Deck 21: Mergers and Acquisitions Web Only

Question 1

The cost of capital of Firm A is 11.2 percent compared to 14.1 percent for Firm B.The market rate of return is 10.8 percent and the risk-free rate is 4 percent.Firm A is considering the acquisition of Firm B.Should this acquisition occur,it will be financed with debt at an interest cost of 8.7 percent.Which of these rates is most appropriate to use as the discount rate when analyzing the acquisition of Firm B by Firm A?

A)8.7%
B)11.2%
C)10.8%
D)14.1%
E)4.0%

Answer 1

14.1%

Question 2

In a true merger,not a consolidation,the acquirer

A)and the target firm become a new firm with a new name.
B)accepts the responsibility for the debts of the target firm.
C)ceases to exist as a separate firm.
D)obtains only the assets of the target firm.
E)is totally absorbed by the acquired firm.

Answer 2

accepts the responsibility for the debts of the target firm.

Question 3

Which of these may be a source of synergy?
I.Unused debt capacity
II.Economies of scale
III.Increase in overall revenue
IV.Unused net operating losses

A)I and IV only
B)II and III only
C)II,III,and IV only
D)I,II,and III only
E)I,II,III,and IV

Answer 3

I,II,III,and IV

Question 4

Assume Firm A acquires Firm B.As a result,the EPS of Firm A increase by 10 percent.Given this increase,you know for certain that the

A)acquisition created synergy.
B)purchase price was below market value.
C)value of B to A exceeded the value of B as a stand-alone firm.
D)acquisition provided diversification benefits.
E)total earnings divided by the total shares increased.

Question 5

Synergy is created in an acquisition only if the

A)value of the combined firm exceeds the sum of the individual firm's separate values.
B)acquisition is an all-cash transaction at the current market value of the target firm.
C)acquisition increases revenues while also reducing cash costs.
D)acquisition is a tax-free transaction.
E)value of the shares exchanged equal the market value of the target firm's shares.

Question 6

A taxable acquisition

A)requires the target firm's shareholders to include the entire value of shares received in their taxable income.
B)is generally more expensive than a comparable tax-free acquisition.
C)results from an exchange of stock.
D)results in a taxable gain for the acquiring firm's shareholders.
E)is the exchange of shares of equivalent value.

Question 7

Rizzo's is a new,well-financed manufacturing firm with high fixed costs.The firm has a strong demand,efficient operations and distribution systems,and low taxes.Rizzo's is most apt to acquire a target firm that will provide

A)vertical integration.
B)economies of scale.
C)unused debt capacity.
D)marketing gains.
E)net operating losses.

Question 8

When a small number of investors acquire all of the equity shares in a firm using borrowed funds,the transaction is best described as a

A)proxy contest.
B)management buyout.
C)leveraged buyout.
D)tender offer.
E)strategic alliance.

Question 9

Which one of these statements is true?

A)One disadvantage of a merger is that it requires the approval of both the target and bidder firm's shareholders.
B)Normally,the target firm's management is very cooperative during the merger process.
C)A consolidation is a complete absorption of a target firm by a bidder firm,which retains its name and identity.
D)An entirely new firm is created when any type of merger or consolidation occurs.
E)Mergers are legally complex and expensive.

Question 10

Which one of these is the best justification for acquiring a firm?

A)Increasing the bidder firm's sphere of political influence
B)Managing a larger firm to justify higher management salaries
C)Desire to control more employees
D)Creating financial value by combining the bidder and target firms
E)Creating accounting goodwill

Question 11

As it applies to an acquisition,the term goodwill is defined as the difference between the

A)purchase price and the book value of the target firm.
B)purchase price and the estimated fair market value of the net assets acquired.
C)fair market value of the net assets acquired and the target firm's equity.
D)market value and the book value of the target firm.
E)market value and book value of the target firm's total assets.

Question 12

A tender offer is often contingent upon the

A)approval of the target firm's board of directors.
B)approval of both the acquirer's and bidder's shareholders during their respective shareholder meetings.
C)acquisition being friendly in nature.
D)bidder obtaining its desired percentage of voting shares in the target firm.
E)approval of the target firm's officers.

Question 13

Which two of these are required for an acquisition to be considered tax-free?
I.The bidder must purchase the target firm for less than its current market value.
II.The acquisition must have a business purpose other than the avoidance of taxes.
III.The stockholders in the target firm must retain an equity interest in the bidder.
IV.The acquisition must be a lump sum cash transaction.

