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    Two Basic Finance Problems - Large Brewing Corporation

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    29.1 The Large Brewing Corporation has acquired the Philadelphia Pretzel Company in a vertical merger. Lager Brewing has issued $300,000 in new Long-term debt to pay for its purchase. ($300,000) is the purchase price.) Construct the balance sheet for the new corporation if the merger is treated as a purchase for accounting purposes. The balance sheets shown here represent the assets of both firms at their true market values. Assume these market values are also the book values.

    Balance Sheet
    (in $ thousands)
    Current assets $400 Current liabilities $200
    Other assets 100 Long-term debt 100
    Net fixed assets 500 Equity 700
    Total ------------ -----------------
    $1000 $1,000

    Balance Sheet
    (in $ thousands
    Current assets $80 Current liabilities $80
    Other assets 40 Equity 120
    Net fixed assets 80
    total ----------- total ---------
    $200 $200

    29.4. Indicate whether you think the following claims regarding takeovers are true or false. In each case provide a brief explanation for your answer.

    a. By merging competitors takeovers have created monopolies that will raise products prices, reduce production, and harm consumers.

    b. Managers act in their own interests at times and, in reality, may not be answerable to shareholders. Takeovers may reflect runaway management.

    c. In an efficient market takeovers would not occur because of market price would reflect the true value of the corporations. This, bidding firms would not be justified in paying premiums above market prices for target firms.

    d. Traders and institutional investors, having extremely short time horizons, are influenced by their perceptions of what other market traders will be thinking of stock prospects and do value takeovers based on fundamental factors. This they will sell shares in target firm despite the true value of the firms.

    e. Mergers are a way of avoiding taxes because they allow the acquiring firm to write up the value of the assets of the acquired firm.

    f. Acquisition analysis frequently focus on the total value of the firms involved. An acquisition, however, will usually affect relative values of stocks and bonds, as well as their total value.

    See attached file for full problem description.

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    Solution Summary

    The solution answers two questions. The first is on the acquisition of Philadelphia Pretzel Company by Large Brewing Corporation. The second question explains various properties on merging competitors and takeovers.