Question 41. Calculation of Average Costs with Economies of Scope C

41. Calculation of Average Costs with Economies of Scope Crib World is considering a merger with Tots Supply Stores. Crib’s total operating costs of producing services are $250,000 for sales volume of $1.25 million. Tots’ total operating costs of producing services are $210,000 for a sales volume (J_P) of $900,000. Calculate the average cost of production for the Crib and Tots firms, respectively.
A. 20%, 23.33%
B. 23.33%, 20%
C. 27.78%, 16.8%
D. 21.4%, 21.4%

42. Calculation of Average Costs with Economies of Scope Crib World is considering a merger with Tots Supply Stores. Crib’s total operating costs of producing services are $250,000 for sales volume of $1.25 million. Tots’ total operating costs of producing services are $210,000 for a sales volume (J_P) of $900,000. For a sales volume of $2.15 million, calculate the reduction in production costs the merged firms need to experience such that the total average cost (TAC) for the merged firms is equal to 17.5%.
A. decrease of $376,250
B. decrease of $83,750
C. decrease of $127,500
D. decrease of $87,500

43. Calculation of Average Costs with Economies of Scope Baby Supplies is considering a merger with Tot Toy Stores. Baby’s total operating costs of producing services are $450,000 for sales volume of $2.15 million. Tot’s total operating costs of producing services are $250,000 for a sales volume (J_P) of $975,000. Calculate the average cost of production for the Baby and Tot Toy firms, respectively.
A. 11.63%, 20.93%
B. 20.93%, 25.64%
C. 46.15%, 11.63%
D. 22.4%, 22.4%

44. Calculation of Average Costs with Economies of Scope Baby Supplies is considering a merger with Tot Toy Stores. Baby’s total operating costs of producing services are $450,000 for sales volume of $2.15 million. Tot’s total operating costs of producing services are $250,000 for a sales volume (J_P) of $975,000.For a sales volume of $3.125 million, calculate the reduction in production costs the merged firms need to experience such that the total average cost (TAC) for the merged firms is equal to 19.5%.
A. decrease of $609,375
B. decrease of $90,625
C. decrease of $9,375
D. decrease of $159,375

45. Valuation of a Merger Tim’s Fix It Shop, Inc., is asking a price of $50 million to be purchased by Taylor’s Tire Hut Corp. The two firms currently have cumulative total cash flows of $4 million which are growing at 2 percent annually. Managers estimate that because of synergies the merged firm’s cash flows will increase by an additional 5 percent for the first four years following the merger. After the first four years cash flows will grow at a rate of 3 percent. The WACC for the merged firms is 12 percent. Calculate the NPV of the merger. Should Taylor’s Tire Hut Corporation agree to acquire Tim’s Fix It Shop, Inc., for the asking price of $50 million?
A. yes, the NPV is³ $0
B. yes, the NPV is£ $0
C. no, the NPV is³ $0
D. no, the NPV is£ $0

46. Valuation of a Merger Windows N Such, Inc., is asking a price of $195 million to be purchased by Curtain Rods Corp. The two firms currently have cumulative total cash flows of $15 million which are growing at 1 percent annually. Managers estimate that because of synergies the merged firm’s cash flows will increase by an additional 3 percent for the first four years following the merger. After the first four years cash flows will grow at a rate of 2 percent. The WACC for the merged firms is 10 percent. Calculate the NPV of the merger. Should Curtain Rods Corporation agree to acquire Windows N Such, Inc., for the asking price of $195 million?
A. yes, the NPV is³ $0
B. yes, the NPV is£ $0
C. no, the NPV is³ $0
D. no, the NPV is£ $0

47. Valuation of a Merger Department Stores, Inc., is asking a price of $25 million to be purchased by Discount Stores Corp. The two firms currently have cumulative total cash flows of $2 million which are growing at 2.5 percent annually. Managers estimate that because of synergies the merged firm’s cash flows will increase by an additional 5 percent for the first four years following the merger. After the first four years cash flows will grow at a rate of 4.5 percent. The WACC for the merged firms is 13 percent. Calculate the NPV of the merger. Should Discount Stores Corporation agree to acquire Department Stores, Inc., for the asking price of $25 million?
A. yes, the NPV is³ $0
B. yes, the NPV is£ $0
C. no, the NPV is³ $0
D. no, the NPV is£ $0

48. Valuation of a Merger You own stock in Carpet City, Inc., which has just made a bid of $165 million to purchase Tile Corporation. The two firms currently have cumulative total cash flows of $25 million which are growing at 2 percent annually. Managers estimate that because of synergies the merged firm’s cash flows will increase by an additional 4 percent for the first three years following the merger. After the first three years cash flows will grow at a rate of 3 percent. The merged firms are expected to have a beta = 1.75, the risk-free rate is 5.5 percent, and the market risk premium is currently 7.5 percent. Calculate the NPV of the merger. Will you vote in favor of the merger?
A. yes, the NPV is³ $0
B. yes, the NPV is£ $0

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