A)I and II only
B)III and IV only
C)II and III only
D)I and III only
E)II and IV only

Question 14

The value of Firm B to Firm A is equal to:

A)V_AB + ΔV.
B)V_AB − V_B + ΔV.
C)V_B + ΔV.
D)V_AB − ΔV.
E)V_A + V_B + ΔV.

Question 15

Which one of these statements is correct?

A)The titles to the target firm's individual assets must be transferred to the acquirer in a merger.
B)If a target firm's managers oppose an acquisition,the acquisition cannot occur.
C)The acquisition of a target firm's assets can be done without the approval of the target firm's shareholders.
D)A tender offer must be accepted by all of the target firm's shareholders to be effective.
E)An acquisition of stock in a target firm may later be followed with a formal merger.

Question 16

Under the purchase accounting method,

A)goodwill must be amortized straight-line over the target firm's estimated life.
B)acquired assets are recorded based on their target firms' book values.
C)goodwill always remains on the acquirer's books at its original value.
D)goodwill will generally be a long-term liability on the acquirer's books.
E)acquired assets are recorded at fair market value.

Question 17

Which one of these statements is true?

A)The NPV of a merger can only be shared with the target firm's shareholders if the merger is financed with cash.
B)A cash acquisition affects the control of a bidder firm.
C)An acquisition financed with shares of stock is generally a tax-free transaction for all involved shareholders.
D)A cash acquisition causes the shareholders of the target firm to share in any merger losses.
E)A cash acquisition is less expensive than a stock acquisition to the shareholders of the acquiring firm when a merger produces a negative NPV.

Question 18

Alto's is known for its efficient production and distribution of musical instruments and related products.Tenor's is a well-known brand of musical instruments with a marginal distribution system.Tenor's might appeal to Alto's as an acquisition target due to the potential synergy resulting from

A)lower taxes.
B)strategic benefits.
C)complementary resources.
D)marketing gains.
E)economies of vertical integration.

Question 19

Which one of these should be the primary appeal of unused debt capacity to a bidder firm?

A)Ability to borrow additional funds to increase management bonuses
B)Source of funding for negative net present value projects
C)Increased funding for the payment of unsustainable dividends
D)Tax savings resulting from increased interest expense on additional debt
E)Debt funding for a golden parachute

Question 20

The purchase ________ best fits the definition of a vertical acquisition.

A)of a men's clothing store by a women's clothing company
B)of a vacation resort by a steel manufacturer
C)of a coal mine by an electric utility company
D)by a restaurant of its main competitor
E)of an airline by a major retail chain

Question 21

The sale of all,or any part of,Firm A's assets to Firm B is referred to as

A)a reversal.
B)a divestiture.
C)an equity carve-out.
D)a spin-off.
E)a split-up.

Question 22

Does diversification achieved through a merger create value? Why or why not?

A)Yes,diversification lowers the volatility of a firm's earnings which,increases the firm's value to shareholders.
B)Yes,diversification lowers the total risk of a firm which,provides a compensable benefit.
C)Yes,diversification increases a firm's earnings which,creates value for the firm.
D)No,diversification lowers unsystematic risk but has no real value to shareholders.
E)No,diversification lowers a firm's earnings and thus destroys value.

Question 23

Which one of these defines the maximum price that a bidder should pay for a target firm?

A)An amount equal to the premium created by a merger of the bidder and target firms
B)Target firm's market value less the value of its long-term debt
C)Target firm's total market value as a stand-alone entity
D)Summation of the target firm's market value plus the merger premium minus any long-term debt
E)Summation of the target firm's market value plus the value of the synergy created by the merger

Question 24

Dog Treats has 7,500 shares of stock outstanding at a market price per share of $13.FIDO has 22,000 shares outstanding that sell for $26 a share.By merging,$12,600 of synergy can be created.What would be the postmerger value of the combined firm if FIDO pays $100,000 to acquire Dog Treats?

A)$569,500
B)$582,100
C)$556,100
D)$669,500
E)$682,100

Question 25

Tropical Foods just paid $249,900 cash to acquire Southern Veggies.Prior to the acquisition,Southern Veggies had a firm value of $228,500 and Tropical Foods was valued at $796,000.The acquisition created $11,400 of synergy from cost efficiencies.What is the value of Southern Veggies to Tropical Foods?

