Question 1

Selling stockholders generally receive a price below the current market value of their prior stock during a merger.

Accepted Answer

A) True 
 B)False  False

Question 2

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

Accepted Answer

A) True 
 B)False  True

Question 3

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  False

Question 4

The typical merger premium is

Accepted Answer

A)  0-20% 
B)  40% 
C)  40-60% 
D)  60-80% 
A)  0-20% 
B)  40% 
C)  40-60% 
D)  60-80%

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

The portfolio effect in a merger has to do with

Accepted Answer

A)  increasing EPS. 
B)  reducing risk. 
C)  creating tax advantages. 
D)  writing off goodwill. 
A)  increasing EPS. 
B)  reducing risk. 
C)  creating tax advantages. 
D)  writing off goodwill.

Question 7

Under a two step buy-out 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 above 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 above are correct.

Question 8

Risk averse investors may discount the future earnings of the merged firm at a higher rate if they move in different directions during business cycles.

Accepted Answer

A) True 
 B)False

Question 9

Vertical integration is usually prohibited or severely restricted by government antitrust regulations.

Accepted Answer

A) True 
 B)False

Question 10

The direct financial motives for merger activity include all of following EXCEPT

Accepted Answer

A)  the portfolio effect. 
B)  improved financial posture and greater debt. 
C)  the utilization of tax loss carryforwards. 
D)  vertical integration. 
A)  the portfolio effect. 
B)  improved financial posture and greater debt. 
C)  the utilization of tax loss carryforwards. 
D)  vertical integration.

Question 11

If an acquiring firm's merger proposal was initially rejected by a target firm's management and board of directors, the acquiring firm could utilize a tender offer to gain control of the target firm.

Accepted Answer

A) True 
 B)False

Question 12

A tax loss carryforward of $1,000,000 for company ZZZ is not usually worth $1,000,000 in present value to a firm that might acquire company ZZZ.

Accepted Answer

A) True 
 B)False

Question 13

Vertical integration represents acquisition of a competitor.

Accepted Answer

A) True 
 B)False

Question 14

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 15

Which of the following type of merger decreases competition?

Accepted Answer

A)  Horizontal merger 
B)  Vertical merger 
C)  Cash purchase 
D)  Stock-for-stock exchange 
A)  Horizontal merger 
B)  Vertical merger 
C)  Cash purchase 
D)  Stock-for-stock exchange

Question 16

The two step buy-out is a recent merger ploy that has which of the following characteristics?

Accepted Answer

A)  It is negotiated in a social, rather than a business setting. 
B)  The acquiring firm offers to pay a very high price for the target company's stock, and a short time later announces another price which may be higher or lower. 
C)  The acquiring firm offers to pay a very high price for the target company's stock for a limited time only, after which it will pay a considerably lower price. 
D)  It forces stockholders to sell out. 
A)  It is negotiated in a social, rather than a business setting. 
B)  The acquiring firm offers to pay a very high price for the target company's stock, and a short time later announces another price which may be higher or lower. 
C)  The acquiring firm offers to pay a very high price for the target company's stock for a limited time only, after which it will pay a considerably lower price. 
D)  It forces stockholders to sell out.

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

Under SFAS 141 and 142, the following occurred

Accepted Answer

A)  goodwill is now amortized 
B)  at least 4 times per year, goodwill must be tested to determine if impaired 
C)  allowed a one time write-down of all past goodwill impairment 
D)  created pooling of interests accounting 
A)  goodwill is now amortized 
B)  at least 4 times per year, goodwill must be tested to determine if impaired 
C)  allowed a one time write-down of all past goodwill impairment 
D)  created pooling of interests accounting

Question 19

Simon Manufacturing Co. is planning to acquire Garfunkel Engineering in a two-step buyout. Garfunkel has 1,500,000 shares of common stock currently outstanding, and the market price is currently at $25 per share. The first step of the buyout would offer to purchase 51% of Garfunkel Engineering common stock for $28 per share. The second step would be to exchange each remaining share of Garfunkel common for $5 in cash and a newly issued share of Simon Manufacturing convertible preferred stock, valued at $31.00 per share.
Simon Manufacturing's investment banker has suggested, as an alternative, a single-stage buyout at $32.50 per share for all of Garfunkel's common stock.
a) What is the total cost of the two-step buyout?
b) What is the total cost of the single step proposal?
c) If it wants to minimize the total cost of the acquisition, what should Simon Manufacturing do?

Accepted Answer

The answer of Simon Manufacturing Co. is planning to acquire...

Question 20

All of the following are potential challenges or downsides to mergers except:

Accepted Answer

A)  anti-trust laws 
B)  dilution 
C)  firm valuation 
D)  synergies 
A)  anti-trust laws 
B)  dilution 
C)  firm valuation 
D)  synergies

Selling stockholders generally receive a price below the current market value of their prior stock during a merger.

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

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

The typical merger premium is

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

The portfolio effect in a merger has to do with

Under a two step buy-out procedure

Risk averse investors may discount the future earnings of the merged firm at a higher rate if they move in different directions during business cycles.

Vertical integration is usually prohibited or severely restricted by government antitrust regulations.

The direct financial motives for merger activity include all of following EXCEPT

If an acquiring firm's merger proposal was initially rejected by a target firm's management and board of directors, the acquiring firm could utilize a tender offer to gain control of the target firm.

A tax loss carryforward of $1,000,000 for company ZZZ is not usually worth $1,000,000 in present value to a firm that might acquire company ZZZ.

Vertical integration represents acquisition of a competitor.

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 decreases competition?

The two step buy-out is a recent merger ploy that has which of the following characteristics?

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

Under SFAS 141 and 142, the following occurred

All of the following are potential challenges or downsides to mergers except:

The Goals and Functions 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

Filters

Exam 20: External Growth Through Mergers

Selling stockholders generally receive a price below the current market value of their prior stock during a merger.

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

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

The typical merger premium is

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

The portfolio effect in a merger has to do with

Under a two step buy-out procedure

Risk averse investors may discount the future earnings of the merged firm at a higher rate if they move in different directions during business cycles.

Vertical integration is usually prohibited or severely restricted by government antitrust regulations.

The direct financial motives for merger activity include all of following EXCEPT

If an acquiring firm's merger proposal was initially rejected by a target firm's management and board of directors, the acquiring firm could utilize a tender offer to gain control of the target firm.

A tax loss carryforward of $1,000,000 for company ZZZ is not usually worth $1,000,000 in present value to a firm that might acquire company ZZZ.

Vertical integration represents acquisition of a competitor.

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 decreases competition?

The two step buy-out is a recent merger ploy that has which of the following characteristics?

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

Under SFAS 141 and 142, the following occurred

All of the following are potential challenges or downsides to mergers except:

The Goals and Functions 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

Filters