Question 1

Following an acquisition, the acquiring firm's balance sheet shows an asset labeled "goodwill." What form of merger accounting was used?

Accepted Answer

A) Consolidation 
B) Aggregation 
C) Purchase 
D) None of these options are correct. 
A) Consolidation 
B) Aggregation 
C) Purchase 
D) None of these options are correct.

Question 2

Compensation paid to top management who lose their jobs in the event of a takeover is called a

Accepted Answer

A) poison pill. 
B) golden parachute. 
C) self-tender. 
D) buyout. 
A) poison pill. 
B) golden parachute. 
C) self-tender. 
D) buyout.

Question 3

A would-be acquirer making a tender offer directly to shareholders is called a proxy fight.

Accepted Answer

A) True 
 B)False

Question 4

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 NPV of the merger.

Accepted Answer

A) $200 
B) $400 
C) $600 
D) $150 
A) $200 
B) $400 
C) $600 
D) $150

Question 5

If Firm A acquires Firm B and Firm B's shareholders are given the fraction x of the combined firm, then the cost of this merger is

Accepted Answer

A) Cost = (PVA
B) − (x)PVB. 
B) Cost = (x)PVAB − PVB. 
C) Cost = PVAB − (x)PVA. 
D) Cost = (x)PVAB − (x)PVB. 
A) Cost = (PVA
B) − (x)PVB. 
B) Cost = (x)PVAB − PVB. 
C) Cost = PVAB − (x)PVA. 
D) Cost = (x)PVAB − (x)PVB.

Question 6

Assume the following data:
 
If Firm A intends to pay $7 million cash for Firm B, then calculate the cost of this merger.

Accepted Answer

A) $2 million 
B) $3 million 
C) $1 million 
D) zero 
A) $2 million 
B) $3 million 
C) $1 million 
D) zero

Question 7

Takeover defenses appear to favor

Accepted Answer

A) stockholders. 
B) workers. 
C) creditors. 
D) managers. 
A) stockholders. 
B) workers. 
C) creditors. 
D) managers.

Question 8

Which of the following actions by an acquiring firm signals its belief that postmerger gains will be substantially larger than expected?

Accepted Answer

A) The acquiring firm makes a stock offer, since its stock value is priced lower than it will be postmerger. 
B) The acquiring firm makes a cash offer, since this allows the acquirer to solely benefit from gains not yet reflected in the market. 
C) The acquiring firm attempts to gain majority ownership, but not complete ownership. 
D) The acquiring firm makes an offer with the condition that management must be replaced. 
A) The acquiring firm makes a stock offer, since its stock value is priced lower than it will be postmerger. 
B) The acquiring firm makes a cash offer, since this allows the acquirer to solely benefit from gains not yet reflected in the market. 
C) The acquiring firm attempts to gain majority ownership, but not complete ownership. 
D) The acquiring firm makes an offer with the condition that management must be replaced.

Question 9

Firm A plans to acquire Firm B by making a cash offer of $27 a share for all 100,000 shares of B. It estimates that the merger will produce cost savings with a present value of $800,000. Recently, Firm B's stock price increased from $20 to $24 per share, evidently due to its excellent financial performance. Firm A thus estimates Firm B's stand-alone price at $24. However, the CFO suggests a re-evaluation of the offer, pointing out that the true stand-alone value of Firm B may be $20 per share, not $24 per share. If the stand-alone value is $20 per share, will the merger still generate positive NPV for Firm A?

Accepted Answer

A) No. The cost to acquire Firm B will exceed the postmerger gain of $800,000. 
B) No. Firm A will break even, since the costs are $400,000 more than expected. 
C) Yes. Firm A will still make a gain, although Firm B captures more of the economic gain than expected. 
D) Yes. Since the market is efficient, the true stand-alone value of Firm B is $24 per share and the CFO's fear is unwarranted. 
A) No. The cost to acquire Firm B will exceed the postmerger gain of $800,000. 
B) No. Firm A will break even, since the costs are $400,000 more than expected. 
C) Yes. Firm A will still make a gain, although Firm B captures more of the economic gain than expected. 
D) Yes. Since the market is efficient, the true stand-alone value of Firm B is $24 per share and the CFO's fear is unwarranted.

