BEAM053

UNIVERSITY OF EXETER
BUSINESS SCHOOL


May 2021





MERGERS, MANAGEMENT BUYOUTS AND OTHER CORPORATE
REORGANIZATIONS


Module Convenor: Dr Lora Dimitrova



Duration: 1 hour + 30 minutes upload time

Word Count: 3,000 words

















Additional Materials needed:
Approved calculators are permitted.
Section 1
BEAM053 1 Please Turn Over


Please discuss whether you agree or disagree with each of the following statements and
briefly explain your answers. There are no points for simply answering true/false. (total
56 marks)


Q1. Distressed exchanges in the U.S. can prevent holdout problems by bondholders by
(i) shortening the maturity of the new debt compared with the existing debt or by (ii)
lowering the interest rate on the new debt compared with the old debt. (14 marks)









Q2. Mergers paid in cash result in increased leverage for the merged firm, making exist-
ing debt riskier and existing creditors worse off. Therefore, cash deals on average
have worse performance compared to stock deals. (14 marks)









Q3. U.S. Chapter 11 is better than U.K. Receivership because the old management is in
charge of the company during reorganization, and they would only invest in positive
NPV projects. (14 marks)









Q4. Although pre-packaged bankruptcy takes shorter time than a traditional Chapter 11,
it is usually more expensive to organize. Leverage buyouts (LBOs) are typical can-
didates for a prepack, because they do not pay taxes. (14 marks)
Section 2
BEAM053 2 End of paper


Please answer all the questions in this section. Show your calculations and state any
assumptions that you make in order to achieve full marks. (total 44 marks)


Q1. Imagine you are offered a mining project with a perpetual EBIT of $2,500 and an
interest expense of $568. The annual depreciation is $500, however, for the business
to operate the asset base has to remain constant, implying a capital expenditure of
$500 p.a. As this is a stable business, working capital investments are negligible.
The firm’s book value of debt and assets are $8,000 and $15,000, respectively. The
firm has an asset beta of 1.3 and a beta of debt of 0.3. The risk-free rate is 5% and
the market risk premium is 7%. Assume a tax rate of 30%.


a. Calculate by iteration the value of the firm using the WACC method (you can stop
after the 3rd iteration). (10 marks)






b. Calculate the APV for the problem in part (a). Justify why you use a particular
discount rate to value the tax shields in your APV. (10 marks)







Q2. List and explain in detail the components of the Anti-Directors Rights Index (Law and
Finance, La Porta, Lopez-de-Silanes, Shleifer and Vishny (1998)). (12 marks)








Q3. Explain what a tender offer is. Describe the different types of terms and conditions
that can be used when structuring a tender offer. (12 marks)









































































































































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