Question 1

Explain the central tenet of the Clayton Act of 1914.

Accepted Answer

The Clayton Act of 1914 forbids an acqui

Question 2

A dissident group solicits votes in an attempt to replace existing management.This is called a

Accepted Answer

A) proxy fight. 
B) shareholder derivative action. 
C) tender offer. 
D) management freeze-out. 
A) proxy fight. 
B) shareholder derivative action. 
C) tender offer. 
D) management freeze-out.

Question 3

Antitrust law can be enforced by the U.S.federal government by

Accepted Answer

A) a civil suit brought by the Justice Department. 
B) a civil suit brought by the Justice Department and proceedings initiated by the Federal Trade Commission (FT
C) . 
C) a civil suit brought by the Justice Department, proceedings initiated by the Federal Trade Commission (FT
C) , and proceedings initiated by the Securities and Exchange Commission (SE
C) . 
D) proceedings initiated by the Federal Trade Commission (FT
C) . 
A) a civil suit brought by the Justice Department. 
B) a civil suit brought by the Justice Department and proceedings initiated by the Federal Trade Commission (FT
C) . 
C) a civil suit brought by the Justice Department, proceedings initiated by the Federal Trade Commission (FT
C) , and proceedings initiated by the Securities and Exchange Commission (SE
C) . 
D) proceedings initiated by the Federal Trade Commission (FT
C) .

Question 4

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.Calculate the postmerger P/E ratio, assuming that cash is used in the acquisition and the merger has no immediate effect on total firm income.

Accepted Answer

A) 12.75 
B) 6.25 
C) 13.75 
D) 17.85 
A) 12.75 
B) 6.25 
C) 13.75 
D) 17.85

Question 5

Briefly explain the term economies of scale.

Accepted Answer

The natural goal of horizontal mergers i

Question 6

A poison pill defense may be implemented by

Accepted Answer

A) giving stock away. 
B) selling firm assets. 
C) issuing rights at a cheap price. 
D) adding seats to the board of directors. 
A) giving stock away. 
B) selling firm assets. 
C) issuing rights at a cheap price. 
D) adding seats to the board of directors.

Question 7

The "Bootstrap Game" may mislead investors regarding the prospects for a merged firm.How are investors potentially misled?

Accepted Answer

A) The firm's management generates cost savings via temporary layoffs of highly paid executives. 
B) The firm gains intellectual property in a merger but then divests the operations of the target firm. 
C) The firm's management changes the name of an acquired firm to feign diversification. 
D) The firm acquires a target with low a P/E ratio, which generates short-term earnings per share growth without any true economic advantage. 
A) The firm's management generates cost savings via temporary layoffs of highly paid executives. 
B) The firm gains intellectual property in a merger but then divests the operations of the target firm. 
C) The firm's management changes the name of an acquired firm to feign diversification. 
D) The firm acquires a target with low a P/E ratio, which generates short-term earnings per share growth without any true economic advantage.

Question 8

Firm A has a value of $150 million and Firm B has a value of $100 million.Merging the two would enable cost savings with a present value of $40 million.Firm A purchases Firm B for $120 million.What is the gain from this merger?

Accepted Answer

A) $20 million 
B) $40 million 
C) $100 million 
D) $80 million 
A) $20 million 
B) $40 million 
C) $100 million 
D) $80 million

Question 9

Many mergers that appear to make economic sense fail because managers cannot handle the complex task of integrating two firms with different

Accepted Answer

A) production processes. 
B) production processes and accounting methods. 
C) corporate cultures. 
D) production processes, accounting methods, and corporate cultures. 
A) production processes. 
B) production processes and accounting methods. 
C) corporate cultures. 
D) production processes, accounting methods, and corporate cultures.

Question 10

Following an acquisition, the acquiring firm's balance sheet shows an asset labeled "goodwill." What form of merger accounting was used?

Accepted Answer

A) Consolidation 
B) Aggregation 
C) Purchase 
D) None of these options are correct. 
A) Consolidation 
B) Aggregation 
C) Purchase 
D) None of these options are correct.

Question 11

Briefly describe the different types of mergers.

Accepted Answer

There are essentially three types of mer

Question 12

Firm A has a value of $100 million and Firm B has a value of $60 million.Merging the two would enable cost savings with a present value of $20 million.Firm A purchases Firm B for $65 million.How much do Firm A's shareholders gain from this merger?

Accepted Answer

A) $30 million 
B) $20 million 
C) $15 million 
D) $5 million 
A) $30 million 
B) $20 million 
C) $15 million 
D) $5 million

Question 13

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 cost of this merger?

