Question 1

Which of the following statements is most CORRECT?

Accepted Answer

A)  If a company that produces military equipment merges with a company that manages a chain of motels, this is an example of a horizontal merger. 
B)  A defensive merger is one where the firm's managers decide to merge with another firm to avoid or lessen the possibility of being acquired through a hostile takeover. 
C)  Acquiring firms send a signal that their stock is undervalued if they choose to use stock to pay for the acquisition. 
D)  In a liquidation, the firm's existing stockholders are given new stock representing separate ownership rights in the division that was divested. The division establishes its own board of directors and officers, and it becomes a separate company. 
E)  If there are no synergistic benefits to be gained from a merger, the acquiring company will stop its plans for the merger. However, if synergistic gains are large, plans for the merger will continue. In fact, the greater the synergistic gains, the smaller the gap between the target's current price and the maximum the acquiring company could pay because of the acquiring company's upper hand in the merger. 
A)  If a company that produces military equipment merges with a company that manages a chain of motels, this is an example of a horizontal merger. 
B)  A defensive merger is one where the firm's managers decide to merge with another firm to avoid or lessen the possibility of being acquired through a hostile takeover. 
C)  Acquiring firms send a signal that their stock is undervalued if they choose to use stock to pay for the acquisition. 
D)  In a liquidation, the firm's existing stockholders are given new stock representing separate ownership rights in the division that was divested. The division establishes its own board of directors and officers, and it becomes a separate company. 
E)  If there are no synergistic benefits to be gained from a merger, the acquiring company will stop its plans for the merger. However, if synergistic gains are large, plans for the merger will continue. In fact, the greater the synergistic gains, the smaller the gap between the target's current price and the maximum the acquiring company could pay because of the acquiring company's upper hand in the merger. B

Question 2

A joint venture is one in which two, or sometimes more, independent companies agree to combine resources in order to achieve a specific objective, usually limited in scope.

Accepted Answer

A) True 
 B)False  True

Question 3

The primary reason given by managers for most mergers is the acquisition of more assets so as to increase sales and market share.

Accepted Answer

A) True 
 B)False  False

Question 4

Post-merger control and the negotiated price paid by the acquirer are two of the most important issues in the terms to merger agreements.

Accepted Answer

A) True 
 B)False

Question 5

Only if a target firm's value is greater to the acquiring firm than its market value as a separate entity will a merger be financially justified.

Accepted Answer

A) True 
 B)False

Question 6

Borrowing funds on terms that would require immediate repayment of all loans if the firm is acquired, selling off at bargain prices the assets that originally made the firm a desirable target, and granting huge "golden parachutes" that open if the firm is acquired are 3 procedures used to defend against hostile takeovers. These strategies are known as "poison pills."

Accepted Answer

A) True 
 B)False

Question 7

Gekko Properties is considering purchasing Teldar Properties. Gekko's analysts project that the merger will result in incremental after-tax cash flows of $2 million, $4 million, $5 million, and $10 million over the next four years. The horizon value of the firm's operations, as of Year 4, is expected to be $107 million. Assume all cash flows occur at the end of the year. The acquisition would be made immediately, if it is undertaken. Teldar's post-merger beta is estimated to be 2.0, and its post-merger tax rate would be 35%. The risk-free rate is 6%, and the market risk premium is 5.5%. What is the value of Teldar to Gekko Properties?

Accepted Answer

A)  $66,680,846 
B)  $70,190,364 
C)  $73,699,883 
D)  $77,384,877 
E)  $81,254,121 
A)  $66,680,846 
B)  $70,190,364 
C)  $73,699,883 
D)  $77,384,877 
E)  $81,254,121

Question 8

In early 2011 Ham Inc.'s management was considering making an offer to buy Egg Corporation. Egg's projected operating income (EBIT) for 2011 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?

Accepted Answer

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

Question 9

Since managers' central goal is to maximize stock price, managers' personal incentives do not interfere with mergers that would benefit the target firm's stockholders.

Accepted Answer

A) True 
 B)False

Question 10

If a petrochemical firm that used oil as feedstock merged with an oil producer that had large oil reserves and a drilling subsidiary, this would be a vertical merger.

Accepted Answer

A) True 
 B)False

Question 11

The value of the target firm is calculated by discounting residual cash flows that belong to the acquiring firm's shareholders at the target's cost of equity reflecting any changes to its capital structure as a result of the merger.

Accepted Answer

A) True 
 B)False

Question 12

A congeneric merger is one where the merging firms operate in related businesses but do not necessarily produce the same products or have a producer-supplier relationship.

Accepted Answer

A) True 
 B)False

Question 13

The text gives a number of valid, acceptable reasons for companies to merge. Which of the following is NOT acceptable?

Accepted Answer

A)  Synergistic benefits arising from mergers. 
B)  Reduction in competition resulting from mergers. 
C)  Acquisition of assets at below replacement value. 
D)  Attempts to minimize taxes by acquiring a firm with large accumulated losses that can be used immediately. 
E)  Using surplus cash to acquire another firm and prevent unfavorable tax consequences for shareholders. 
A)  Synergistic benefits arising from mergers. 
B)  Reduction in competition resulting from mergers. 
C)  Acquisition of assets at below replacement value. 
D)  Attempts to minimize taxes by acquiring a firm with large accumulated losses that can be used immediately. 
E)  Using surplus cash to acquire another firm and prevent unfavorable tax consequences for shareholders.

