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Free CFA® CFA-Level-II Exam Braindumps (page: 23)

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Voyager Inc., a primarily internet-based media company, is buying The Daily, a media company with exposure to newspapers, television, and the internet.

Company Descriptions
Voyager Inc. is organized into two segments: Internet and Newspaper Publishing. The internet segment operates Web sites that offer news, entertainment, and advertising content in text and video format. The internet segment represents 75% of the company's total revenues. The newspaper publishing segment publishes 10 daily newspapers. The newspaper publishing segment represents 25% of the company's total revenues.


The Daily is organized into three segments: Newspaper Publishing (60% of revenues), Broadcasting (35% of revenues), and Internet (5% of revenues). The newspaper publishing segment publishes 101 daily newspapers. The Broadcasting segment owns and operates 25 television stations. The Internet segment consists of an internet advertising service. The Daily's newspaper publishing and broadcasting segments cover the twenty largest markets in the United States.

Voyager's acquisition of The Daily is The company's second major acquisition in its history. The previous acquisition was at the height of the merger boom in the year 2000. Voyager purchased the Dragon Company at a premium to net asset value, thereby doubling the company's size. Voyager used the pooling method to account for the acquisition of Dragon; however, because of FASB changes to the Business Combination Standard, Voyager will use the acquisition method to account for the Daily acquisition.


Voyager has made an all-cash offer of $45 per share to acquire The Daily. Wall Street is skeptical about the merger. While Voyager has been growing its revenues by 40% per year, The Daily's revenue growth has been less than 2% per year. Michael Renner. the CFO of Voyager, defends the acquisition by stating that The Daily has accumulated a large amount of tax losses and that the combined company can benefit by immediately increasing net income after the merger. In addition, Renner states that the New Voyager will eliminate the inefficiencies of the internet operations and thereby boost future earnings. Renner believes that the merged companies will have a value of $17.5 billion.

In the past, The Daily's management has publicly stated its opposition to merging with any company, a position management still maintains. As a result of this situation, Voyager submitted their merger proposal directly to The Daily's board of directors, while the firm's CEO was on vacation. Upon returning from vacation, The Daily's CEO issued a public statement claiming that the proposed merger was unacceptable under any circumstances.

Voyager used the pooling of inierests method when accounting for the 2000 acquisition of Dragon, rather than the acquisition method it would use today. Which of the following is least likely a feature of the pooling of interests method?

  1. Operating results for prior periods are restated as though the two firms were always combined.
  2. The pooling of interests method combines historic book values and fair values.
  3. The pooling of interests method combines historic book values.

Answer(s): B

Explanation:

Historically, two accounting methods have been used for business combinations: (1) the purchase method and (2) the pooling-of-interests method. However, over the last few years, the pooling method has been eliminated from U.S. GAAP and IFRS. Now, the acquisition method is required.

The pooling-of-interests method, also known as uniting-of-interests method under IFRS, combined the ownership interests of the two firms and viewed the participants as equals—neither firm acquired the other. The assets and liabilities of the two firms were simply combined. Key attributes of the pooling method include the following:

• The two firms are combined using historical book values.
• Operating results for prior periods are restated as though the two firms were always combined.
• Ownership interests continue, and former accounting bases are maintained.

Note that fair values played no role in accounting for a business combination using the pooling method—the actual price paid was suppressed from the balance sheet and income statement. (Study Session 5, LOS 21.c)



Voyager Inc., a primarily internet-based media company, is buying The Daily, a media company with exposure to newspapers, television, and the internet.

Company Descriptions
Voyager Inc. is organized into two segments: Internet and Newspaper Publishing. The internet segment operates Web sites that offer news, entertainment, and advertising content in text and video format. The internet segment represents 75% of the company's total revenues. The newspaper publishing segment publishes 10 daily newspapers. The newspaper publishing segment represents 25% of the company's total revenues.

The Daily is organized into three segments: Newspaper Publishing (60% of revenues), Broadcasting (35% of revenues), and Internet (5% of revenues). The newspaper publishing segment publishes 101 daily newspapers. The Broadcasting segment owns and operates 25 television stations. The Internet segment consists of an internet advertising service. The Daily's newspaper publishing and broadcasting segments cover the twenty largest markets in the United States.