Accepted Answer

A) $30 million 
B) $20 million 
C) $5 million 
D) $10 million 
A) $30 million 
B) $20 million 
C) $5 million 
D) $10 million

Question 14

Merging in order to lower financing costs is likely to fail for the following reason:

Accepted Answer

A) Costs of issuing larger amounts of debt increase. 
B) Tax shields decrease for larger companies. 
C) Any gain from lowering the required interest rate is offset by increased guarantees on the debt. 
D) It is difficult for bondholders to calculate the postmerger debt outstanding. 
A) Costs of issuing larger amounts of debt increase. 
B) Tax shields decrease for larger companies. 
C) Any gain from lowering the required interest rate is offset by increased guarantees on the debt. 
D) It is difficult for bondholders to calculate the postmerger debt outstanding.

Question 15

Which of the following factor(s) influence(s) the acquiring firm's choice between merger and an acquisition of stock?

Accepted Answer

A) Shareholders are dealt with directly to bypass target management and board of directors. 
B) In a tender offer, usually some minority shareholders do not tender, stopping complete firm absorption. 
C) Target management may be unfriendly and resist an offer.Resistance often increases the acquisition price. 
D) Shareholders are dealt with directly to bypass target management and board of directors; in a tender offer, usually some minority shareholders do not tender, stopping complete firm absorption; and target management may be unfriendly and resist an offer.Resistance often increases the acquisition price. 
A) Shareholders are dealt with directly to bypass target management and board of directors. 
B) In a tender offer, usually some minority shareholders do not tender, stopping complete firm absorption. 
C) Target management may be unfriendly and resist an offer.Resistance often increases the acquisition price. 
D) Shareholders are dealt with directly to bypass target management and board of directors; in a tender offer, usually some minority shareholders do not tender, stopping complete firm absorption; and target management may be unfriendly and resist an offer.Resistance often increases the acquisition price.

Question 16

Firm A has a value of $200 million and Firm B has a value of $120 million.Merging the two would enable cost savings with a present value of $30 million.Firm A purchases Firm B for $130 million.What is the cost of this merger?

Accepted Answer

A) $30 million 
B) $20 million 
C) $15 million 
D) $10 million 
A) $30 million 
B) $20 million 
C) $15 million 
D) $10 million

Question 17

The following are sensible motives for mergers:

Accepted Answer

A) to prevent the target firm from wasting surplus funds. 
B) to prevent the target firm from wasting surplus funds and to eliminate target firm inefficiencies. 
C) to prevent the target firm from wasting surplus funds, to eliminate target firm inefficiencies, and to acquire complementary resources. 
D) to increase earnings per share (EPS). 
A) to prevent the target firm from wasting surplus funds. 
B) to prevent the target firm from wasting surplus funds and to eliminate target firm inefficiencies. 
C) to prevent the target firm from wasting surplus funds, to eliminate target firm inefficiencies, and to acquire complementary resources. 
D) to increase earnings per share (EPS).

Question 18

Discuss the difficulties associated with a typical merger.

Accepted Answer

The difficulties are numerous and easily

Question 19

If Firm A acquires Firm B for cash, then the cost of the merger is equal to the cash payment minus Firm B's value as a separate entity.

Accepted Answer

A) True 
 B)False

Question 20

The following are sensible motives for mergers except

Accepted Answer

A) economies of scale. 
B) complementary resources. 
C) diversification. 
D) eliminating inefficiencies. 
A) economies of scale. 
B) complementary resources. 
C) diversification. 
D) eliminating inefficiencies.

Exam 31: Mergers

Explain the central tenet of the Clayton Act of 1914.

A dissident group solicits votes in an attempt to replace existing management.This is called a

Antitrust law can be enforced by the U.S.federal government by

Briefly explain the term economies of scale.

A poison pill defense may be implemented by

The "Bootstrap Game" may mislead investors regarding the prospects for a merged firm.How are investors potentially misled?

Firm A has a value of $150 million and Firm B has a value of $100 million.Merging the two would enable cost savings with a present value of $40 million.Firm A purchases Firm B for $120 million.What is the gain from this merger?

Many mergers that appear to make economic sense fail because managers cannot handle the complex task of integrating two firms with different

Following an acquisition, the acquiring firm's balance sheet shows an asset labeled "goodwill." What form of merger accounting was used?

Briefly describe the different types of mergers.

Firm A has a value of $100 million and Firm B has a value of $60 million.Merging the two would enable cost savings with a present value of $20 million.Firm A purchases Firm B for $65 million.How much do Firm A's shareholders gain from this merger?

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 cost of this merger?

Merging in order to lower financing costs is likely to fail for the following reason:

Which of the following factor(s) influence(s) the acquiring firm's choice between merger and an acquisition of stock?

Firm A has a value of $200 million and Firm B has a value of $120 million.Merging the two would enable cost savings with a present value of $30 million.Firm A purchases Firm B for $130 million.What is the cost of this merger?

The following are sensible motives for mergers:

Discuss the difficulties associated with a typical merger.

If Firm A acquires Firm B for cash, then the cost of the merger is equal to the cash payment minus Firm B's value as a separate entity.

The following are sensible motives for mergers except

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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