Question #2
Reading: Reading 18 Corporate Restructuring
PDF File: Reading 18 Corporate Restructuring.pdf
Page: 1
Status: Unattempted
Correct Answer: A
Question
Kavi Biswas, CFA, makes the following statements: Statement 1: Empirical studies suggest that corporate transactions taken during stronger economic times tend to create more value. Statement 2: Corporate transactions tend to be cyclical, increasing in prevalence during economic expansions and decreasing during contractions. Which statement is correct?
Answer Choices:
A. Statement 1 only
B. Statement 2 only
C. Neither statement is correct. Simon Gracier follows Company P. On December 31, 20x2, Company P made an offer to acquire 100% of Company S's outstanding shares for a purchase price of €175 million—€122 million is financed by senior unsecured debentures with a yield of 6.5%, and the remaining is in stock based on the €52 per share current market price of Company P. Pre-acquisition financial statements are presented in Financial Statements (€ thousands) for the Year Ended December 31, 20X2 . Financial Statements (€ thousands) for the Year Ended December 31, 20X2 Balance Sheet Company P Company S
Explanation
Statement 1 is incorrect. Empirical studies suggest that corporate transactions taken
during weaker economic times tend to create more value.
(Module 18.1, LOS 18.a)
Simon Gracier follows Company P. On December 31, 20x2, Company P made an offer to
acquire 100% of Company S's outstanding shares for a purchase price of €175 million—€122
million is financed by senior unsecured debentures with a yield of 6.5%, and the remaining is
in stock based on the €52 per share current market price of Company P. Pre-acquisition
financial statements are presented in Financial Statements (€ thousands) for the Year
Ended December 31, 20X2 .
Financial Statements (€ thousands) for the Year Ended December 31, 20X2
Balance Sheet
Company P Company S
Working capital
€25,098
€3,692
Fixed assets
€1,807,088
€265,800
Total assets
€1,832,186
€269,492
Debt
€24,460
€9,262
Equity
€1,807,726
€260,230
€1,832,186
€269,492
Income Statement
Company P Company S
Sales
€225,886
€33,225
COGS
€166,026
€19,603
Gross profit
€59,860
€13,622
SG&A
€24,845
€3,987
Depreciation
€8,442
€2,269
Interest expense
€1,223
€741
Income from continuing operations
€25,350
€6,625
Gracier is concerned about the impact of the acquisition on Company P's WACC.
Peer Comparable Company Analysis for Company S (€ '000s) shows data about Company
S's peers.
Peer Comparable Company Analysis for Company S (€ '000s)
ompany Enterprise Value Revenues EV/Rev
Alpha
1,312
298
4.40
Beta
569
115
4.95
Gamma
1,994
391
5.10
Zeta
812
167
4.86