Question 1

The "two-step buyout" procedure allows the acquiring firm to pay a lower total price than if a single offer is made.

Accepted Answer

A) True 
 B)False

Question 2

In a merger, two or more companies are combined to form an entirely new entity.

Accepted Answer

A) True 
 B)False

Question 3

While a horizontal merger may improve profitability, it will not necessarily reduce the portfolio risk of the acquiring company.

Accepted Answer

A) True 
 B)False

Question 4

Earnings per share of the purchasing firm usually goes in which direction during a merger?

Accepted Answer

A)  EPS will increase immediately if the purchased firm has a lower P/E ratio. 
B)  EPS will decrease immediately if the purchased firm has a lower P/E ratio. 
C)  EPS is not affected by the merger. 
D)  EPS will increase in the future if the purchased firm is less aggressive. 
A)  EPS will increase immediately if the purchased firm has a lower P/E ratio. 
B)  EPS will decrease immediately if the purchased firm has a lower P/E ratio. 
C)  EPS is not affected by the merger. 
D)  EPS will increase in the future if the purchased firm is less aggressive.

Question 5

Following a merger, the change in the risk profile of the merged companies may influence the price earnings ratio just as much as the change in the overall growth rate.

Accepted Answer

A) True 
 B)False

Question 6

For mergers occurring after 2001, goodwill is valued and placed on the balance sheet as an asset and impairment is the only way to devalue it.

Accepted Answer

A) True 
 B)False

Question 7

Leveraged buyouts are restricted to "outside" tender offers.

Accepted Answer

A) True 
 B)False

Question 8

It is possible to merge with a company so that the merger results in the same earnings per share but still lowers the new firm's cost of capital.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is NOT a financial motive, but rather an operating motive for merging and consolidation?

Accepted Answer

A)  The portfolio diversification effect 
B)  Tax loss carry forward 
C)  Greater financing capability 
D)  Synergys 
A)  The portfolio diversification effect 
B)  Tax loss carry forward 
C)  Greater financing capability 
D)  Synergys

Question 10

After a merger has been announced, subsequent cancellation generally causes the potential acquiree's stock to decline in value.

Accepted Answer

A) True 
 B)False

Question 11

Stockholders of acquired firms in mergers tend to be more concerned with future earnings and dividends exchanged than with the market value exchanged.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following type of merger goes against the antitrust policy?

Accepted Answer

A)  A horizontal merger 
B)  A vertical merger 
C)  A cash purchase 
D)  A stock-for-stock exchange 
A)  A horizontal merger 
B)  A vertical merger 
C)  A cash purchase 
D)  A stock-for-stock exchange

Question 13

Which of the following is NOT a form of compensation that selling stockholders could receive?

Accepted Answer

A)  Stock 
B)  Cash 
C)  Stock options 
D)  Fixed income securities 
A)  Stock 
B)  Cash 
C)  Stock options 
D)  Fixed income securities

Question 14

If the purchasing firm's price earnings ratio is greater than the acquired firm's price earnings, the surviving firm will automatically get an increase in earnings per share.

Accepted Answer

A) True 
 B)False

Question 15

U.S. is different from other countries in regards to what is considered taxable income. If income is earned overseas, the company still has to pay tax to the U.S. government regardless if the income has already been charged tax in another country.

Accepted Answer

A) True 
 B)False

Question 16

Synergy is said to occur when the merged company is

Accepted Answer

A)  able to eliminate divisions that were doing the same tasks. 
B)  able to combine the marketing efforts of all merged companies. 
C)  able to get the employees from all merged companies to work towards one company goal. 
D)  all of the answers are correct. 
A)  able to eliminate divisions that were doing the same tasks. 
B)  able to combine the marketing efforts of all merged companies. 
C)  able to get the employees from all merged companies to work towards one company goal. 
D)  all of the answers are correct.

Question 17

In planning mergers, there is a tendency to _____ synergistic benefits.

Accepted Answer

A)  overestimate 
B)  underestimate 
C)  correctly estimate 
D)  not estimate 
A)  overestimate 
B)  underestimate 
C)  correctly estimate 
D)  not estimate

Question 18

An example of a horizontal merger would be

Accepted Answer

A)  Pepsi and Sears. 
B)  McDonald's and Pillsbury. 
C)  Pepsi and Frito Lay. 
D)  Coca-Cola and Dr Pepper. 
A)  Pepsi and Sears. 
B)  McDonald's and Pillsbury. 
C)  Pepsi and Frito Lay. 
D)  Coca-Cola and Dr Pepper.

Question 19

Nonfinancial motives for mergers include

Accepted Answer

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

Question 20

Synergy is said to take place when the merged companies are greater than the individual companies working separately.

Accepted Answer

A) True 
 B)False

Exam 20: External Growth Through Mergers

The "two-step buyout" procedure allows the acquiring firm to pay a lower total price than if a single offer is made.

In a merger, two or more companies are combined to form an entirely new entity.

While a horizontal merger may improve profitability, it will not necessarily reduce the portfolio risk of the acquiring company.

Earnings per share of the purchasing firm usually goes in which direction during a merger?

Following a merger, the change in the risk profile of the merged companies may influence the price earnings ratio just as much as the change in the overall growth rate.

For mergers occurring after 2001, goodwill is valued and placed on the balance sheet as an asset and impairment is the only way to devalue it.

Leveraged buyouts are restricted to "outside" tender offers.

It is possible to merge with a company so that the merger results in the same earnings per share but still lowers the new firm's cost of capital.

Which of the following is NOT a financial motive, but rather an operating motive for merging and consolidation?

After a merger has been announced, subsequent cancellation generally causes the potential acquiree's stock to decline in value.

Stockholders of acquired firms in mergers tend to be more concerned with future earnings and dividends exchanged than with the market value exchanged.

Which of the following type of merger goes against the antitrust policy?

Which of the following is NOT a form of compensation that selling stockholders could receive?

If the purchasing firm's price earnings ratio is greater than the acquired firm's price earnings, the surviving firm will automatically get an increase in earnings per share.

U.S. is different from other countries in regards to what is considered taxable income. If income is earned overseas, the company still has to pay tax to the U.S. government regardless if the income has already been charged tax in another country.

Synergy is said to occur when the merged company is

In planning mergers, there is a tendency to _____ synergistic benefits.

An example of a horizontal merger would be

Nonfinancial motives for mergers include

Synergy is said to take place when the merged companies are greater than the individual companies working separately.

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

Filters