Question 1

The merger of two similar pharmaceutical firms is an example of a

Accepted Answer

A) horizontal merger. 
B) cross-border merger. 
C) conglomerate merger. 
D) horizontal merger and conglomerate merger. 
A) horizontal merger. 
B) cross-border merger. 
C) conglomerate merger. 
D) horizontal merger and conglomerate merger. A

Question 2

The following are methods available to change the management of a firm:
I.a successful proxy contest in which a group of shareholders vote in a new board of directors who then pick a new management team;
II.a takeover of one firm by another firm;
III.a leveraged buyout of the firm by a private group of investors

Accepted Answer

A) I only 
B) II and III only 
C) I, II, and III 
D) I and III only 
A) I only 
B) II and III only 
C) I, II, and III 
D) I and III only C

Question 3

Two companies can sensibly be considered for a merger if they have complementary resources.

Accepted Answer

A) True 
 B)False  True

Question 4

Suppose that the market price of Company A is $50 per share and that of Company B is $20. If A offers half a share of common stock for each share of B, what is the percentage increase in wealth for B's shareholders? (Assume that the offer has no effect on the value of A's shares.)

Accepted Answer

A) −20 percent 
B) +25 percent 
C) −25 percent 
D) +20 percent 
A) −20 percent 
B) +25 percent 
C) −25 percent 
D) +20 percent

Question 5

A dissident group solicits votes in an attempt to replace existing management. This is called a

Accepted Answer

A) proxy fight. 
B) shareholder derivative action. 
C) tender offer. 
D) management freeze-out. 
A) proxy fight. 
B) shareholder derivative action. 
C) tender offer. 
D) management freeze-out.

Question 6

The following are sensible motives for mergers EXCEPT

Accepted Answer

A) economies of scale. 
B) complementary resources. 
C) diversification. 
D) eliminating inefficiencies. 
A) economies of scale. 
B) complementary resources. 
C) diversification. 
D) eliminating inefficiencies.

Question 7

Firm A has a value of $200 million and Firm B has a value of $120 million. Merging the two would enable cost savings with a present value of $30 million. Firm A purchases Firm B for $130 million. How much do Firm A's shareholders gain from this merger?

Accepted Answer

A) $30 million 
B) $20 million 
C) $15 million 
D) $10 million 
A) $30 million 
B) $20 million 
C) $15 million 
D) $10 million

Question 8

The gain from a merger is computed as Gain = PVAB − (PVA + PVB).

Accepted Answer

A) True 
 B)False

Question 9

The following data on a merger are given:
 
Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock. Calculate the postmerger P/E ratio, assuming that cash is used in the acquisition and the merger has no immediate effect on total firm income.

Accepted Answer

A) 12.75 
B) 6.25 
C) 13.75 
D) 17.85 
A) 12.75 
B) 6.25 
C) 13.75 
D) 17.85

Question 10

As a pre-offer defensive maneuver, existing bondholders can demand repayment if there is a change of control as a result of a hostile takeover. These bonds are an example of:

Accepted Answer

A) greenmail. 
B) a "scorched earth" policy. 
C) crown jewels. 
D) a poison put. 
A) greenmail. 
B) a "scorched earth" policy. 
C) crown jewels. 
D) a poison put.

Question 11

What role do hedge funds take when they speculate on merger activity by buying stock of firms that are "in play"?

Accepted Answer

A) Speculation causes an increased chance of antitrust lawsuits. 
B) Hedge funds specialize in taking on the risk that the deal will fall through and allow risk-averse investors to cash out. 
C) Hedge funds help reduce the cost of the merger to an acquirer. 
D) Hedge funds enable international mergers. 
A) Speculation causes an increased chance of antitrust lawsuits. 
B) Hedge funds specialize in taking on the risk that the deal will fall through and allow risk-averse investors to cash out. 
C) Hedge funds help reduce the cost of the merger to an acquirer. 
D) Hedge funds enable international mergers.

Question 12

Companies A and B are valued as follows:
 
Company A now acquires B by offering one (new)share of A for every two shares of B (that is, after the merger, there are 2,500 shares of A outstanding). Suppose that the merger really does increase the value of the combined firms by $20,000. . What is the cost of the merger?