Question 14

Which of the following statements is most CORRECT?

Accepted Answer

A)  The high value of the U.S. dollar relative to Japanese and European currencies in the 1980s, made U.S. companies comparatively inexpensive to foreign buyers, spurring many mergers. 
B)  During the 1980s, the Reagan and Bush administrations tried to foster greater competition and they were adamant about preventing the loss of competition; thus, most large mergers were disallowed. 
C)  The expansion of the junk bond market made debt more freely available for large acquisitions and LBOs in the 1980s, and thus, it resulted in an increased level of merger activity. 
D)  Increased nationalization of business and a desire to scale down and focus on producing in one's home country has virtually halted cross-border mergers today. 
E)  Because strategic alliances and joint ventures are easy to form and enable firms to compete better in the global economy than would mergers, merger activity has virtually come to a halt in the 21st century. 
A)  The high value of the U.S. dollar relative to Japanese and European currencies in the 1980s, made U.S. companies comparatively inexpensive to foreign buyers, spurring many mergers. 
B)  During the 1980s, the Reagan and Bush administrations tried to foster greater competition and they were adamant about preventing the loss of competition; thus, most large mergers were disallowed. 
C)  The expansion of the junk bond market made debt more freely available for large acquisitions and LBOs in the 1980s, and thus, it resulted in an increased level of merger activity. 
D)  Increased nationalization of business and a desire to scale down and focus on producing in one's home country has virtually halted cross-border mergers today. 
E)  Because strategic alliances and joint ventures are easy to form and enable firms to compete better in the global economy than would mergers, merger activity has virtually come to a halt in the 21st century.

Question 15

The purchase of assets at below their replacement cost and tax considerations are two factors that motivate mergers.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following statements is most CORRECT?

Accepted Answer

A)  Leveraged buyouts (LBOs) occur when a firm issues equity and uses the proceeds to take a firm public. 
B)  In a typical LBO, bondholders do well but shareholders see their value decline. 
C)  Firms are forbidden by law to sell any assets during the first five years following a leverage buyout. 
D)  Not all target firms are acquired by publicly traded corporations. In recent years, an increasing number of firms have been acquired by private equity firms. Private equity firms raise capital from wealthy individuals and look for opportunities to make profitable investments. 
E)  In an LBO sometimes the acquiring group plans to run the acquired company for a number of years, boost its sales and profits, and then take it public again as a stronger company. In other instances, the LBO firm plans to sell off divisions to other firms that can gain synergies. In either case, the acquiring group expects to make a substantial profit from the LBO, but the inherent risks are small due to the heavy use of venture capital and very little debt. 
A)  Leveraged buyouts (LBOs) occur when a firm issues equity and uses the proceeds to take a firm public. 
B)  In a typical LBO, bondholders do well but shareholders see their value decline. 
C)  Firms are forbidden by law to sell any assets during the first five years following a leverage buyout. 
D)  Not all target firms are acquired by publicly traded corporations. In recent years, an increasing number of firms have been acquired by private equity firms. Private equity firms raise capital from wealthy individuals and look for opportunities to make profitable investments. 
E)  In an LBO sometimes the acquiring group plans to run the acquired company for a number of years, boost its sales and profits, and then take it public again as a stronger company. In other instances, the LBO firm plans to sell off divisions to other firms that can gain synergies. In either case, the acquiring group expects to make a substantial profit from the LBO, but the inherent risks are small due to the heavy use of venture capital and very little debt.

Question 17

Which of the following statements is most CORRECT?

Accepted Answer

A)  Tax considerations often play a part in mergers. If one firm has excess cash, purchasing another firm exposes the purchasing firm to additional taxes. Thus, firms with excess cash rarely undertake mergers. 
B)  The smaller the synergistic benefits of a particular merger, the greater the scope for striking a bargain in negotiations, and the higher the probability that the merger will be completed. 
C)  Since mergers are frequently financed by debt rather than equity, a lower cost of debt or a greater debt capacity are rarely relevant considerations when considering a merger. 
D)  Managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification, including more stable earnings. However, since shareholders are free to diversify their own holdings, and at what's probably a lower cost, research of U.S. firms suggests that in most cases, diversification through mergers does not increase the firm's value. 
E)  Research of U.S. firms suggests that managers' personal motivations have had little, if any, impact on firms' decisions to merge. 
A)  Tax considerations often play a part in mergers. If one firm has excess cash, purchasing another firm exposes the purchasing firm to additional taxes. Thus, firms with excess cash rarely undertake mergers. 
B)  The smaller the synergistic benefits of a particular merger, the greater the scope for striking a bargain in negotiations, and the higher the probability that the merger will be completed. 
C)  Since mergers are frequently financed by debt rather than equity, a lower cost of debt or a greater debt capacity are rarely relevant considerations when considering a merger. 
D)  Managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification, including more stable earnings. However, since shareholders are free to diversify their own holdings, and at what's probably a lower cost, research of U.S. firms suggests that in most cases, diversification through mergers does not increase the firm's value. 
E)  Research of U.S. firms suggests that managers' personal motivations have had little, if any, impact on firms' decisions to merge.

