Nina's Fashion Case

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BRIEF CONTENTS Table of Contents BRIEF CONTENTS 0 Table of Contents 1 MAIN CONTENTS 2 Case Background 2 Question 01 3 Question 02 3 Question 03 4 Question 04 5 Question 05 6 Question 06 7 Question 07 9 Question 08 10 Question 09 10 Question 10 12 Question 11 13 Question 12 14 MAIN CONTENTS Case Background Background Nina’s Fashions, Inc. runs a chain of retail clothing stores in Michigan, Wisconsin, and Illinois. Established in 1953, the company has been extending its business by means of acquisitions, and its strategic plans show preference for leasing over purchasing new sales locations. Management is considering taking over Chis, a chain of eleven stores which operate in Northern Illinois. Concerning the acquisition is the expected cash flows, a critical element of which is interest expense once Nina’s acquired Chic. (1) Interest on Chic’s existing debt (2) Interest on new debt funding the acquisition (3) Interest on new debts issuing over time for the purpose of expansion on new division Chic is currently financed by 40% Debt and taxed 30%; the volatility proves its beta to be 1.2. Had Chic be taken over, its debt ratio will boost to 50% and its burden tax rate rises to 40%. At the time, T-bond rate is 10% and investment bankers estimated 6% for the market premium. Problems Leasing preference leads Nina’s to a “was chest” of excess cash and poses stress on the decision whether or not to proceed the acquisition. Amongst deliberations are negotiations, maximum price offering, etc. Question 01 Question Several factors have been proposed as providing a rationale for mergers. Among the more prominent ones are (1) tax considerations, (2) diversification, (3) control, (4) purchase of assets below replacement cost, and (5) synergy. From the standpoint of society, which of these reasons are justifiable? Which

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