In Early 2009 Ham Inc

question 6

Multiple Choice

In early 2009 Ham Inc.'s management was considering making an offer to buy Egg Corporation. Egg's projected operating income (EBIT) for 2009 was $30 million, but Ham believes that if the two firms were merged, it could consolidate some operations, reduce Egg's expenses, and raise its EBIT to $40 million. Neither company uses any debt, and they both pay income taxes at a 40% rate. Ham has a better reputation among investors, who regard it as better managed and also less risky, so Ham's stock has a P/E ratio of 15 versus a P/E of 12 for Egg. Since Ham's management will be running the entire enterprise after a merger, investors will value the resulting corporation based on Ham's P/E. Based on expected market values, how much synergy should the merger create?

• A) $129.96
• B) $136.80
• C) $144.00
• D) $151.20
• E) $158.76

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Definitions:

Economically Inefficient

A situation where resources are not allocated in a way that maximizes the total benefit to society, often resulting in wasted or misallocated resources.

Voter Failure

A situation where voters are uninformed or make irrational decisions, leading to outcomes not reflecting the true preferences of the majority.

Allocative Efficiency

A state of the economy in which production represents consumer preferences; every good or service is produced up to the point where the last unit provides a utility level equal to the cost of producing it.

Productive Efficiency

A situation where the economy or an economic system operates in a way that it cannot produce more of one good without affecting the production of another good.