Question 1

Mergers after the financial crisis of 2008 were driven by which of the following factors?

Accepted Answer

A)  High interest rates 
B)  Large cash positions 
C)  Less global competition 
D)  High price earnings ratios 
A)  High interest rates 
B)  Large cash positions 
C)  Less global competition 
D)  High price earnings ratios

Question 2

The Celluloid Collar Corporation has $360,000 in tax loss carry-forwards.The Bowstring Shirt Company,a firm in the 30% tax bracket,would be willing to pay (on a non-discounted basis)the sum of ______________ for the carry-forward alone.

Accepted Answer

A)  $108,000 
B)  $252,000 
C)  $350,000 
D)  $200,000 
A)  $108,000 
B)  $252,000 
C)  $350,000 
D)  $200,000

Question 3

The portfolio effect after a merger should provide the firm with risk reduction benefits that result in:

Accepted Answer

A)  the expected value of earnings per share may increase as a result of the merger,the standard deviation of possible outcomes may increase as a result of risk reduction through diversification. 
B)  the expected value of earnings per share may remain relatively constant as a result of the merger,the standard deviation of possible outcomes may increase as a result of risk reduction through diversification. 
C)  the expected value of earnings per share may decline as a result of the merger,the standard deviation of possible outcomes may decline as a result of risk reduction through diversification. 
D)  the expected value of earnings per share may remain relatively constant as a result of the merger,the standard deviation of possible outcomes may decline as a result of risk reduction through diversification. 
A)  the expected value of earnings per share may increase as a result of the merger,the standard deviation of possible outcomes may increase as a result of risk reduction through diversification. 
B)  the expected value of earnings per share may remain relatively constant as a result of the merger,the standard deviation of possible outcomes may increase as a result of risk reduction through diversification. 
C)  the expected value of earnings per share may decline as a result of the merger,the standard deviation of possible outcomes may decline as a result of risk reduction through diversification. 
D)  the expected value of earnings per share may remain relatively constant as a result of the merger,the standard deviation of possible outcomes may decline as a result of risk reduction through diversification.

Question 4

Non-financial motives for mergers include:

Accepted Answer

A)  marketing expansion. 
B)  portfolio effect. 
C)  access to capital. 
D)  tax loss carry-forward. 
A)  marketing expansion. 
B)  portfolio effect. 
C)  access to capital. 
D)  tax loss carry-forward.

Question 5

Officers of a selling firm are almost always released.

Accepted Answer

A) True 
 B)False

Question 6

Historically,the Foreign Investment Review Agency:

Accepted Answer

A)  ensured no large takeovers of Canadian firms by foreigners occurred. 
B)  established Canada as a place for large foreign investment. 
C)  allowed an increasing number of unfriendly mergers and buyouts. 
D)  was a created through the passing of the Investment Canada Act. 
A)  ensured no large takeovers of Canadian firms by foreigners occurred. 
B)  established Canada as a place for large foreign investment. 
C)  allowed an increasing number of unfriendly mergers and buyouts. 
D)  was a created through the passing of the Investment Canada Act.

Question 7

Selling shareholders who are offered cash in a merger may be willing to part with the shares they hold because:

Accepted Answer

A)  the offered shares may be less marketable. 
B)  a merger can create improved financing posture as a result of expansion in size. 
C)  they can attain a lower degree of market concentration as a result. 
D)  the price they are offered for their shares may be above book value or market value. 
A)  the offered shares may be less marketable. 
B)  a merger can create improved financing posture as a result of expansion in size. 
C)  they can attain a lower degree of market concentration as a result. 
D)  the price they are offered for their shares may be above book value or market value.

Question 8

To avoid an unfriendly takeover,management may institute one or more of several takeover defences.List and explain in detail these defences.

Accepted Answer

These defensive tactics are sometimes re

Question 9

An unfriendly takeover can always be stopped by invoking a poison pill under the Companies Act.

Accepted Answer

A) True 
 B)False

Question 10

Hostile takeovers may be avoided in Canada due to:

Accepted Answer

A)  Canadians are more risk oriented. 
B)  A white knight investor. 
C)  companies have cyclical cash flows. 
D)  closely held companies. 
A)  Canadians are more risk oriented. 
B)  A white knight investor. 
C)  companies have cyclical cash flows. 
D)  closely held companies.

Question 11

Vertical integration represents acquisition of a competitor.

Accepted Answer

A) True 
 B)False

Question 12

Aardvark Software,Inc.can purchase all the stock of Zebra Computer Services for $1,000,000 in cash.Zebra is expected to generate net after-tax cash flows of $100,000 per year for each of the next 10 years.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%.

Question 13

Which of the following type of merger creates goodwill?