A)$245,000
B)$261,300
C)$232,800
D)$229,000
E)$239,900

Question 26

LTL has 9,000 shares of stock outstanding at a market price per share of $21.STS has 45,000 shares outstanding that sell for $39 a share.By merging,$15,200 of synergy can be created.What would be the postmerger value of the combined firm if STS acquires LTL in a stock acquisition valued at $200,000?

A)$1,744,000
B)$1,759,200
C)$1,944,000
D)$1,766,500
E)$1,959,200

Question 27

The Red Hen is acquiring The Chicken Coop for $375,000 cash.The fixed assets of The Chicken Coop have a market value of $315,000,and the net working capital is $38,000.What amount of goodwill,if any,will be recorded on the books of The Red Hen?

A)$60,000
B)$0
C)$22,000
D)$3,000
E)$35,000

Question 28

When a firm distributes shares in a subsidiary to its existing stockholders on a pro rata basis,the firm is doing

A)a reversal.
B)a divestiture.
C)an equity carve-out.
D)a spin-off.
E)a split-up.

Question 29

Western Farms just paid $185,000 cash to acquire Northern Foods.Prior to the acquisition Western Farms had 12,000 shares of stock outstanding at a price per share of $17.Northern Foods had 7,500 shares outstanding at a price per share of $23.The acquisition created $4,500 of synergy.What is the value of Northern Foods to Western Farms?

A)$185,000
B)$181,500
C)$229,500
D)$220,500
E)$177,000

Question 30

Low's has 17,500 shares of stock outstanding at a price per share of $37.40.Bert's has 25,000 shares outstanding at a price per share of $41.50.Bert's believes it can create $12,800 of synergy if it acquires Low's in an exchange of stock.What is the value of the combined firm following the merger? Assume both firms are all-equity financed.

A)$1,704,800
B)$1,597,500
C)$1,753,300
D)$1,692,000
E)$1,679,200

Question 31

Share rights plans

A)vary in detail but are all designed to increase the cost of the firm to an unfriendly acquirer.
B)with flip-in provisions allow existing shareholders to purchase additional shares at market value without incurring any transaction costs.
C)require any unfriendly acquirer to exchange two shares in the target firm for every one share in the merged firm.
D)allow shareholders to purchase additional shares at below market value at a time chosen by the rights holder.
E)grant stock dividends to their holders in addition to the normal cash dividends.

Question 32

Which one of these statements is correct?

A)Cash acquisitions provide greater benefits to acquiring shareholders than stock acquisitions when V_AB < V_A + V_B.
B)Cash acquisitions with positive NPVs are more expensive than comparable stock acquisitions to the acquiring shareholders.
C)Acquiring firms dilute ownership when an acquisition is an all-cash transaction.
D)The cost of a cash acquisition is dependent upon the acquisition gains.
E)The acquiring firm's shareholders are better served if a negative NPV acquisition is a stock,rather than a cash,transaction.

Question 33

If the acquirer wants the target firm's managers to stay in place,at least for a stated period of time,the acquirer should employ the tactic known as a

A)golden parachute.
B)crown jewel.
C)golden handcuff.
D)captured knight.
E)white knight.

Question 34

The Green Fiddle has $48,000 of goodwill on its books as the result of the acquisition of The Blue Café.The acquisition has an estimated useful life of 25 years.If the acquisition were to be made today,the goodwill would be about $5,000 more than it was originally.What is the amount of goodwill amortization that needs to be deducted this year?

A)$0
B)$1,920
C)−$5,000
D)$5,000
E)$200

Question 35

Staggered elections

A)allow a portion of the board members to be elected on a permanent basis.
B)increase the difficulties incurred when trying to replace the board of directors.
C)are set forth in supermajority amendments.
D)can be altered on a one-time basis to open all seats on the board to a simultaneous vote if shareholders approve a standstill agreement.
E)increase the probability that a firm will be acquired by a stronger competitor.

Question 36

Studies have shown that acquiring firm shareholders tend to realize minimal gains,if any,due to

A)the target firm and acquiring firm being too similar in size.
B)the target firm's being acquired for less than their true value.
C)merger gains being underestimated.
D)overinflated synergy estimates.
E)negative purchase premiums.

Question 37

Bakers Mart just acquired Liver Works in a stock transaction.The combined firm has a postmerger value of $174,900.As independent firms,Bakers Mart was worth $106,800 and Liver Works was worth $61,100.How much synergy was created by the merger?

