AcquaMerge Round 1

Q1.
A&A Corp created a qualified special purpose entity (QSPE) to securitize accounts
receivable in accordance with generally accepted accounting principles. Cullen receives cash
when the receivables are transferred to the QSPE. If the current accounting treatment for QSPEs
is eliminated, what adjustment, if any, would be most appropriate?
1.
2.
3.
4.

Reverse the transfer and treat the proceeds received as equity.

Reverse the transfer and treat the proceeds received as debt.
Continue with the transfer and treat the proceeds as debt.
No adjustment is necessary.

Q2.
Debt outstanding: 5 million, Preferred stock outstanding: 2 million, Common Stock: 13
million. What is the WACC if before tax cost of debt is 10%, Cost of equity is 13%, Cost of
preferred stock is 9.2%. Marginal tax rate is 40%?
1.
2.
3.
4.

10.37%
10.56%
10.87%
10.75%

Q3.
Sahil Design pays a current annual dividend of Rs. 2 and is currently growing at a rate of
20%. This rate is expected to decline to 10% over four years and remain at that level indefinitely.
The required rate of return for an investment in Lisa Design is 18%. The current estimated value
of Sahil Design using the H-model is:
1.
2.
3.
4.

Q4.

Rs. 24.30
Rs. 24.22
Rs. 32.50
Rs. 29.78

Which of these is NOT a hostile takeover defense mechanism

1.
2.
3.
4.

Macaroni Defense
Jamestown Defense
Crown Jewels Defense
People Pill

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Q5.
Tide Industries is not expected to pay a dividend until ten years from now, at which time
it is expected to pay a dividend of Rs1.25 and increase the dividend at a rate of 4% thereafter. If
the required rate of return 12%, the current value of tide is closest:
1.
2.
3.
4.

Rs. 5.64
Rs. 5.99
Rs. 5.50
Rs. 5.03

Q6.
Which of the following firms would most appropriately valued using an asset based
model?
1. An energy exploration firm in financial distress that owns drilling rights for offshore
areas.
2. A paper firm located in a country that is experiencing high inflation.
3. A software firm that invests heavily in research and development and frequency
introduces new products.
4. A trading firm in a market with an unprecedented bull-run.

Q7.
Lalram Company recently reported EBIT margin of 11%, total asset turnover of 1.2, a
financial leverage ratio of 1.5, and interest burden of 70%. Assuming an income tax rate of 35%,
Lalaram's return on equity is closest to:
1.
2.
3.
4.

8%
9%
10%
11%

Q8.
A firm has an expected dividend payout ratio of 60% and an expected future growth rate
of 7%. What should the firm's fundamental price-ro-earnings (P/E) ratio be if the required rate of
return on stocks of this type is 15%?
1.
2.
3.
4.

Q9.

5.0x
7.5x
10.0x
9.0x

Name the first ever LBO in Indian history.

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Q10. X acquired Y in 1998 and created a company with a total market capitalization of $237
bn. Name X & Y.

11 15
Way Fly, an airplane parts distributor, has made an offer to acquire Horizon Systems, a developer
of software for flights. The offer is to pay Horizons shareholders the current market value of
their stock in Way Flys stock. The relevant information is given below:
Way Fly

Horizon

Share price

$40

$25

Number of outstanding shares

(millions)

40

15

Earnings (millions)

$100

$30

The total earnings of the combined company will not increase so are estimated to be $130 mil.
Horizon managers are not interested in the offer by Way Fly. The managers, instead, approach
Skiers, Inc., which is in the same industry as Horizon, to see if it would be interested in acquiring
Horizon. Skiers is interested, and both companies believe there will be synergies from this
acquisition. If Skiers were to acquire Horizon, it would do so by paying $400 million in cash.
Skiers is somewhat concerned whether antitrust regulators would consider the acquisition of
Horizon an antitrust violation. The market in which the two companies operate consists of eight
competitors. The largest company has a 25 percent market share. Skiers has the second largest
market share of 20 percent. Five companies, including Horizon, each have a market share of 10
percent. The smallest company has a 5 percent market share.

Q11. The acquisition of Horizon by Way Fly and the acquisition of Horizon by Skiers,
respectively, would be examples of a:
1.
2.
3.
4.

Vertical Merger & Horizontal Merger

Conglomerate Merger & Vertical Merger
Conglomerate Merger & Horizontal Merger
Both Conglomerate Merger

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Q12. If Horizon were to be acquired by Way Fly under the terms of the original offer, the postmerger EPS of the new company would be closest to:
1.
2.
3.
4.

$2.00
$2.32
$2.63
$2.75

Q13. Which of the following defenses best describes the role of Skiers in the acquisition
scenario?
1.
2.
3.
4.

Crown Jewel
Pac-Man
White Knight
Golden Parachute

Q14. Suppose Skiers acquires Horizon for the stated terms. The gain to Horizon shareholders
resulting from the merger transaction would be closest to:
1.
2.
3.
4.

$25 million
$160 million
$375 million
$225 million

Q15. If Skiers and Horizon attempt to merge, the increase in the HerfindahlHirschman Index
(HHI) and the probable action by the Department of Justice and the FTC, respectively, in
response to the merger announcement are:
Increase in the HHI

Probable Response of Department of Justice and

FTC
1.
2.
3.
4.

Q16.

290
290
400
420

To challenge the merger

To investigate the merger
To challenge the merger
To investigate the merger

Connect and name the famous failed M&A deal:

Koyal si teri
boli..
4

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&
Q17.

Jaydeep Corporation recently reported the following:

Earnings before interest
and taxes
Interest expense
Earnings before taxes
Income taxes
Income from associates
Net income

$246,5
00
(10,00
0)
$236,5
00
94,600
16,750
$158,6
50

Tax burden, without the regard to the investments in associates, is closest to:
1.
2.
3.
4.

Q18.
1.
2.
3.
4.

57.6%
60.0%
67.1%
69%

Under BIFR administration, Merger of two companies is known as

Reverse Merger
Negotiated Merger
Offer for Sale
Arranged Merger

Q19. Shares of Marsh Ltd. and Global Electric Ltd. are currently traded at Rs.100 and Rs.25
respectively. The share swap ratio based on Market Price would be
1.
2.
3.
4.

1.00
2.50
0.40
0.80

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Q20. Value-weighted methodology is used to construct and track a two-stock index based on
Stocks P and Q. Stock P has an initial price of $10, and there are 10 million shares outstanding.
Stock Q has an initial price of $20, and there are 40 million shares outstanding. Two weeks later,
Stock Ps price is $12 and Stock Q's price is still $20. The shares outstanding remain the same.
What is the percentage change in value-weighted index, over these two weeks?
1.
2.
3.
4.

1.02%
20%
6.67%
2.22%

Q21. Sharma brothers, a publicly traded company, closed its last fiscal year with an P/E ratio
of 20.00. ABC Enterprise, a publicly traded company, closed its last fiscal year with an P/E ratio
of 18.00. Sharma brothers plans to acquire ABC Enterprise. What will the acquisition be for
Sharma brothers 1.
2.
3.
4.

Q22.
I.
II.

Accretive
Dilutive
Neutral
None of the above

Time Warner was acquired by AOL. It is an example of:

Cross-border Merger
Horizontal Merger

1.
2.
3.
4.

III.
IV.

Conglomerate Merger
Vertical Merger

I and II only.
I and III only.
III only
IV only.

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