Deck 18: Mergers and Acquisitions, and Business Failure

Question 1

Business failure may be caused by all of the following EXCEPT

A) corporate maturity.
B) economic downturns.
C) mismanagement.
D) increasing liquidity.

Answer 1

increasing liquidity.

Question 2

Leveraged buyouts are clear examples of

A) strategic mergers.
B) financial mergers.
C) vertical mergers.
D) congeneric mergers.

Answer 2

financial mergers.

Question 3

The use of a large amount of debt to finance the acquisition of other firms is a

A) congeneric buyout.
B) leveraged buyout.
C) hostile merger.
D) conglomerate merger.

Answer 3

leveraged buyout.

Question 4

The firm in a merger transaction that is being pursued as a takeover potential is called the

A) target company.
B) acquiring company.
C) conglomerate.
D) holding company.

Question 5

A merger of a paper manufacturer and a logging company is an example of

A) horizontal merger.
B) conglomerate merger.
C) vertical merger.
D) congeneric merger.

Question 6

One of the key motives for combinations is the tax benefit of

A) increasing additional recaptured depreciation.
B) using capital gains.
C) taking advantage of the other firm's tax loss carryforward.
D) reducing the marginal tax rate.

Question 7

___________may result in expansion of operations in an existing product line and elimination of a competitor.

A) Conglomerate merger
B) Horizontal merger
C) Congeneric merger
D) Vertical merger

Question 8

Business combinations are used by firms to externally expand in order to achieve all of the following objectives EXCEPT

A) to acquire needed assets.
B) to increase common stock outstanding.
C) to increase liquidity.
D) to increase productive capacity.

Question 9

A key consideration in the holding company decision is

A) the risk from the separate "companies" in the holding company being classed as one company.
B) the risk-return tradeoff due to the leverage effect.
C) the greater "distance" between top level and operating management.
D) the risk of the domino effect if one company in the holding company fails.

Question 10

In defending against hostile takeover attempts, a company will approve anti?takeover amendmentsto the corporate charter that constrain the firm's ability to transfer managerial control of the firm asa result of a merger. This is called the __________ strategy.

A) poison pill
B) greenmail
C) shark repellent
D) golden parachute

Question 11

If the P/E paid is equal to the P/E of the acquiring company, the effect on the earnings per share of the acquired company will be

A) negative.
B) positive.
C) neutral.
D) uncorrelated.

Question 12

The ability to use the same sales and distribution channels to reach customers of both businesses isa benefit of

A) congeneric merger
B) horizontal merger
C) conglomerate merger
D) vertical merger

Question 13

An attractive candidate for acquisition through a leveraged buyout should possess all of thefollowing characteristics EXCEPT

A) a low level of debt.
B) a solid profit history and reasonable expectations for growth.
C) low fixed assets.
D) stable and predictable cash flows.

Question 14

The actual ratio of exchange in a stock?exchange acquisition is the ratio of the

A) market value per share of the target company to the per share market price of the acquiring firm.
B) amount paid per share of the target company to the per share market price of the acquiring firm.
C) book value per share of the target company to the per share market price of the acquiring firm.
D) amount paid per share of the target company to the per share book value of the acquiring firm.

Question 15

All of the following are reasons for mergers EXCEPT

A) tax considerations.
B) synergism.
C) increasing managerial skills.
D) monopoly control of the markets.

Question 16

Typically in a leveraged buyout approximately___________percent (if not more) of the purchase price is financed with debt.

A) 70
B) 30
C) 50
D) 90

Question 17

All of the following may be true about tender offers EXCEPT

A) management has the exclusive right to accept the offer.
B) defensive tactics may be taken to ward off the offer.
C) they may be made without warning as an abrupt attempt at a corporate takeover.
D) they may add pressure to existing merger negotiations.

Question 18

The combination of two or more companies to form a completely new corporation is a

A) holding company
B) merger
C) congeneric formation
D) consolidation

Question 19

Which of the following describes a merger in which one firm acquires a supplier or a customer?

A) horizontal merger.
B) conglomerate.
C) vertical.
D) congeneric.

