Question 1

Who are antitakeover defenses designed to protect?

Accepted Answer

Firms institute antitakeover measures to protect managers and senior executives. The dominant research shows that shareholders of selling firms benefit from an acquisition. Thus, it is hard not to argue that the only real beneficiary is management, at the expense of shareholders.

Question 2

The following are methods available to change the management of a firm:

Accepted Answer

A) a successful proxy contest in which a group of shareholders vote in a new board of directors, who then pick a new management team. 
B) a takeover of one firm by another firm and a leveraged buyout of the firm by a private group of investors. 
C) a successful proxy contest in which a group of shareholders vote in a new board of directors, who then pick a new management team; a takeover of one firm by another firm; and a leveraged buyout of the firm by a private group of investors. 
D) a successful proxy contest in which a group of shareholders vote in a new board of directors, who then pick a new management team, and a leveraged buyout of the firm by a private group of investors. 
A) a successful proxy contest in which a group of shareholders vote in a new board of directors, who then pick a new management team. 
B) a takeover of one firm by another firm and a leveraged buyout of the firm by a private group of investors. 
C) a successful proxy contest in which a group of shareholders vote in a new board of directors, who then pick a new management team; a takeover of one firm by another firm; and a leveraged buyout of the firm by a private group of investors. 
D) a successful proxy contest in which a group of shareholders vote in a new board of directors, who then pick a new management team, and a leveraged buyout of the firm by a private group of investors. C

Question 3

The following data on a merger are given: $\begin{array} { l c l l } 
& \text { Firm A } & \text { Firm B}&\text {  Firm AB }  \
\text { Price per share } & \$ 100 & \$ 10 & \
\text { Total earnings } & \$ 500 & \$ 300 & \
\text { Shares outstanding } & 100 & 40 & \
\text { Total value } & \$ 10,000 & \$ 400 & \$ 11,000
\end{array}$ Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock.What will earnings per share be for Firm A after the merger, assuming that cash is used in the acquisition?

Accepted Answer

A) $6 
B) $7 
C) $8 
D) $5 
A) $6 
B) $7 
C) $8 
D) $5 C

Question 4

The DOC Corporation with a book value of $20 million and a market value of $30 million has acquired the CIC Corporation with a book value of $6 million and a market value of $8 million at a price of $9 million.If the transaction is a purchase, will there be any goodwill, and if so, what is the amount of goodwill?

Accepted Answer

A) No goodwill; 0 
B) Yes, goodwill; 3 
C) Yes, goodwill; 1 
D) Goodwill cannot be calculated with the information given. 
A) No goodwill; 0 
B) Yes, goodwill; 3 
C) Yes, goodwill; 1 
D) Goodwill cannot be calculated with the information given.

Question 5

Firm A is planning to acquire Firm B.If Firm A prefers to make a cash offer for the merger, it indicates that

Accepted Answer

A) firm A's managers are optimistic about the postmerger value of A. 
B) firm A's managers are pessimistic about the postmerger value of A. 
C) firm A's managers are neutral about the postmerger value of A. 
D) firm A's managers are neutral about the postmerger value of B. 
A) firm A's managers are optimistic about the postmerger value of A. 
B) firm A's managers are pessimistic about the postmerger value of A. 
C) firm A's managers are neutral about the postmerger value of A. 
D) firm A's managers are neutral about the postmerger value of B.

Question 6

Suppose that the market price of Company A is $50 per share and that of Company B is $20.If A offers half a share of common stock for each share of B, what is the percentage increase in wealth for B's shareholders? (Assume that the offer has no effect on the value of A?s shares.)

Accepted Answer

A) -20 percent 
B) +25 percent 
C) -25 percent 
D) +20 percent 
A) -20 percent 
B) +25 percent 
C) -25 percent 
D) +20 percent

Question 7

The following are pre-offer defenses: litigation, asset restructuring, and liability restructuring.

Accepted Answer

A) True 
 B)False

Question 8

Companies A and B are valued as follows: $\begin{array} { l c c } 
& \mathrm { A } & \mathrm { B } \
\text { Number of shares } & 2,000 & 1,000 \
\text { Earnings per share } & \$ 10 & \$ 10 \
\text { Share price } & \$ 100 & \$ 50
\end{array}$ Company A now acquires B by offering one (new) share of A for every two shares of B (that is, after the merger, there are 2,500 shares of A outstanding).If investors are aware that there are no economic gains from the merger, what is the price-earnings ratio of A's stock after the merger?

Accepted Answer

A) 7.5 
B) 8.3 
C) 10 
D) 5 
A) 7.5 
B) 8.3 
C) 10 
D) 5

Question 9

As a defensive maneuver, a firm issues deep-discount bonds that are redeemable at par in the event of an unfriendly takeover.These bonds are an example of

Accepted Answer

A) greenmail. 
B) a "scorched earth" policy. 
C) crown jewels. 
D) a poison pill. 
A) greenmail. 
B) a "scorched earth" policy. 
C) crown jewels. 
D) a poison pill.