Question 10

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. What will be the postmerger price per share for Firm A's stock if Firm A pays in cash?

Accepted Answer

A) $108 
B) $110 
C) $102 
D) $114 
A) $108 
B) $110 
C) $102 
D) $114

Question 11

The following are pre-offer defenses: litigation, asset restructuring, and liability restructuring.

Accepted Answer

A) True 
 B)False

Question 12

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. What is the cost of 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 13

The following are sensible reasons for mergers:
I.economies of scale;
II.economics of vertical integration;
III.complementary resources;
IV.prevent target firm from wasting surplus funds;
V.eliminate target firm inefficiencies;
VI.industry consolidation

Accepted Answer

A) I only 
B) I, II, and III only 
C) I, III, IV, and V only 
D) I, II, III, IV, V, and VI 
A) I only 
B) I, II, and III only 
C) I, III, IV, and V only 
D) I, II, III, IV, V, and VI

Question 14

The following are dubious reasons for mergers:
I.diversification;
II.increase earnings per share (EPS);
III.lower financing costs;
IV.industry consolidation

Accepted Answer

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

Question 15

Who gains the most in mergers?

Accepted Answer

Generally, sellers do better than buyers

Question 16

A poison pill protects the rights of shareholders.

Accepted Answer

A) True 
 B)False

Question 17

Briefly describe the different types of mergers.

Accepted Answer

There are essentially three types of mer

Question 18

A modification of the corporate charter that requires 80 percent shareholder approval for a takeover is called a(n)

Accepted Answer

A) repurchase standstill provision. 
B) exclusionary self-tender. 
C) supermajority amendment. 
D) tender offer. 
A) repurchase standstill provision. 
B) exclusionary self-tender. 
C) supermajority amendment. 
D) tender offer.

Question 19

The merger between Amazon and Whole Foods is an example of a

Accepted Answer

A) horizontal merger. 
B) vertical merger. 
C) conglomerate merger. 
D) None of these options are correct. 
A) horizontal merger. 
B) vertical merger. 
C) conglomerate merger. 
D) None of these options are correct.

Question 20

A vertical merger is one in which the buyer expands forward in the direction of the ultimate consumer or backward toward the source of raw material.

Accepted Answer

A) True 
 B)False

Exam 31: Mergers

Following an acquisition, the acquiring firm's balance sheet shows an asset labeled "goodwill." What form of merger accounting was used?

Compensation paid to top management who lose their jobs in the event of a takeover is called a

A would-be acquirer making a tender offer directly to shareholders is called a proxy fight.

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 NPV of the merger.

If Firm A acquires Firm B and Firm B's shareholders are given the fraction x of the combined firm, then the cost of this merger is

Assume the following data: If Firm A intends to pay $7 million cash for Firm B, then calculate the cost of this merger.

Takeover defenses appear to favor

Which of the following actions by an acquiring firm signals its belief that postmerger gains will be substantially larger than expected?

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. What will be the postmerger price per share for Firm A's stock if Firm A pays in cash?

The following are pre-offer defenses: litigation, asset restructuring, and liability restructuring.

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. What is the cost of this merger?

The following are sensible reasons for mergers: I.economies of scale; II.economics of vertical integration; III.complementary resources; IV.prevent target firm from wasting surplus funds; V.eliminate target firm inefficiencies; VI.industry consolidation

The following are dubious reasons for mergers: I.diversification; II.increase earnings per share (EPS); III.lower financing costs; IV.industry consolidation

Who gains the most in mergers?

A poison pill protects the rights of shareholders.

Briefly describe the different types of mergers.

A modification of the corporate charter that requires 80 percent shareholder approval for a takeover is called a(n)

The merger between Amazon and Whole Foods is an example of a

A vertical merger is one in which the buyer expands forward in the direction of the ultimate consumer or backward toward the source of raw material.

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

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