Voyager's acquisition of The Daily is The company's second major acquisition in its history. The previous acquisition was at the height of the merger boom in the year 2000. Voyager purchased the Dragon Company at a premium to net asset value, thereby doubling the company's size. Voyager used the pooling method to account for the acquisition of Dragon; however, because of FASB changes to the Business Combination Standard, Voyager will use the acquisition method to account for the Daily acquisition.


Voyager has made an all-cash offer of $45 per share to acquire The Daily. Wall Street is skeptical about the merger. While Voyager has been growing its revenues by 40% per year, The Daily's revenue growth has been less than 2% per year. Michael Renner. the CFO of Voyager, defends the acquisition by stating that The Daily has accumulated a large amount of tax losses and that the combined company can benefit by immediately increasing net income after the merger. In addition, Renner states that the New Voyager will eliminate the inefficiencies of the internet operations and thereby boost future earnings. Renner believes that the merged companies will have a value of $17.5 billion.

In the past, The Daily's management has publicly stated its opposition to merging with any company, a position management still maintains. As a result of this situation, Voyager submitted their merger proposal directly to The Daily's board of directors, while the firm's CEO was on vacation. Upon returning from vacation, The Daily's CEO issued a public statement claiming that the proposed merger was unacceptable under any circumstances.

Based on Renner's comments defending Voyager's acquisition of The Daily, indicate whether his comments about net income and elimination of inefficiencies are most likely correct.

  1. Only Renner's comment that unused tax losses will immediately translate into higher net income is correct.
  2. Only Renner's comment that the elimination of inefficiencies within the internet operations will create additional value is correct.
  3. Both comments are correct.

Answer(s): A

Explanation:

If the target of a merger has unused tax losses accumulated, the merged company can use the tax losses to immediately lower its tax liability, thus increasing its net income (Correct). The internet operation of The Daily is insignificant compared to the overall merger value. Any improvement in the cost structure of the internet operation will not have a significant impact on overall earnings. In addition, the high growth characteristics of the internet segment would not warrant a cost restructuring of the operations. (Incorrect) (Study Session 9, LOS 31.b)



Voyager Inc., a primarily internet-based media company, is buying The Daily, a media company with exposure to newspapers, television, and the internet.

Company Descriptions
Voyager Inc. is organized into two segments: Internet and Newspaper Publishing. The internet segment operates Web sites that offer news, entertainment, and advertising content in text and video format. The internet segment represents 75% of the company's total revenues. The newspaper publishing segment publishes 10 daily newspapers. The newspaper publishing segment represents 25% of the company's total revenues.
The Daily is organized into three segments: Newspaper Publishing (60% of revenues), Broadcasting (35% of revenues), and Internet (5% of revenues). The newspaper publishing segment publishes 101 daily newspapers. The Broadcasting segment owns and operates 25 television stations. The Internet segment consists of an internet advertising service. The Daily's newspaper publishing and broadcasting segments cover the twenty largest markets in the United States.

Voyager's acquisition of The Daily is The company's second major acquisition in its history. The previous acquisition was at the height of the merger boom in the year 2000. Voyager purchased the Dragon Company at a premium to net asset value, thereby doubling the company's size. Voyager used the pooling method to account for the acquisition of Dragon; however, because of FASB changes to the Business Combination Standard, Voyager will use the acquisition method to account for the Daily acquisition.



Voyager has made an all-cash offer of $45 per share to acquire The Daily. Wall Street is skeptical about the merger. While Voyager has been growing its revenues by 40% per year, The Daily's revenue growth has been less than 2% per year. Michael Renner. the CFO of Voyager, defends the acquisition by stating that The Daily has accumulated a large amount of tax losses and that the combined company can benefit by immediately increasing net income after the merger. In addition, Renner states that the New Voyager will eliminate the inefficiencies of the internet operations and thereby boost future earnings. Renner believes that the merged companies will have a value of $17.5 billion.