Question 18

Synergistic benefits can arise from a number of different sources, including operating economies of scale, financial economies, and increased managerial efficiency.

Accepted Answer

A) True 
 B)False

Question 19

Most defensive mergers occur as a result of managers' actions to maximize shareholders' wealth.

Accepted Answer

A) True 
 B)False

Question 20

Firms use defensive tactics to fight off undesired mergers. These tactics do NOT include

Accepted Answer

A)  raising antitrust issues. 
B)  developing poison pills. 
C)  getting white knights to bid for the firm. 
D)  repurchasing their own stock. 
E)  engaging in risk arbitrage. 
A)  raising antitrust issues. 
B)  developing poison pills. 
C)  getting white knights to bid for the firm. 
D)  repurchasing their own stock. 
E)  engaging in risk arbitrage.

Which of the following statements is most CORRECT?

A joint venture is one in which two, or sometimes more, independent companies agree to combine resources in order to achieve a specific objective, usually limited in scope.

The primary reason given by managers for most mergers is the acquisition of more assets so as to increase sales and market share.

Post-merger control and the negotiated price paid by the acquirer are two of the most important issues in the terms to merger agreements.

Only if a target firm's value is greater to the acquiring firm than its market value as a separate entity will a merger be financially justified.

Since managers' central goal is to maximize stock price, managers' personal incentives do not interfere with mergers that would benefit the target firm's stockholders.

If a petrochemical firm that used oil as feedstock merged with an oil producer that had large oil reserves and a drilling subsidiary, this would be a vertical merger.

The value of the target firm is calculated by discounting residual cash flows that belong to the acquiring firm's shareholders at the target's cost of equity reflecting any changes to its capital structure as a result of the merger.

A congeneric merger is one where the merging firms operate in related businesses but do not necessarily produce the same products or have a producer-supplier relationship.

The text gives a number of valid, acceptable reasons for companies to merge. Which of the following is NOT acceptable?

Which of the following statements is most CORRECT?

The purchase of assets at below their replacement cost and tax considerations are two factors that motivate mergers.

Which of the following statements is most CORRECT?

Which of the following statements is most CORRECT?

Synergistic benefits can arise from a number of different sources, including operating economies of scale, financial economies, and increased managerial efficiency.

Most defensive mergers occur as a result of managers' actions to maximize shareholders' wealth.

Firms use defensive tactics to fight off undesired mergers. These tactics do NOT include

Overview

Financial Markets

Financial Statements

Statement Analysis

Time Value of Money

Forecasting

Interest Rates

Risk and Return

Bonds

Stocks

Cost of Capital

Capital Budgeting Mc Problems

Cash Flow and Risk

Real Options

Capital Structure

Dividends

Working Capital

Derivatives

Multinational

Hybrid Financing

Filters

Exam 21: Mergers

Which of the following statements is most CORRECT?

A joint venture is one in which two, or sometimes more, independent companies agree to combine resources in order to achieve a specific objective, usually limited in scope.

The primary reason given by managers for most mergers is the acquisition of more assets so as to increase sales and market share.

Post-merger control and the negotiated price paid by the acquirer are two of the most important issues in the terms to merger agreements.

Only if a target firm's value is greater to the acquiring firm than its market value as a separate entity will a merger be financially justified.

Since managers' central goal is to maximize stock price, managers' personal incentives do not interfere with mergers that would benefit the target firm's stockholders.

If a petrochemical firm that used oil as feedstock merged with an oil producer that had large oil reserves and a drilling subsidiary, this would be a vertical merger.

The value of the target firm is calculated by discounting residual cash flows that belong to the acquiring firm's shareholders at the target's cost of equity reflecting any changes to its capital structure as a result of the merger.

A congeneric merger is one where the merging firms operate in related businesses but do not necessarily produce the same products or have a producer-supplier relationship.

The text gives a number of valid, acceptable reasons for companies to merge. Which of the following is NOT acceptable?

Which of the following statements is most CORRECT?

The purchase of assets at below their replacement cost and tax considerations are two factors that motivate mergers.

Which of the following statements is most CORRECT?

Which of the following statements is most CORRECT?

Synergistic benefits can arise from a number of different sources, including operating economies of scale, financial economies, and increased managerial efficiency.

Most defensive mergers occur as a result of managers' actions to maximize shareholders' wealth.

Firms use defensive tactics to fight off undesired mergers. These tactics do NOT include

Overview

Financial Markets

Financial Statements

Statement Analysis

Time Value of Money

Forecasting

Interest Rates

Risk and Return

Bonds

Stocks

Cost of Capital

Capital Budgeting Mc Problems

Cash Flow and Risk

Real Options

Capital Structure

Dividends

Working Capital

Derivatives

Multinational

Hybrid Financing

Filters