A)$8,700
B)$7,500
C)$7,000
D)$2,500
E)$0

Question 38

Firm B has the option to purchase the key assets of Firm A at a predetermined fixed price should Firm A become the target in an unfriendly takeover attempt.Which term applies to the option given to Firm B?

A)Countertender offer
B)Fair price provision
C)Dual class capitalization
D)Bear hug
E)Lockup

Question 39

ABC created a new company,XYZ,from its subsidiary unit and maintained ownership of all of the shares in XYZ.When ABC felt market conditions were favorable,it did an IPO and sold 25 percent of its shares in XYZ.ABC has effectively completed

A)a reversal.
B)a divestiture.
C)an equity carve-out.
D)a spin-off.
E)a split-up.

Question 40

On average,shareholders of

A)the target firm benefit from mergers.
B)the target firm benefit from cash mergers and incur losses in stock mergers.
C)the acquiring firm benefit the most from a merger.
D)the target firm suffer losses when a merger occurs.
E)both the acquiring and target firms incur losses when firms merge.

Question 41

JLM has 7,400 shares of stock outstanding at a market price per share of $18.Hi-Tek has 36,000 shares outstanding that sell for $45 a share.By merging,$5,000 of synergy can be created.Hi-Tek is acquiring JLM for $135,000 worth of Hi-Tek stock.What is the postmerger value per share?

A)$45.00
B)$46.57
C)$45.08
D)$44.92
E)$44.83

Question 42

Carlisle's Market has a market value of $789,000 while World's market value is $213,000.Carlisle's just acquired World for $225,000 cash.What is the net present value of the acquisition if the merger creates $26,000 of synergy from cost efficiencies?

A)$14,000
B)$17,000
C)−$14,000
D)−$17,000
E)−$12,000

Question 43

Global Network has a market value of $713,000.AG Communications has 46,700 shares of stock outstanding at a price per share of $56.AG is acquiring Global in an exchange for 13,500 shares of AG stock.The merger is expected to create $28,000 of synergy.What will be the postmerger value of the firm?

A)$3,218,100
B)$3,482,800
C)$3,356,200
D)$3,220,000
E)$3,298,000

Question 44

Firm A has a market value of $318,000 while Firm B's market value is $69,000.Firm A just acquired Firm B for $75,000 cash.What is the net present value of the acquisition if the merger creates $15,500 of synergy?

A)$7,000
B)$4,500
C)−$6,000
D)$9,500
E)−$13,000

Question 45

New Tech has a market value of $452,000.Emerson Electrics has 37,000 shares of stock outstanding at a price per share of $21.Emerson Electrics is acquiring New Tech in exchange for 21,500 shares of Emerson Electrics stock.The merger is expected to create $3,000 of synergy.What is the acquisition net present value?

A)−$790
B)$3,511
C)$2,503
D)$2,214
E)$3,000

Question 46

Racing Motors has a market value of $187,000.PJ Racing has 22,500 shares of stock outstanding at a price per share of $43.PJ Racing is acquiring Racing Motors in an exchange for 4,350 shares of PJ Racing stock.The merger is expected to create $21,000 of synergy.The postmerger value of the firm will be ________ and the postmerger price per share will be ________.

A)$1,215,000; $43.78
B)$1,865,500; $44.06
C)$1,240,000; $42.89
D)$1,040,000; $44.06
E)$1,175,500; $43.78

Question 47

The Glass Works has a market value of $336,000.Creative Pottery has 23,800 shares of stock outstanding at a price per share of $37.Creative Pottery is acquiring The Glass Works in exchange for 9,200 shares of Creative Pottery stock.The merger is expected to create $24,000 of synergy.What is the NPV of the acquisition?

A)−$11,407
B)$24,608
C)$14,136
D)$19,600
E)$5,701

Question 48

Wilson's has 6,000 shares of stock outstanding at a market price per share of $19.Neilsen's has 22,000 shares outstanding that sell for $33 a share.By merging,$11,000 of synergy can be created.Neilsen's is acquiring Wilson's for $115,005 worth of Neilsen stock.What is the postmerger value per share?

A)$33.39
B)$33.00
C)$29.97
D)$29.42
E)$28.15

Question 49

Al's Market has a market value of $418,900.Liza's has a market value of $724,500.Liza's believes it can create $46,000 of synergy if it acquires Al's for $425,000 in cash.What is the value of the firm following the merger? Assume both firms are all-equity financed.

A)$764,400
B)$1,098,900
C)$1,189,400
D)$718,400
E)$968,900