Question 1

The price that a company has to pay to purchase another firm is usually

Accepted Answer

A)  the book value. 
B)  the market value. 
C)  some premium over the current market value. 
D)  some discount of the current market value. 
A)  the book value. 
B)  the market value. 
C)  some premium over the current market value. 
D)  some discount of the current market value.

Question 2

The "two-step buyout" procedure induces stockholders to delay their reaction to the offer, since they will receive a higher price later.

Accepted Answer

A) True 
 B)False

Question 3

A business combination of two or more companies in which the resulting firm maintains the identity of the acquiring company is defined as a

Accepted Answer

A)  consolidation. 
B)  holding company. 
C)  conglomerate. 
D)  merger. 
A)  consolidation. 
B)  holding company. 
C)  conglomerate. 
D)  merger.

Question 4

In the event that Active Corp., which has a low P/E ratio, acquires Basic Corp., which has a higher P/E ratio, we could be assured that one of the following would occur, with everything else being equal. Which one would occur?

Accepted Answer

A)  Active Corp. will have an immediate increase in EPS. 
B)  Active Corp. will have an immediate decrease in EPS. 
C)  Active Corp. will have an immediate increase in the growth rate of EPS. 
D)  Active Corp. will have an immediate decrease in the P/E ratio. 
A)  Active Corp. will have an immediate increase in EPS. 
B)  Active Corp. will have an immediate decrease in EPS. 
C)  Active Corp. will have an immediate increase in the growth rate of EPS. 
D)  Active Corp. will have an immediate decrease in the P/E ratio.

Question 5

To qualify for a pooling of interests, which of the following criteria does not need to be met?

Accepted Answer

A)  The acquiring corporation issues only common stock, with rights identical to its old outstanding voting stock, in exchange for substantially all of the other company's voting stock. 
B)  The acquired firm's stockholders do not maintain an ownership position in the surviving firm. 
C)  The combined entity does not intend to dispose of a significant portion of the assets of the combined companies within two years. 
D)  The combination is effected in a single transaction. 
A)  The acquiring corporation issues only common stock, with rights identical to its old outstanding voting stock, in exchange for substantially all of the other company's voting stock. 
B)  The acquired firm's stockholders do not maintain an ownership position in the surviving firm. 
C)  The combined entity does not intend to dispose of a significant portion of the assets of the combined companies within two years. 
D)  The combination is effected in a single transaction.

Question 6

The existing management of a firm is almost always ready to accept an offer for the purchase of the firm at a price above the market price.

Accepted Answer

A) True 
 B)False

Question 7

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 8

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 9

The portfolio effect of a merger is greatest for the stockholders of the firm being acquired.

Accepted Answer

A) True 
 B)False

Question 10

Which one of the following types of mergers is most likely to lead to diversification benefits?

Accepted Answer

A)  A horizontal merger 
B)  A vertical merger 
C)  A tax-free exchange 
D)  A conglomerate merger 
A)  A horizontal merger 
B)  A vertical merger 
C)  A tax-free exchange 
D)  A conglomerate merger

Question 11

The potential of a tax loss carryforward has no effect when considering the acquisition of a company.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following is NOT a potential benefit of a merger?

Accepted Answer

A)  An improved financing posture 
B)  A portfolio effect 
C)  Dilution of earnings per share 
D)  A tax loss carryforward 
A)  An improved financing posture 
B)  A portfolio effect 
C)  Dilution of earnings per share 
D)  A tax loss carryforward

Question 13

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 14

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 15

The 2017 Tax Cuts and Jobs Act created a territorial tax system where taxes are accrued in the country where the income is earned.

Accepted Answer

A) True 
 B)False

Question 16

When a tobacco firm merges with a steel company, it would be called

Accepted Answer

A)  a horizontal merger. 
B)  a vertical merger. 
C)  a conglomerate merger. 
D)  a consolidation. 
A)  a horizontal merger. 
B)  a vertical merger. 
C)  a conglomerate merger. 
D)  a consolidation.

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

Although corporate managers have a responsibility to act in the shareholders' best interest, management frequently opposes acquisitions due to personal motives.

Accepted Answer

A) True 
 B)False

Question 19

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 20

The desire to expand management and marketing capabilities is a direct financial motive for an acquisition.

Accepted Answer

A) True 
 B)False

Exam 20: External Growth Through Mergers

The price that a company has to pay to purchase another firm is usually

The "two-step buyout" procedure induces stockholders to delay their reaction to the offer, since they will receive a higher price later.

A business combination of two or more companies in which the resulting firm maintains the identity of the acquiring company is defined as a

In the event that Active Corp., which has a low P/E ratio, acquires Basic Corp., which has a higher P/E ratio, we could be assured that one of the following would occur, with everything else being equal. Which one would occur?

To qualify for a pooling of interests, which of the following criteria does not need to be met?

The existing management of a firm is almost always ready to accept an offer for the purchase of the firm at a price above the market price.

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.

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

The portfolio effect of a merger is greatest for the stockholders of the firm being acquired.

Which one of the following types of mergers is most likely to lead to diversification benefits?

The potential of a tax loss carryforward has no effect when considering the acquisition of a company.

Which of the following is NOT a potential benefit of a merger?

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.

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.

The 2017 Tax Cuts and Jobs Act created a territorial tax system where taxes are accrued in the country where the income is earned.

When a tobacco firm merges with a steel company, it would be called

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

Although corporate managers have a responsibility to act in the shareholders' best interest, management frequently opposes acquisitions due to personal motives.

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

The desire to expand management and marketing capabilities is a direct financial motive for an acquisition.

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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