Question 20

The firm in a merger transaction that attempts to merge or takeover another company is called the

A) conglomerate.
B) target company.
C) holding company.
D) acquiring company.

Question 21

In defending against hostile takeover attempts, a company will include provisions in theemployment contracts of key executives that provide them with sizable compensation if the firm istaken over. This is called the __________strategy.

A) shark repellent
B) greenmail
C) white knight
D) golden parachute

Question 22

A financial merger is undertaken to increase

A) cash flows; which is used to service the debt typically incurred to finance the merger transaction.
B) cash flows; which is used to increase dividends to shareholders.
C) operating efficiency; which is used to increase cash flows.
D) marketshare; which is used to maximize shareholder wealth.

Question 23

A combination of companies where the former corporations cease to exist is

A) a consolidation.
B) a congeneric formation.
C) a holding company.
D) a merger.

Question 24

All of the following are advantages of holding companies EXCEPT

A) reduced federal corporate taxes due to the holding company status.
B) possible provincial tax benefits realized by each subsidiary in its state of incorporation.
C) lawsuits or legal actions against a subsidiary will not threaten the remaining companies.
D) since each subsidiary is a separate corporation, the failure of one company should cost the holding company no more than its investment in that subsidiary.

Question 25

The primary advantage of a holding company, that permit(s) the firm to control a large amount ofassets with a relatively small dollar investment is known as

A) tax effects.
B) risk protection.
C) the leverage effect.
D) administrative costs.

Question 26

Which of the following is a common method used to pay for an acquisition?

A) Increase the market price of existing shares.
B) In a takeover, the winning company does not pay for the acquired firm.
C) Issue a new class of shares.
D) Pay shareholders of the acquired company a combination of shares and cash.

Question 27

The creation of a high?debt, private corporation with improved cash flow and value is the goal in

A) leveraged buyout.
B) issuing junk bonds.
C) a financial merger.
D) conglomerate merger.

Question 28

A(n)__________ is undertaken with the goal of restructuring the acquired company in order to improve its cash flow and unlock its hidden value.

A) operating merger.
B) hostile takeover.
C) financial merger.
D) strategic merger.

Question 29

Most firms seeking merger partners will hire the services of

A) an investment broker.
B) a commercial banker.
C) a private contractor.
D) an investment banker.

Question 30

In defending against a hostile takeover, the strategy involving the payment of a large,debt?financed, cash dividend is the __________strategy.

A) leveraged recapitalization
B) white knight
C) shark repellent
D) golden parachute

Question 31

A merger involving the purchase of a specific product line, rather than the whole company is

A) a selective lines merger.
B) a variation of the strategic merger.
C) a financial merger.
D) an operating merger.

Question 32

When the ratio of exchange in a merger is equal to one and both the acquiring and the target companies have the same premerger earnings per share, the merged firm's earnings per share will initially

A) remain constant.
B) increase.
C) drop to zero.
D) decline.

Question 33

Generally, a combination of two firms of unequal size is called

A) a congeneric formation.
B) a holding company.
C) a consolidation.
D) a merger.

Question 34

Greater control over the acquisition of raw materials or the distribution of finished goods is an economic benefit of

A) vertical merger
B) conglomerate merger
C) congeneric merger
D) horizontal merger

Question 35

All of the following are disadvantages of holding companies EXCEPT

A) high cost of administration.
B) increased risk.
C) legal responsibility for subsidiaries.
D) double taxation.

Question 36

When a firm undertakes a merger to improve its sources and supply of raw materials, this is an example of a

A) hostile takeover.
B) friendly merger.
C) financial merger.
D) strategic merger.

Question 37

__________is an arrangement initiated by the debtor firm to negotiate with the creditors about a plan for sustaining or liquidating the firm.

A) A filing under the Bankruptcy and Insolvency Act.
B) An involuntary reorganization.
C) An involuntary liquidation.
D) A voluntary settlement.

Question 38

In defending against a hostile takeover, the strategy that involves the target firm finding a more suitable acquirer and prompting it to compete with the initial hostile acquirer to take over the firm is called the__________ strategy.