Question 10

A conglomerate merger is one in which an acquiring firm buys a closely related firm.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following actions is least effective in changing a firm's strategy?

Accepted Answer

A) Conducting a successful proxy contest 
B) Threat of a takeover from a rival firm 
C) Organizing a leveraged buyout by well-known wealthy private investors 
D) The sale of shares by a minority shareholder 
A) Conducting a successful proxy contest 
B) Threat of a takeover from a rival firm 
C) Organizing a leveraged buyout by well-known wealthy private investors 
D) The sale of shares by a minority shareholder

Question 12

Companies A and B are valued as follows: $\begin{array} { l c l } 
& \mathrm { A } & \mathrm { B } \
\# \text { of shares } & 2000 & 1000 \
\text { Earnings per share } & \$ 10 & \$ 10 \
\text { Share price } & \$ 100 & \$ 50
\end{array}$ Company A now acquires B by offering one (new) share of A for every two shares of B (that is, after the merger, there are 2,500 shares of A outstanding).Suppose that the merger really does increase the value of the combined firms by $20,000..What is the cost of the merger?

Accepted Answer

A) zero 
B) $2,000 
C) $8,000 
D) $4,000 
A) zero 
B) $2,000 
C) $8,000 
D) $4,000

Question 13

Briefly describe some of the good motives for mergers.

Accepted Answer

There are several good motives for merge

Question 14

The following data on a merger are given: $\begin{array} { l c l l } 
& \text { Firm A } & \text { Firm B}&\text {  Firm AB }\
\text { Price per share } & \$ 100 & \$ 10 & \
\text { Total earnings } & \$ 500 & \$ 300 & \
\text { Shares outstanding } & 100 & 40 & \
\text { Total value } & \$ 10,000 & \$ 400 & \$ 11.000
\end{array}$ Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock.What will be the postmerger price per share for Firm A's stock if Firm A pays in cash?

Accepted Answer

A) $108 
B) $110 
C) $102 
D) $114 
A) $108 
B) $110 
C) $102 
D) $114

Question 15

A vertical merger is one in which the buyer expands forward in the direction of the ultimate consumer or backward toward the source of raw material.

Accepted Answer

A) True 
 B)False

Question 16

Who gains the most in mergers?

Accepted Answer

Generally, sellers do better than buyers

Question 17

Supermajorities give shareholders more control over the firm.

Accepted Answer

A) True 
 B)False

Question 18

The market for corporate control includes

Accepted Answer

A) mergers. 
B) mergers and spin-offs and divestitures. 
C) mergers, spin-offs and divestitures, and leveraged buyouts (LBOs). 
D) mergers, spin-offs and divestitures, leveraged buyouts (LBOs), and privatizations. 
A) mergers. 
B) mergers and spin-offs and divestitures. 
C) mergers, spin-offs and divestitures, and leveraged buyouts (LBOs). 
D) mergers, spin-offs and divestitures, leveraged buyouts (LBOs), and privatizations.

Question 19

Firm A has a value of $100 million and Firm B has a value of $70 million.Merging the two would enable cost savings with a present value of $20 million.Firm A purchases Firm B for $75 million.What is the gain from this merger?

Accepted Answer

A) $30 million 
B) $20 million 
C) $15 million 
D) $75 million 
A) $30 million 
B) $20 million 
C) $15 million 
D) $75 million

Question 20

The gain from a merger is computed as Gain = PVAB - (PVA + PVB).

Accepted Answer

A) True 
 B)False

Exam 31: Mergers

Who are antitakeover defenses designed to protect?

The following are methods available to change the management of a firm:

Firm A is planning to acquire Firm B.If Firm A prefers to make a cash offer for the merger, it indicates that

Suppose that the market price of Company A is $50 per share and that of Company B is $20.If A offers half a share of common stock for each share of B, what is the percentage increase in wealth for B's shareholders? (Assume that the offer has no effect on the value of A?s shares.)

The following are pre-offer defenses: litigation, asset restructuring, and liability restructuring.

As a defensive maneuver, a firm issues deep-discount bonds that are redeemable at par in the event of an unfriendly takeover.These bonds are an example of

A conglomerate merger is one in which an acquiring firm buys a closely related firm.

Which of the following actions is least effective in changing a firm's strategy?

Briefly describe some of the good motives for mergers.

A vertical merger is one in which the buyer expands forward in the direction of the ultimate consumer or backward toward the source of raw material.

Who gains the most in mergers?

Supermajorities give shareholders more control over the firm.

The market for corporate control includes

Firm A has a value of $100 million and Firm B has a value of $70 million.Merging the two would enable cost savings with a present value of $20 million.Firm A purchases Firm B for $75 million.What is the gain from this merger?

The gain from a merger is computed as Gain = PVAB - (PVA + PVB).

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

Investment Strategy and Economic Rents

Agency Problems Compensation and Performance Measurement

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing Risk

Financial Analysis

Financial Planning

Working Capital Management

Corporate Restructuring

Governance and Corporate Control Around the World

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