Deck 20: External Growth Through Mergers

Question 1

The impact on EPS is influenced by all but the:

A) relative debt/equity ratios of the firms.
B) exchange ratio.
C) relative earnings growth rates of the firms.
D) premium paid above market value for the acquired firm.

Answer 1

B

Question 2

$\begin{array} { r r } &\underline{\text { Alpha }} &\underline{ \text { Beta }} \\\text {Total earnings}& \$ 1,000,000 & \$ 600,000 \\ \text {Number of shares outstanding}&400,000 & 200,000 \\ \text {Earnings per share}&\$ 2.50 & \$ 3.00 \\ \text {Price/earnings}&12 \mathrm { X } & 10 \mathrm { X } \\\text { Market price/share } & \$ 30.00 & \$ 30.00 \end{array}$

-Alpha has a growth rate in EPS of 12%.Beta's growth rate in EPS is 9%.What is the post-merger growth rate assuming the facts as previously stated? (Assume no Synergy.)

A) 10.50%
B) 10.88%
C) 11.37%
D) 11.87%

Answer 2

10.88%

Question 3

Which of the following is not a form of compensation that selling shareholders could receive?

A) Stock
B) Cash
C) Stock options
D) Fixed income securities

Answer 3

C

Question 4

Which of the following statements is true of mergers and amalgamations in Canada?

A) The terms "merger" and "amalgamation" have no legal definition.
B) The term "merger" is legally defined and the term "amalgamation" is not.
C) The term "amalgamation" is legally defined and the term "merger" is not.
D) Amalgamation means one company purchases the shares of another and merger means a statutory combination under one of the Provincial Corporations Act,the Canada Corporations Act,or the Canada Business Corporations Act.

Question 5

Hostile takeovers are less common in Canada because:

A) Canadian use of IFRS makes companies appear less profitable.
B) share ownership is not widely held.
C) companies have greater regulatory requirements.
D) the government does not allow hostile takeovers.

Question 6

Synergy is said to occur when the whole is:

A) equal to the sum of the parts.
B) less than the sum of the parts.
C) greater than the sum of the parts.
D) greater than or equal to the sum of the parts.

Question 7

The Investment Canada Act is intended to:

A) lower interest rates in foreign investments.
B) change regulation of Canadian companies investing abroad.
C) increasing foreign competition in Canada.
D) ensure that the takeover of a Canadian company by a foreign entity will result in a net gain for Canada.

Question 8

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 one of the following would occur.

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 P/E.

Question 9

Dilution in earnings per share occurs when a company with:

A) a high P/E ratio buys a company with a low P/E ratio.
B) a low P/E ratio buys a company with a high P/E ratio.
C) a high growth rate in earnings per share buys a company with a low growth rate in earnings per share.
D) a low growth rate in earnings per share buys a company with a high growth rate in earnings per share.

Question 10

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

A) consolidation.
B) holding company.
C) conglomerate.
D) statutory amalgamation.

Question 11

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

A) Improved financing posture.
B) Portfolio effect.
C) Dilution of earnings per share.
D) Tax loss carry-forward.

Question 12

$\begin{array} { r r } &\underline{\text { Alpha }} &\underline{ \text { Beta }} \\\text {Total earnings}& \$ 1,000,000 & \$ 600,000 \\ \text {Number of shares outstanding}&400,000 & 200,000 \\ \text {Earnings per share}&\$ 2.50 & \$ 3.00 \\ \text {Price/earnings}&12 \mathrm { X } & 10 \mathrm { X } \\\text { Market price/share } & \$ 30.00 & \$ 30.00 \end{array}$

-Assume Alpha pays a 20% premium for Beta in a pooling of interests' transaction.Calculate the post-merger EPS for Alpha.

A) $2.50
B) $3.00
C) $3.50
D) $4.00

Question 13

Historically,the Foreign Investment Review Agency:

A) ensured no large takeovers of Canadian firms by foreigners occurred.
B) established Canada as a place for large foreign investment.
C) allowed an increasing number of unfriendly mergers and buyouts.
D) was a created through the passing of the Investment Canada Act.