A) greenmail
B) white knight
C) golden parachute
D) poison pill

Question 39

Marketing Concepts, Inc. is considering the acquisition of Management Theories, Inc. at a cashprice of $1.5 million. Management Theories, Inc. has short?term liabilities of $500,000. As a resultof acquiring Management Theories, Inc., Marketing Concepts, Inc. would acquire the copyrights to a national best?seller which would provide an estimated cash flow of $300,000 for the next five years. The firm has a cost of capital of 20 percent. The approximate net present value of this acquisition is

A) -$1,102,700.
B) $480,800.
C) -$102,700.
D) $500,000.

Question 40

A hostile merger is typically accomplished through

A) a tender offer.
B) an exchange of the acquirer's stocks and bonds.
C) a cash purchase.
D) an exchange of the acquirer's stock.

Question 41

The long?run effect on the earnings per share of the merged firm depends largely on

A) the ratio of exchange.
B) the synergy of the merged firm.
C) the pre-merger P/E ratio.
D) the tax considerations.

Question 42

The reduction of risk resulting from combining firms with differing seasonal or cyclical patterns ofsales or earnings is a key benefit of

A) vertical merger.
B) congeneric merger.
C) conglomerate merger.
D) horizontal merger.

Question 43

A formal proposal to purchase a given number of shares of a firm's stock at a specified price is a

A) warrant.
B) tender offer.
C) stock purchase option.
D) right.

Question 44

A leveraged buyout needs to be carried out through

A) a vertical merger.
B) a hostile takeover.
C) a friendly merger.
D) a conglomerate merger.

Question 45

In defending against a hostile takeover, the strategy that involves the firm repurchasing through negotiation a large block of stock at a premium from one or more shareholders in order to end those shareholders' hostile takeover attempt is known as the __________strategy.

A) poison pill
B) golden parachute
C) shark repellent
D) greenmail

Question 46

The combination of two or more companies which results in one of the corporations having a voting control of one or more of the other companies is a

A) congeneric formation.
B) holding company.
C) consolidation.
D) merger.

Question 47

A__________ is a method of structuring a financial merger, whereas a__________ involves the sale ofthe firm's assets.

A) congeneric buyout; divestiture
B) horizontal merger; leveraged divestiture
C) leveraged buyout; divestiture
D) leveraged buyout; bankruptcy

Question 48

If the P/E paid is greater than the P/E of the acquiring company, the effect on the earnings per share of the acquired company will be

A) positive.
B) uncorrelated.
C) negative.
D) neutral.

Question 49

If the P/E paid is less than the P/E of the acquiring company, the effect on the earnings per share of the acquired company will be

A) uncorrelated.
B) neutral.
C) positive.
D) negative.

Question 50

When a firm undertakes a merger in order to eliminate redundant functions or increase market share, this is an example of

A) friendly merger.
B) strategic merger.
C) a financial merger.
D) hostile takeover.

Question 51

Most firms seeking merger partners will hire the services of

A) a commercial banker.
B) a private contractor.
C) an investment broker.
D) an investment banker.

Question 52

Normally, the acquiring firm pays a price that is a premium above the market price of the acquired firm. This means that the ratio of exchange in market price is

A) always less than 1.
B) always greater than 1.
C) equal to 1.
D) usually negative.

Question 53

In defending against a hostile takeover, the strategy that involves the target firm creating securitiesthat give their holders certain rights that become effective when a takeover is attempted is called the __________strategy.

A) shark repellent
B) golden parachute
C) greenmail
D) poison pill

Question 54

An attractive candidate for acquisition through leveraged buyout should possess which of the following characteristics:

A) a relatively low level of debt.
B) stable and predictable cash flows that are adequate to meet interest and principal payments on the debt and provide adequate working capital.
C) a good position in its industry with a solid profit history and reasonable expectations of growth.
D) a relatively high level of "bankable" assets that can be used as loan collateral.
E) all of the above.

Question 55

When making a cash acquisition of a going concern, the acquiring corporation must be certain

A) to recognize different accounting techniques.
B) to consider the problems of assimilating the acquired management.
C) to adjust after?tax cash flows.
D) to adjust the discount rate for risk differences.