In the past, The Daily's management has publicly stated its opposition to merging with any company, a position management still maintains. As a result of this situation, Voyager submitted their merger proposal directly to The Daily's board of directors, while the firm's CEO was on vacation. Upon returning from vacation, The Daily's CEO issued a public statement claiming that the proposed merger was unacceptable under any circumstances.

Assuming that Renner's estimate of the value of the merged companies is correct, calculate the acquirer's gain from the merger.

  1. $7,910.5 million.
  2. $9,503.2 million.
  3. $11,634.2 million.

Answer(s): A

Explanation:

First, we must separate the synergistic value from the combined value of the firm as follows:

VAT = VA + VT + S – C

where:
VAT = the combined value of the firm

VA = the value of the acquirer before the merger
VT = the value of the target before the merger
S = the synergistic value from the merger
C = the cash paid to the target

Rearranging the formula, the synergistic value can be isolated as follows:
S = VAT -VA - VT + C

= 17,500 - (68 x 117.6) - (35 213-1) + (45 213.1) _
= 17,500 - 7,996.8 - 7,458.5 + 9,589.5
= 11,634.2 million.

Next calculate the acquirer's gain as follows:
acquirer's gain = S - (PT - VT)

where:
S = the synergistic value from the merger
PT = the price paid for the target
VT = the value of the target before the merger

acquirers gain = 11,634.2 - [(45 x 213.1) - (35 x 213.1)]
= 11,634.2-(9,589.5-7,458.5)
= $9,503.2 million

(Study Session 9, LOS 31-1)



Voyager Inc., a primarily internet-based media company, is buying The Daily, a media company with exposure to newspapers, television, and the internet.

Company Descriptions
Voyager Inc. is organized into two segments: Internet and Newspaper Publishing. The internet segment operates Web sites that offer news, entertainment, and advertising content in text and video format. The internet segment represents 75% of the company's total revenues. The newspaper publishing segment publishes 10 daily newspapers. The newspaper publishing segment represents 25% of the company's total revenues.

The Daily is organized into three segments: Newspaper Publishing (60% of revenues), Broadcasting (35% of revenues), and Internet (5% of revenues). The newspaper publishing segment publishes 101 daily newspapers. The Broadcasting segment owns and operates 25 television stations. The Internet segment consists of an internet advertising service. The Daily's newspaper publishing and broadcasting segments cover the twenty largest markets in the United States.

Voyager's acquisition of The Daily is The company's second major acquisition in its history. The previous acquisition was at the height of the merger boom in the year 2000. Voyager purchased the Dragon Company at a premium to net asset value, thereby doubling the company's size. Voyager used the pooling method to account for the acquisition of Dragon; however, because of FASB changes to the Business Combination Standard, Voyager will use the acquisition method to account for the Daily acquisition.


Voyager has made an all-cash offer of $45 per share to acquire The Daily. Wall Street is skeptical about the merger. While Voyager has been growing its revenues by 40% per year, The Daily's revenue growth has been less than 2% per year. Michael Renner. the CFO of Voyager, defends the acquisition by stating that The Daily has accumulated a large amount of tax losses and that the combined company can benefit by immediately increasing net income after the merger. In addition, Renner states that the New Voyager will eliminate the inefficiencies of the internet operations and thereby boost future earnings. Renner believes that the merged companies will have a value of $17.5 billion.

In the past, The Daily's management has publicly stated its opposition to merging with any company, a position management still maintains. As a result of this situation, Voyager submitted their merger proposal directly to The Daily's board of directors, while the firm's CEO was on vacation. Upon returning from vacation, The Daily's CEO issued a public statement claiming that the proposed merger was unacceptable under any circumstances.

Assume that Voyager offers 63 million shares of its stock, rather than cash, to acquire The Daily. The share price of the combined company is closest to:

  1. $145 per share.
  2. $150 per share.
  3. $155 per share.

Answer(s): B

Explanation:

total shares = 63.0 + 117.6 = 180.6 million
= 7,996.8 + 7,458.5 + 11,634.2 - 0 = 27,089.5
new share price = 27,089.5 / 180.6 = 150.0 (Study Session 9, LOS 31,.l,m)



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