Question 1

Which of the following statements is most CORRECT?

Accepted Answer

A)  The acquiring firm's required rate of return in most horizontal mergers will not be affected, because the two firms will have similar betas. 
B)  The goal of merger valuation is to value the target firm's total capital at the target firm's weighted average cost of capital because a firm is acquired from all of its investors--both shareholders and creditors. 
C)  The basic rationale for any financial merger is synergy and, thus, the estimation of pro forma cash flows is the single most important part of the analysis. 
D)  In most mergers, the benefits of synergy and the premium the acquirer pays over the market price are summed and then divided equally between the shareholders of the acquiring and target firms. 
E)  The primary rationale for most operating mergers is synergy. 
A)  The acquiring firm's required rate of return in most horizontal mergers will not be affected, because the two firms will have similar betas. 
B)  The goal of merger valuation is to value the target firm's total capital at the target firm's weighted average cost of capital because a firm is acquired from all of its investors--both shareholders and creditors. 
C)  The basic rationale for any financial merger is synergy and, thus, the estimation of pro forma cash flows is the single most important part of the analysis. 
D)  In most mergers, the benefits of synergy and the premium the acquirer pays over the market price are summed and then divided equally between the shareholders of the acquiring and target firms. 
E)  The primary rationale for most operating mergers is synergy.

Question 2

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 3

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 4

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 5

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 6

In a financial merger, the relevant post-merger cash flows are simply the sum of the expected cash flows of the two companies, measured as if they were operated independently.

Accepted Answer

A) True 
 B)False

Question 7

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 8

Since a manager's central goal is to maximize the firm's stock price, any merger offer that provides stockholders with significant gains over the current stock price will be approved by the current management team.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements is most CORRECT?

Accepted Answer

A)  A conglomerate merger is one where a firm combines with another firm in the same industry. 
B)  Regulations in the United States prohibit acquiring firms from using common stock to purchase another firm. 
C)  Defensive mergers are designed to make a company less vulnerable to a takeover. 
D)  The equity residual method values a target firm by discounting residual cash flows at the acquiring firm's overall cost of capital reflecting the combined firm's post-merger capital structure. 
E)  A financial merger occurs when the operations of the firms involved are integrated in the hope of achieving synergistic benefits. 
A)  A conglomerate merger is one where a firm combines with another firm in the same industry. 
B)  Regulations in the United States prohibit acquiring firms from using common stock to purchase another firm. 
C)  Defensive mergers are designed to make a company less vulnerable to a takeover. 
D)  The equity residual method values a target firm by discounting residual cash flows at the acquiring firm's overall cost of capital reflecting the combined firm's post-merger capital structure. 
E)  A financial merger occurs when the operations of the firms involved are integrated in the hope of achieving synergistic benefits.

Question 10

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

Question 11

In a merger with true synergies, the post-merger value exceeds the sum of the separate companies' pre-merger values.

Accepted Answer

A) True 
 B)False

Question 12

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 13

A conglomerate merger occurs when two firms with either a horizontal or a vertical business relationship combine.

Accepted Answer

A) True 
 B)False

Question 14

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 15

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 16

One of the main reasons why foreign firms are interested in buying U.S. companies is to gain entrance to the U.S. market. A decline in the value of the dollar relative to most foreign currencies makes this competitive strategy especially attractive.

Accepted Answer

A) True 
 B)False

Question 17

Leveraged buyouts (LBOs) occur when a firm's managers, generally backed by private equity groups, try to gain control of a publicly owned company by buying shares in the company using large amounts of borrowed money.

Accepted Answer

A) True 
 B)False

Question 18

Since the primary rationale for any operating merger is synergy, in planning such mergers the development of accurate pro forma cash flows is the single most important task.

Accepted Answer

A) True 
 B)False

Question 19

A company seeking to fight off a hostile takeover might employ the services of an investment banking firm to develop a defensive strategy.

Accepted Answer

A) True 
 B)False

Which of the following statements is most CORRECT?

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.

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.

Which of the following statements is most CORRECT?

In a financial merger, the relevant post-merger cash flows are simply the sum of the expected cash flows of the two companies, measured as if they were operated independently.

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

Since a manager's central goal is to maximize the firm's stock price, any merger offer that provides stockholders with significant gains over the current stock price will be approved by the current management team.

Which of the following statements is most CORRECT?

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

In a merger with true synergies, the post-merger value exceeds the sum of the separate companies' pre-merger values.

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.

A conglomerate merger occurs when two firms with either a horizontal or a vertical business relationship combine.

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?

One of the main reasons why foreign firms are interested in buying U.S. companies is to gain entrance to the U.S. market. A decline in the value of the dollar relative to most foreign currencies makes this competitive strategy especially attractive.

Leveraged buyouts (LBOs) occur when a firm's managers, generally backed by private equity groups, try to gain control of a publicly owned company by buying shares in the company using large amounts of borrowed money.

Since the primary rationale for any operating merger is synergy, in planning such mergers the development of accurate pro forma cash flows is the single most important task.

A company seeking to fight off a hostile takeover might employ the services of an investment banking firm to develop a defensive strategy.

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

Exam 21: Mergers

Which of the following statements is most CORRECT?

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.

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.

Which of the following statements is most CORRECT?

In a financial merger, the relevant post-merger cash flows are simply the sum of the expected cash flows of the two companies, measured as if they were operated independently.

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

Since a manager's central goal is to maximize the firm's stock price, any merger offer that provides stockholders with significant gains over the current stock price will be approved by the current management team.

Which of the following statements is most CORRECT?

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

In a merger with true synergies, the post-merger value exceeds the sum of the separate companies' pre-merger values.

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.

A conglomerate merger occurs when two firms with either a horizontal or a vertical business relationship combine.

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?

One of the main reasons why foreign firms are interested in buying U.S. companies is to gain entrance to the U.S. market. A decline in the value of the dollar relative to most foreign currencies makes this competitive strategy especially attractive.

Leveraged buyouts (LBOs) occur when a firm's managers, generally backed by private equity groups, try to gain control of a publicly owned company by buying shares in the company using large amounts of borrowed money.

Since the primary rationale for any operating merger is synergy, in planning such mergers the development of accurate pro forma cash flows is the single most important task.

A company seeking to fight off a hostile takeover might employ the services of an investment banking firm to develop a defensive strategy.

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