Question 1

A spin-off is a type of divestiture in which the assets of a division are sold to another firm.

Accepted Answer

A) True 
 B)False  False

Question 2

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 B

Question 3

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 4

Anacott Steel is acquiring Terafly Incorporated. Terafly is expected to provide Anacott with operating cash flows of $12, $21, $16, and $9 million over the next four years, respectively. In addition, the horizon value of all remaining cash flows at the end of Year 4 is estimated at $18 million. The merger will cost Anacott $45.0 million today. If the value of the merger is estimated at $9.00 per share and Anacott has 1,000,000 shares outstanding, what equity discount rate must the firm be using to value this acquisition?

Accepted Answer

A)  11.63% 
B)  12.25% 
C)  12.89% 
D)  13.57% 
E)  14.25% 
A)  11.63% 
B)  12.25% 
C)  12.89% 
D)  13.57% 
E)  14.25%

Question 5

Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the discount rate can only be determined after the merger is consummated.

Accepted Answer

A) True 
 B)False

Question 6

In early 2011 Giant Inc.'s management was considering making an offer to buy Micro Corporation. Micro's projected operating income (EBIT) for 2011 was $30 million, but Giant believes that if the two firms were merged, it could consolidate some operations, reduce Micro's expenses, and raise its EBIT to $35 million. Neither company uses any debt, and they both pay income taxes at a 35% rate. Giant has a better reputation among investors, who regard it as very well managed and not very risky, so its stock has a P/E ratio of 12 versus a P/E of 9 for Micro. Since Giant's management would be running the entire enterprise after a merger, investors would value the resulting corporation based on Giant's P/E. If Micro has 10 million shares outstanding, by how much should the merger increase its share price, assuming all of the synergy will go to its stockholders?

Accepted Answer

A)  $7.94 
B)  $8.36 
C)  $8.80 
D)  $9.26 
E)  $9.75 
A)  $7.94 
B)  $8.36 
C)  $8.80 
D)  $9.26 
E)  $9.75

Question 7

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.

Question 8

Merger activity is likely to heat up when interest rates are high because target firms can expect to receive an especially high premium over the pre-announcement stock price.

Accepted Answer

A) True 
 B)False

Question 9

The rate used to discount projected merger cash flows should be the overall cost of capital of the new consolidated firm because it incorporates the actual capital structure of the new firm.

Accepted Answer

A) True 
 B)False

Question 10

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 11

The distribution of synergistic gains between the stockholders of two merged firms is almost always based strictly on their respective market values before the announcement of the merger.

Accepted Answer

A) True 
 B)False

Question 12

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 13

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 14

Simpson Inc. is considering a vertical merger with The Lachey Company. Simpson currently has a required return of 11%, while Lachey's required return is 15%. The market risk premium is 5% and the risk-free rate is 5%. Assume the market is in equilibrium. If Simpson is going to make up 67% of the new firm (and Lachey will comprise the remaining 33%), what will be the beta of the new merged firm? There will be no additional infusion of debt in the merger.

Accepted Answer

A)  1.46 
B)  1.54 
C)  1.61 
D)  1.69 
E)  1.78 
A)  1.46 
B)  1.54 
C)  1.61 
D)  1.69 
E)  1.78

Question 15

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 16

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

Accepted Answer

A) True 
 B)False

Question 17

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.

Question 18

Which of the following actions does NOT help managers defend against a hostile takeover?

Accepted Answer

A)  Establishing a poison pill provision. 
B)  Granting lucrative golden parachutes to senior managers. 
C)  Establishing a super-majority provision in the company's bylaws to raise the percentage of the board of directors that must approve an acquisition from 50% to 75%. 
D)  Retiring long-term debt early to reduce total debt on the balance sheet which will increase the firm's financial position. 
E)  Finding a "white squire" that will buy enough of the target firm's shares to block the hostile takeover. 
A)  Establishing a poison pill provision. 
B)  Granting lucrative golden parachutes to senior managers. 
C)  Establishing a super-majority provision in the company's bylaws to raise the percentage of the board of directors that must approve an acquisition from 50% to 75%. 
D)  Retiring long-term debt early to reduce total debt on the balance sheet which will increase the firm's financial position. 
E)  Finding a "white squire" that will buy enough of the target firm's shares to block the hostile takeover.

Question 19

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 20

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.

A spin-off is a type of divestiture in which the assets of a division are sold to another firm.

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.

Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the discount rate can only be determined after the merger is consummated.

Which of the following statements is most CORRECT?

Merger activity is likely to heat up when interest rates are high because target firms can expect to receive an especially high premium over the pre-announcement stock price.

The rate used to discount projected merger cash flows should be the overall cost of capital of the new consolidated firm because it incorporates the actual capital structure of the new firm.

Which of the following statements is most CORRECT?

The distribution of synergistic gains between the stockholders of two merged firms is almost always based strictly on their respective market values before the announcement of the merger.

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.

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

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

Which of the following actions does NOT help managers defend against a hostile takeover?

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.

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

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Time Value of Money

Interest Rates

Bonds

Risk and Return

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Exam 21: Mergers

A spin-off is a type of divestiture in which the assets of a division are sold to another firm.

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.

Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the discount rate can only be determined after the merger is consummated.

Which of the following statements is most CORRECT?

Merger activity is likely to heat up when interest rates are high because target firms can expect to receive an especially high premium over the pre-announcement stock price.

The rate used to discount projected merger cash flows should be the overall cost of capital of the new consolidated firm because it incorporates the actual capital structure of the new firm.

Which of the following statements is most CORRECT?

The distribution of synergistic gains between the stockholders of two merged firms is almost always based strictly on their respective market values before the announcement of the merger.

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.

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

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

Which of the following actions does NOT help managers defend against a hostile takeover?

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.

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

Overview

Financial Markets

Financial Statements

Statement Analysis

Time Value of Money

Interest Rates

Bonds

Risk and Return

Stocks

Cost of Capital

Capital Budgeting

Cash Flow and Risk

Real Options

Capital Structure

Dividends

Working Capital

Forecasting

Derivatives

Multinational

Hybrid Financing

Filters