inc. pays $35 in cash for each share of Wallingford Co.?
Select an Answer: $9.3M $4.2M $2.8M $6.3M
Rationale:
Because this is a cash acquisition, the following formula applies:
Cost = Cash Paid − PVB
= ($35 × 300,000) − ($14 × 300,000)
= $10.5M − $4.2M = $6.3M
2025-05-08
Vignette: Company P has 49% ownership in Company S. This ownership stake has a book value of $5,000 at December 31, 20x2.
The following is information for Company S for years ending 20x3 and 20x4:
20x3
20x4
Net income
$1,000
$1,200
Dividends
$200
$300
Question: Assume Company P's 49% ownership in Company S represents controlling interest, as the remaining shares are publicly held in small percentage ownerships. What would Company P report on its balance sheet for the year ending 20x3, related to Company S?
Rationale:
Since Company P controls Company S, the consolidation method of accounting would be used; thus, Company P would consolidate all of Company S' asset and liability accounts.
Investment in S: This account would have $0 balance since it is not used to account for the investment in S when the two companies' accounts are consolidated.
Minority interest:
December 31, 20x2:
Since 49% equity has book value of $5,000, Company S's total shareholders' equity is ($5,000/49%) = $10,204.08.
Beginning balance $5,204.08 + Proportionate net income ($1,000 × 51%) − Proportionate dividends ($200 × 51%) = $5,612.08.
2025-05-07
Question: If the value of the euro is quoted as .75 euro per U.S. dollar (E/$ = .75) and the value of the yen is quoted as 150 yen per U.S. dollar (Y/$ = 150), the cross-exchange rate between the yen and the euro is closest to:
Select an Answer: 133 200 175 166
Rationale:
To arrive at the answer, take the value of the euro (.75 euro per U.S. dollar) and calculate its reciprocal (1/.75) to arrive at 1.33 dollars. Then multiply that by the number of yen per U.S. dollar (150) to arrive at the cross-exchange rate between the yen and the euro.
2025-05-06
Question: Sophia Cane, a U.S. investor, received a quote for 0.95000 $ / €. What is the quote in indirect terms?
Select an Answer: 1.4872 1.3847 1.0526 0.5128 0.9500 1.0976
Rationale:
The quote is currently direct, to get the indirect quote, we must invert the current quote:
1 / ($/€) = 1 / 0.95000
€ / $ = 1.0526
2025-05-05
Vignette: Palm Development Corporation is considering a backhoe or a bulldozer for their Landscaping Division capital budget.
The projects are independent with an initial cash requirement of $13,680 for the backhoe and $17,944 for the bulldozer.
The cost of capital is 14% and after-tax cash flows, including depreciation are:
Year
Backhoe
Bulldozer
1
$4,080
6,000
2
$4,080
6,000
3
$4,080
6,000
4
$4,080
6,000
5
$4,080
6,000
Question: Based on the MIRR for the bulldozer, the project should be ________.
Select an Answer: rejected none of these answers either rejected or accepted accepted
Rationale:
MIRR = 17.19% > 14% and the projects are independent.