Accepted Answer

A) zero 
B) $2,000 
C) $8,000 
D) $4,000 
A) zero 
B) $2,000 
C) $8,000 
D) $4,000

Question 13

A poison pill defense may be implemented by

Accepted Answer

A) giving stock away. 
B) selling firm assets. 
C) issuing rights that allow existing shareholders to buy stock at a bargain price. 
D) adding seats to the board of directors. 
A) giving stock away. 
B) selling firm assets. 
C) issuing rights that allow existing shareholders to buy stock at a bargain price. 
D) adding seats to the board of directors.

Question 14

Historically, merger activity increases with which market condition?

Accepted Answer

A) Low stock market prices 
B) High stock market prices 
C) Moderate market prices 
D) Merger activity is relatively constant throughout all market conditions. 
A) Low stock market prices 
B) High stock market prices 
C) Moderate market prices 
D) Merger activity is relatively constant throughout all market conditions.

Question 15

Which of the following factor(s)influence(s)the acquiring firm's choice between merger and an acquisition of stock?
I.Shareholders are dealt with directly to bypass target management and board of directors.
II.In a tender offer, usually some minority shareholders do not tender, stopping complete firm absorption.
III.Target management may be unfriendly and resist an offer. Resistance often increases the acquisition price.

Accepted Answer

A) I only 
B) II only 
C) III only 
D) I, II, and III 
A) I only 
B) II only 
C) III only 
D) I, II, and III

Question 16

When a merger of two firms is achieved by one firm, automatically assuming all the assets and all the liabilities of the other firm, such a merger requires

Accepted Answer

A) no shareholder meeting to vote. 
B) the approval of at least 50 percent of the stockholders (or as specified by corporate charters or state laws)of each firm. 
C) that the management of the two firms be tossed out. 
D) that the target firm search for alternative suitors. 
A) no shareholder meeting to vote. 
B) the approval of at least 50 percent of the stockholders (or as specified by corporate charters or state laws)of each firm. 
C) that the management of the two firms be tossed out. 
D) that the target firm search for alternative suitors.

Question 17

Briefly describe some of the good motives for mergers.

Accepted Answer

There are several good motives for merge

Question 18

Firm A has a value of $150 million and Firm B has a value of $100 million. Merging the two would enable cost savings with a present value of $40 million. Firm A purchases Firm B for $120 million. What is the gain from this merger?

Accepted Answer

A) $20 million 
B) $40 million 
C) $100 million 
D) $80 million 
A) $20 million 
B) $40 million 
C) $100 million 
D) $80 million

Question 19

Diversification is a very sensible reason for two companies to merge.

Accepted Answer

A) True 
 B)False

Question 20

Who are antitakeover defenses designed to protect?

Accepted Answer

Firms institute antitakeover measures to

Exam 31: Mergers

The merger of two similar pharmaceutical firms is an example of a

Two companies can sensibly be considered for a merger if they have complementary resources.

Suppose that the market price of Company A is $50 per share and that of Company B is $20. If A offers half a share of common stock for each share of B, what is the percentage increase in wealth for B's shareholders? (Assume that the offer has no effect on the value of A's shares.)

A dissident group solicits votes in an attempt to replace existing management. This is called a

The following are sensible motives for mergers EXCEPT

Firm A has a value of $200 million and Firm B has a value of $120 million. Merging the two would enable cost savings with a present value of $30 million. Firm A purchases Firm B for $130 million. How much do Firm A's shareholders gain from this merger?

The gain from a merger is computed as Gain = PVAB − (PVA + PVB).

The following data on a merger are given: Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock. Calculate the postmerger P/E ratio, assuming that cash is used in the acquisition and the merger has no immediate effect on total firm income.

As a pre-offer defensive maneuver, existing bondholders can demand repayment if there is a change of control as a result of a hostile takeover. These bonds are an example of:

What role do hedge funds take when they speculate on merger activity by buying stock of firms that are "in play"?

A poison pill defense may be implemented by

Historically, merger activity increases with which market condition?

When a merger of two firms is achieved by one firm, automatically assuming all the assets and all the liabilities of the other firm, such a merger requires

Briefly describe some of the good motives for mergers.

Firm A has a value of $150 million and Firm B has a value of $100 million. Merging the two would enable cost savings with a present value of $40 million. Firm A purchases Firm B for $120 million. What is the gain from this merger?

Diversification is a very sensible reason for two companies to merge.

Who are antitakeover defenses designed to protect?

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

How to Ensure That Projects Truly Have Positive Npvs

Agency Problems and Investment

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Corporate Restructuring

Governance and Corporate Control Around the World

Filters

The gain from a merger is computed as Gain = PV_AB − (PV_A + PV_B).