Question 56

When the ratio of exchange in a merger is equal to one and both the acquiring and the target companies have the same premerger earnings per share, both the acquiring and the target companies have the same

A) P/E ratio.
B) debt ratio.
C) return on equity.
D) book value per share.

Question 57

Typically, reasons for undertaking mergers are

A) only financial.
B) in conflict with wealth maximization.
C) strategic or financial.
D) only strategic.

Question 58

The "stakeholders" in targeted takeover companies include the

A) employees.
B) customers.
C) creditors.
D) shareholders.
E) all of the above.

Question 59

Business failure may be caused by all of the following EXCEPT

A) low or negative returns.
B) liabilities that exceed market value of assets.
C) technical insolvency.
D) book value of assets that exceed liabilities.

Question 60

A friendly merger transaction is typically consummated through all of the following EXCEPT

A) an exchange of the acquirer's stock and bonds.
B) an exchange of the acquirer's stock
C) a cash purchase
D) a tender offer.

Question 61

Synergy is the extra value created by merging two firms.

Question 62

Vertical merger is a merger of two firms in the same line of business.

Question 63

Poison pill is a takeover defense in which the target firm finds an acquirer more to its liking thanthe initial hostile acquirer and prompts the two to compete to take over the firm.

Question 64

A major disadvantage of holding companies is the increased risk resulting from the leverage effect.

Question 65

A corporate takeover is valued as a capital budgeting exercise.

Question 66

Consolidation is a corporation that has voting control of one or more other corporations.

Question 67

The sale of a unit of a firm to existing management is often achieved through

A) a leveraged buyout.
B) an employee stock option.
C) a cash exchange.
D) a limited partnership.

Question 68

Horizontal merger is a merger in which one firm acquires another firm in the same generalindustry but neither in the same line of business nor a supplier or customer.

Question 69

The acquisition of a "cash?rich" company allows the acquiring company

A) to reduce leverage and to increase borrowing power.
B) to reap greater tax benefits.
C) to develop better managers.
D) to achieve economies of scale in some phase of the business.

Question 70

The takeover target's management may not support a proposed takeover due to a very high tenderoffer.

Question 71

A holding company is a corporation that is controlled by one or more other corporations.

Question 72

The overriding goal for merging is to

A) increase cash flows.
B) maximize operating efficiency.
C) maximize shareholder wealth as reflected in the acquirer's share price.
D) maximize shareholder wealth as reflected in the share price of the target firm.

Question 73

White knight is a takeover defense in which a firm issues securities that give their holders certain rights that become effective when a takeover is attempted and that make the target firm less desirable to a hostile acquirer.

Question 74

A __________occurs when the operations of the acquiring and target firms are combined in order toachieve economies and thereby cause the performance of the merged firm to exceed that of thepre?merged firm.

A) financial merger
B) strategic merger
C) operating merger
D) hostile takeover

Question 75

The combination of two or more companies which results in the firm maintaining the identity of one of the firms is

A) consolidation.
B) merger.
C) holding company.
D) congeneric formation.

Question 76

__________is achieved by acquiring a company in the same general industry, but neither in the same line of business nor a supplier or a customer.

A) Horizontal merger
B) Vertical merger
C) Conglomerate merger
D) Congeneric merger

Question 77

An attempt to gain control of the firm by buying sufficient shares of the target firm in themarketplace is known as a__________ and is typically accomplished through a

A) hostile takeover; tender offer.
B) friendly takeover; tender offer.
C) friendly takeover; merger.
D) hostile takeover; merger.

Question 78

A firm that wants to expand or extend its operations in existing or new product areas may avoid many of the risks associated with the design, manufacture, and sale of additional or new product and remove a potential competitor by acquiring a suitable going concern.

Question 79

The combination of a dress manufacturer and a credit bureau is an example of

A) vertical merger.
B) conglomerate merger.
C) congeneric merger.
D) horizontal merger.

Question 80

Cash acquisitions of going concerns are best analyzed using

A) ratio analysis.
B) capital budgeting techniques.
C) the weighted marginal cost of capital theory.
D) an investment opportunity schedule.