Question

.           Target is a wholly owned subsidiary of MegaCorp Inc. MegaCorp supplies a number of services to target.

Target sells some of its products to other MegaCorp subsidiaries. Target also buys products from other MegaCorp subsidiaries that are used as inputs in producing Target’s products. Which of the following adjustments should the acquirer make to Target’s financial statements before valuing the firm?

1. Deduct the actual cost of services required by Target that are being supplied by the parent without

          charge from target’s cost of sales.

2. Deduct the difference between the cost of products purchased from other MegaCorp subsidiaries at   below market prices and the actual market prices for such products from Target’s cost of sales.
3. Deduct the difference between the cost of products purchased from other MegaCorp subsidiaries at above market prices and the actual cost of such products if purchased from other sources from Target’s cost of sales
4. A and B only.
5. None of the above.

           

1. Which of the following is generally not considered a source of value to the acquiring firm?

1. Duplicate facilities
2. Patents
3. Land on the balance sheet at below market value
4. Warranty claims
5. Copyrights

2. The initial offer price for the target firm is defined as  

           

1. The minimum price
2. The present value of the minimum price plus some fraction of the present value of net synergy
3. The present value of net synergy plus the current market value of the target firm
4. The maximum price less the minimum price
5. The maximum price less the present value of net synergy

1. Which of the following are examples of business alliances?

1. Mergers
2. Acquisitions
3. Joint ventures
4. Equity partnerships
5. C and D

Answer 1

First question:

The correct answer is: Option C. Deduct the difference between the cost of products purchased from other MegaCorp subsidiaries at above market prices and actual market prices from Target's cost of sales.

This is the right accounting treatment before valuation.

Second Question:

The correct answer is option d. Warranty claims

Warranty claims will not lead to additional value for the acquirer.

Third question:

The correct answer is option b. The present value of the minimum price plus some fraction of the present value of net synergy

Fourth question:

The correct answer is option e. C and D

Joint ventures and Equity partnerships are examples of equity participation.