Question 14

$\begin{array} { r r } &\underline{\text { Alpha }} &\underline{ \text { Beta }} \\\text {Total earnings}& \$ 1,000,000 & \$ 600,000 \\ \text {Number of shares outstanding}&400,000 & 200,000 \\ \text {Earnings per share}&\$ 2.50 & \$ 3.00 \\ \text {Price/earnings}&12 \mathrm { X } & 10 \mathrm { X } \\\text { Market price/share } & \$ 30.00 & \$ 30.00 \end{array}$

-Which of the following would be true concerning the EPS of Alpha Corp.in 5 years? Alpha's EPS would be:

A) higher due to the merger.
B) the same with or without the merger.
C) lower without the merger.
D) lower with the merger.

Question 15

Which of the following is a tender offer that utilizes borrowed funds and the acquired firm's assets as collateral?

A) Unfriendly take-over
B) Divestiture
C) Repurchase
D) Leveraged buyout

Question 16

Which of the following firms would be a takeover candidate?

A) A firm with strong market position,high earnings and low current assets.
B) A firm with strong market position,low earnings and low cash balances.
C) A firm with strong market position,low earnings and high cash balances.
D) A firm with high non-current assets,high earnings and low current assets.

Question 17

How much would Company A write off each year?

A) $112,500
B) $37,500
C) $150,000
D) $0

Question 18

Over how many years can goodwill be written off for accounting purposes?

A) 0 years
B) 20 years
C) 40 years
D) 50 years

Question 19

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

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

Question 20

White knights:

A) advise companies on ways to avoid being taken over.
B) offer a higher purchase price and a friendlier offer in the event of an unsolicited and unfriendly takeover attempt.
C) attempt to make money in the stock market on shares that are likely merger candidates.
D) buy depressed stock of quality companies when merger talks are discontinued.

Question 21

The elimination of overlapping functions and the meshing of two firms' strong areas or products creates the managerial incentive for mergers known as:

A) horizontal integration.
B) vertical integration.
C) synergy.
D) the portfolio effect.

Question 22

Which of the following is not a motive for selling by the shareholders of the acquired company?

A) Opportunity to diversify
B) Tax advantage
C) Attractive price
D) Avoid bias against smaller businesses

Question 23

Aardvark Software,Inc.can purchase all the stock of Zebra Computer Services for $1,000,000 in cash.Zebra is expected to generate net after-tax cash flows of $100,000 per year for each of the next 10 years.Aardvark should:

A) not purchase Zebra Computer Services.
B) purchase Zebra Computer Services.
C) purchase Zebra only if Aardvark's cost of capital is between 5% and 10%.
D) purchase Zebra only if Aardvark's cost of capital is above 10%.

Question 24

A white knight benefits the:

A) acquiring firm.
B) acquiring firm's shareholders.
C) officers of the acquired company.
D) potential acquired firm.

Question 25

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

A) Greater access to financial markets,and thus,be in a better position to raise debt and equity capital.
B) Achieving risk reduction while perhaps maintaining the firm's rate of return.
C) Tax loss carry-forward might be available in a merger if one of the firms has previously sustained a tax loss.
D) Increased standard deviation of earnings per share.

Question 26

Synergy is:

A) the 2 + 2 = 3 effect.
B) the 2 + 2 = 4 effect.
C) the 2 + 2 = 5 effect.
D) always present in a merger.

Question 27

Selling shareholders who are offered cash in a merger may be willing to part with the shares they hold because:

A) the offered shares may be less marketable.
B) a merger can create improved financing posture as a result of expansion in size.
C) they can attain a lower degree of market concentration as a result.
D) the price they are offered for their shares may be above book value or market value.

Question 28

The financial motives for merger activity include all of the following except:

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

Question 29

The portfolio effect after a merger should provide the firm with risk reduction benefits that result in:

A) the expected value of earnings per share may increase as a result of the merger,the standard deviation of possible outcomes may increase as a result of risk reduction through diversification.
B) the expected value of earnings per share may remain relatively constant as a result of the merger,the standard deviation of possible outcomes may increase as a result of risk reduction through diversification.
C) the expected value of earnings per share may decline as a result of the merger,the standard deviation of possible outcomes may decline as a result of risk reduction through diversification.
D) the expected value of earnings per share may remain relatively constant as a result of the merger,the standard deviation of possible outcomes may decline as a result of risk reduction through diversification.

Question 30

The portfolio effect in a merger has to do with:

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

Question 31

Non-financial motives for mergers include:

A) marketing expansion.
B) portfolio effect.
C) access to capital.
D) tax loss carry-forward.

