Question 1

Under a two-step buyout procedure

Accepted Answer

A)  shareholders receive a higher total price than if a single offer is made. 
B)  the second offer is at a higher price per share. 
C)  shareholders are encouraged to react quickly to the offer. 
D)  two of the options are correct. 
A)  shareholders receive a higher total price than if a single offer is made. 
B)  the second offer is at a higher price per share. 
C)  shareholders are encouraged to react quickly to the offer. 
D)  two of the options are correct. C

Question 2

Aardvark Software Inc. can purchase all the stock of Zebra Computer Services for $1,200,000 in cash. Zebra is expected to generate net after-tax cash flows of $100,000 per year for each of the next 12 years. Based solely on the facts provided, Aardvark should

Accepted Answer

A)  not purchase Zebra Computer Services. 
B)  purchase Zebra Computer Services. 
C)  purchase Zebra only if Aardvark's cost of capital is between 5% and 10%. 
D)  purchase Zebra only if Aardvark's cost of capital is above 10%. 
A)  not purchase Zebra Computer Services. 
B)  purchase Zebra Computer Services. 
C)  purchase Zebra only if Aardvark's cost of capital is between 5% and 10%. 
D)  purchase Zebra only if Aardvark's cost of capital is above 10%. A

Question 3

For mergers occurring after 2001, goodwill must be amortized and written off over 40 years or less.

Accepted Answer

A) True 
 B)False  False

Question 4

The earnings-per-share impact of a merger is influenced by relative price-earnings ratios and the terms of exchange.

Accepted Answer

A) True 
 B)False

Question 5

Multinational mergers provide economic and political diversification, which can lead to a higher cost of capital for the new firm.

Accepted Answer

A) True 
 B)False

Question 6

Mergers often improve the financing flexibility that a larger company has available.

Accepted Answer

A) True 
 B)False

Question 7

A tax loss carry forward of $1,000,000 for company ZZZ is not usually worth $1,000,000 in today's dollars to a firm that might acquire company ZZZ.

Accepted Answer

A) True 
 B)False

Question 8

In the event that Active Corp., which has a low P/E ratio, acquires Basic Corp., which has a higher P/E ratio, we could be assured that one of the following would occur, with everything else being equal. Which one would occur?

Accepted Answer

A)  Active Corp. will have an immediate increase in EPS. 
B)  Active Corp. will have an immediate decrease in EPS. 
C)  Active Corp. will have an immediate increase in the growth rate of EPS. 
D)  Active Corp. will have an immediate decrease in the P/E ratio. 
A)  Active Corp. will have an immediate increase in EPS. 
B)  Active Corp. will have an immediate decrease in EPS. 
C)  Active Corp. will have an immediate increase in the growth rate of EPS. 
D)  Active Corp. will have an immediate decrease in the P/E ratio.

Question 9

Which one of the following types of mergers is most likely to lead to diversification benefits?

Accepted Answer

A)  A horizontal merger 
B)  A vertical merger 
C)  A tax-free exchange 
D)  A conglomerate merger 
A)  A horizontal merger 
B)  A vertical merger 
C)  A tax-free exchange 
D)  A conglomerate merger

Question 10

The elimination of overlapping functions and the meshing of two firms' strong areas or products creates the managerial incentive for mergers known as

Accepted Answer

A)  horizontal integration. 
B)  vertical integration. 
C)  synergy. 
D)  the portfolio effect. 
A)  horizontal integration. 
B)  vertical integration. 
C)  synergy. 
D)  the portfolio effect.

Question 11

White knights

Accepted Answer

A)  advise companies on ways to avoid being taken over. 
B)  offer a higher purchase price and "friendlier offer" in the event of an unsolicited and unfriendly takeover attempt. 
C)  attempt to make money in the stock market on stocks that are likely merger candidates. 
D)  buy depressed stock of quality companies when merger talks are discontinued. 
A)  advise companies on ways to avoid being taken over. 
B)  offer a higher purchase price and "friendlier offer" in the event of an unsolicited and unfriendly takeover attempt. 
C)  attempt to make money in the stock market on stocks that are likely merger candidates. 
D)  buy depressed stock of quality companies when merger talks are discontinued.

Question 12

Leveraged takeovers occur to firms that have an unusually large cash to total assets position.

Accepted Answer

A) True 
 B)False

Question 13

When a tobacco firm merges with a steel company, it would be called

Accepted Answer

A)  a horizontal merger. 
B)  a vertical merger. 
C)  a conglomerate merger. 
D)  a consolidation. 
A)  a horizontal merger. 
B)  a vertical merger. 
C)  a conglomerate merger. 
D)  a consolidation.