Accepted Answer

A)  Horizontal merger 
B)  Vertical merger 
C)  Pooling of interests 
D)  Purchase of assets 
A)  Horizontal merger 
B)  Vertical merger 
C)  Pooling of interests 
D)  Purchase of assets

Question 14

Synergy is:

Accepted Answer

A)  the 2 + 2 = 3 effect. 
B)  the 2 + 2 = 4 effect. 
C)  the 2 + 2 = 5 effect. 
D)  always present in a merger. 
A)  the 2 + 2 = 3 effect. 
B)  the 2 + 2 = 4 effect. 
C)  the 2 + 2 = 5 effect. 
D)  always present in a merger.

Question 15

$\begin{array} { r r } &\underline{\text { Alpha }} &\underline{ \text { Beta }} \
\text {Total earnings}& \$ 1,000,000 & \$ 600,000 \ 
\text {Number of shares outstanding}&400,000 & 200,000 \
 \text {Earnings per share}&\$ 2.50 & \$ 3.00 \ 
 \text {Price/earnings}&12 \mathrm { X } & 10 \mathrm { X } \
\text { Market price/share } & \$ 30.00 & \$ 30.00 \end{array}$
-Assume Alpha pays a 20% premium for Beta in a pooling of interests' transaction.Calculate the post-merger EPS for Alpha.

Accepted Answer

A)  $2.50 
B)  $3.00 
C)  $3.50 
D)  $4.00 
A)  $2.50 
B)  $3.00 
C)  $3.50 
D)  $4.00

Question 16

Dilution in earnings per share occurs when a company with:

Accepted Answer

A)  a high P/E ratio buys a company with a low P/E ratio. 
B)  a low P/E ratio buys a company with a high P/E ratio. 
C)  a high growth rate in earnings per share buys a company with a low growth rate in earnings per share. 
D)  a low growth rate in earnings per share buys a company with a high growth rate in earnings per share. 
A)  a high P/E ratio buys a company with a low P/E ratio. 
B)  a low P/E ratio buys a company with a high P/E ratio. 
C)  a high growth rate in earnings per share buys a company with a low growth rate in earnings per share. 
D)  a low growth rate in earnings per share buys a company with a high growth rate in earnings per share.

Question 17

An example of a horizontal merger would be:

Accepted Answer

A)  Husky Oil and Sears. 
B)  McDonalds and Pillsbury. 
C)  Pepsi and Frito Lay. 
D)  Coca Cola and Canada Dry. 
A)  Husky Oil and Sears. 
B)  McDonalds and Pillsbury. 
C)  Pepsi and Frito Lay. 
D)  Coca Cola and Canada Dry.

Question 18

Shareholders do not like a white knight since it always results in their receiving a lower share price.

Accepted Answer

A) True 
 B)False

Question 19

The subsidiaries of a holding company are separate legal entities,and one cannot force the bankruptcy of another.

Accepted Answer

A) True 
 B)False

Question 20

Risk averse investors may discount the future expected performance of the merged firm at a lower rate.

Accepted Answer

A) True 
 B)False

Exam 20: External Growth Through Mergers

Mergers after the financial crisis of 2008 were driven by which of the following factors?

The Celluloid Collar Corporation has $360,000 in tax loss carry-forwards.The Bowstring Shirt Company,a firm in the 30% tax bracket,would be willing to pay (on a non-discounted basis)the sum of ______________ for the carry-forward alone.

The portfolio effect after a merger should provide the firm with risk reduction benefits that result in:

Non-financial motives for mergers include:

Officers of a selling firm are almost always released.

Historically,the Foreign Investment Review Agency:

Selling shareholders who are offered cash in a merger may be willing to part with the shares they hold because:

To avoid an unfriendly takeover,management may institute one or more of several takeover defences.List and explain in detail these defences.

An unfriendly takeover can always be stopped by invoking a poison pill under the Companies Act.

Hostile takeovers may be avoided in Canada due to:

Vertical integration represents acquisition of a competitor.

Aardvark Software,Inc.can purchase all the stock of Zebra Computer Services for $1,000,000 in cash.Zebra is expected to generate net after-tax cash flows of $100,000 per year for each of the next 10 years.Aardvark should:

Which of the following type of merger creates goodwill?

Synergy is:

Total earnings \ 1,000,000 \ 600,000 Number of shares outstanding 400,000 200,000 Earnings per share \ 2.50 \ 3.00 Price/earnings 12 10 Market price/share \ 30.00 \ 30.00 -Assume Alpha pays a 20% premium for Beta in a pooling of interests' transaction.Calculate the post-merger EPS for Alpha.

Dilution in earnings per share occurs when a company with:

An example of a horizontal merger would be:

Shareholders do not like a white knight since it always results in their receiving a lower share price.

The subsidiaries of a holding company are separate legal entities,and one cannot force the bankruptcy of another.

Risk averse investors may discount the future expected performance of the merged firm at a lower rate.

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: Public and Private Placement

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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