PART EIGHT Topics in Corporate Finance

7. Economies of Scale What does it mean to say that a proposed merger will take advantage of available economies of scale? Suppose Eastern Power Co. and Western Power Co. are located in different time zones. Both of them operate at 60 percent of capacity except for peak periods, when they operate at 100 percent of capacity. The peak periods begin at 9:00 a.m. and 5:00 p.m. local time and last about 45 minutes. Explain why a merger between Eastern and Western might make sense.

8. Hostile Takeovers What types of actions might the management of a firm take to fight a hostile acquisition bid from an unwanted suitor? How do the targetfirm shareholders benefit from the defensive tactics of their management team? How are the target-firm shareholders harmed by such actions? Explain.

9. Merger Offers Suppose a company in which you own stock has attracted two takeover offers. Would it ever make sense for your company's management to favor the lower offer? Does the form of payment affect your answer at all?

10. Merger Profit Acquiring-firm stockholders seem to benefit very little from takeovers. Why is this finding a puzzle? What are some of the reasons offered for it?

Questions and Problems


(Questions 1-9)

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