Question 14

The existing management of a firm is almost always ready to accept an offer for the purchase of the firm at a price above the market price.

Accepted Answer

A) True 
 B)False

Question 15

The portfolio effect of a merger is greatest for the stockholders of the firm being acquired.

Accepted Answer

A) True 
 B)False

Question 16

Too much diversification has led many companies to sell off companies previously acquired during the merger boom.

Accepted Answer

A) True 
 B)False

Question 17

The rising ratio of divestitures to new acquisitions that occurred in the past suggests that

Accepted Answer

A)  poison pills are no longer effective as a defense against takeovers. 
B)  too much diversification strained the operating capabilities of many firms. 
C)  the portfolio effect has been a highly successful method of reducing risk. 
D)  multinational firms are increasingly considered high risky investments. 
A)  poison pills are no longer effective as a defense against takeovers. 
B)  too much diversification strained the operating capabilities of many firms. 
C)  the portfolio effect has been a highly successful method of reducing risk. 
D)  multinational firms are increasingly considered high risky investments.

Question 18

A motive for selling stockholders may be the bias against smaller companies.

Accepted Answer

A) True 
 B)False

Question 19

Under the Financial Accounting Standards Board's SFAS 141 and 142, which of the following occurred?

Accepted Answer

A)  Goodwill is now amortized. 
B)  At least four times per year, goodwill must be tested to determine if it is impaired. 
C)  It allowed a one-time write-down of all past goodwill impairment. 
D)  It created pooling of interests accounting. 
A)  Goodwill is now amortized. 
B)  At least four times per year, goodwill must be tested to determine if it is impaired. 
C)  It allowed a one-time write-down of all past goodwill impairment. 
D)  It created pooling of interests accounting.

Question 20

Which of the following terms is not specifically related to an unfriendly buyout?

Accepted Answer

A)  Takeover tender offer 
B)  White knight 
C)  Saturday night special 
D)  Synergy 
A)  Takeover tender offer 
B)  White knight 
C)  Saturday night special 
D)  Synergy

Exam 20: External Growth Through Mergers

Under a two-step buyout procedure

Aardvark Software Inc. can purchase all the stock of Zebra Computer Services for $1,200,000 in cash. Zebra is expected to generate net after-tax cash flows of $100,000 per year for each of the next 12 years. Based solely on the facts provided, Aardvark should

For mergers occurring after 2001, goodwill must be amortized and written off over 40 years or less.

The earnings-per-share impact of a merger is influenced by relative price-earnings ratios and the terms of exchange.

Multinational mergers provide economic and political diversification, which can lead to a higher cost of capital for the new firm.

Mergers often improve the financing flexibility that a larger company has available.

A tax loss carry forward of $1,000,000 for company ZZZ is not usually worth $1,000,000 in today's dollars to a firm that might acquire company ZZZ.

In the event that Active Corp., which has a low P/E ratio, acquires Basic Corp., which has a higher P/E ratio, we could be assured that one of the following would occur, with everything else being equal. Which one would occur?

Which one of the following types of mergers is most likely to lead to diversification benefits?

The elimination of overlapping functions and the meshing of two firms' strong areas or products creates the managerial incentive for mergers known as

White knights

Leveraged takeovers occur to firms that have an unusually large cash to total assets position.

When a tobacco firm merges with a steel company, it would be called

The existing management of a firm is almost always ready to accept an offer for the purchase of the firm at a price above the market price.

The portfolio effect of a merger is greatest for the stockholders of the firm being acquired.

Too much diversification has led many companies to sell off companies previously acquired during the merger boom.

The rising ratio of divestitures to new acquisitions that occurred in the past suggests that

A motive for selling stockholders may be the bias against smaller companies.

Under the Financial Accounting Standards Board's SFAS 141 and 142, which of the following occurred?

Which of the following terms is not specifically related to an unfriendly buyout?

The Goals and Activities of Financial Management

Review of Accounting

Financial Analysis

Financial Forecasting

Operating and Financial Leverage

Working Capital and the Financing Decision

Current Asset Management

Sources of Short-Term Financing

The Time Value of Money

Valuation and Rates of Return

Cost of Capital

The Capital Budgeting Decision

Risk and Capital Budgeting

Capital Markets

Investment Banking

Long-Term Debt and Lease Financing

Common and Preferred Stock Financing

Dividend Policy and Retained Earnings

Convertibles, Warrants, and Derivatives

International Financial Management

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