Question 32

The Prad Corporation is considering a merger with the Stone Company which has 400,000 outstanding shares selling for $25.An investment dealer has advised that to succeed in its merger Prad Corp.would have to offer $45 per share for Stones' stock.Prad Corp.stock is selling for $30.How many shares of Prad Corp.stock would have to be exchanged to acquire all of Stones' stock?

A) 266,667 shares
B) 600,000 shares
C) 720,000 shares
D) 800,000 shares

Question 33

Which of the following type of merger creates goodwill?

A) Horizontal merger
B) Vertical merger
C) Pooling of interests
D) Purchase of assets

Question 34

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

A) overestimate
B) underestimate
C) correctly estimate
D) need more information

Question 35

An example of a horizontal merger would be:

A) Husky Oil and Sears.
B) McDonalds and Pillsbury.
C) Pepsi and Frito Lay.
D) Coca Cola and Canada Dry.

Question 36

All of the following are potential benefits to a corporation in offering share purchases rather than non-equity compensation except:

A) a share purchase more readily qualifies a merger for a tax-free exchange.
B) a corporation may diminish the perceived dilutive effect of a merger.
C) the shareholders of the acquired firm may defer any capital gains taxes.
D) when the stock is sold,the tax is recognized.

Question 37

The Celluloid Collar Corporation has $360,000 in tax loss carry-forwards.The Bowstring Shirt Company,a firm in the 30% tax bracket,would be willing to pay (on a non-discounted basis)the sum of ______________ for the carry-forward alone.

A) $108,000
B) $252,000
C) $350,000
D) $200,000

Question 38

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

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

Question 39

Which of the following is not a financial motive but rather an operating motive for merger and consolidation?

A) The portfolio diversification effect.
B) Tax-loss carry-forward.
C) Greater financing capability.
D) Desire for greater size.

Question 40

Which of the following type of merger is most likely to lead to diversification benefits?

A) Horizontal merger
B) Vertical merger
C) Tax free exchange
D) Conglomerate

Question 41

The advantage of a holding company:

A) is that it seems to afford opportunities for leverage.
B) is that it always prevents foreign acquisition.
C) is the avoidance of competition laws.
D) is that it magnifies poor returns.

Question 42

One potential advantage of a merger to the acquiring firm is the portfolio effect which attempts to achieve risk reduction while perhaps maintaining the rate of return for the firm.

Question 43

Hostile takeovers may be avoided in Canada due to:

A) Canadians are more risk oriented.
B) A white knight investor.
C) companies have cyclical cash flows.
D) closely held companies.

Question 44

A purchase of assets merger recording is desirable due to the possibility of the creation of goodwill on the books of the surviving firm.

Question 45

If the acquiring firm's P/E ratio is greater than the P/E of the acquired firm,the surviving firm will automatically get an increase in EPS.

Question 46

One of the primary motives of merger activity is that acquiring companies find it less expensive to buy assets than to build.

Question 47

$$\begin{array} { l r r } &\underline{ \text { Company A }} &\underline{ \text { Company B }} \\\text { Total earnings } & \$ 2,000,000 & \$ 1,000,000 \\\text { Number of shares outstanding } & 400,000 & 100,000 \\\text { Earnings per share } & \$ 5.00 & \$ 10.00 \\\text { Price/earnings } & 6 \mathrm { X } & 3 \mathrm { X } \\\text { Market price/share } & 30.00 & \$ 30.00\end{array}$$

-Which of the following would be true concerning the EPS of Company A.in 5 years? Company A's EPS would be:

A) higher due to the merger.
B) the same with or without the merger.
C) lower without the merger.
D) lower with the merger.

Question 48

The term "Reverse Leveraged Buyout" refers to a company that had previously gone from a public company to a private company and sells stock to the public years later.

Question 49

The Sheridan Corporation is considering a merger with the Kent Company which has 600,000 outstanding shares selling for $20.An investment dealer has advised that to succeed in its merger Sheridan Corp.would have to offer $40 per share for Kent's stock.Sheridan Corp.stock is selling for $25.How many shares of Sheridan Corp.stock would have to be exchanged to acquire all of Kent's stock?

A) 960,000 shares
B) 600,000 shares
C) 750,000 shares
D) 480,000 shares

Question 50

$$\begin{array} { l r r } &\underline{ \text { Company A }} &\underline{ \text { Company B }} \\\text { Total earnings } & \$ 2,000,000 & \$ 1,000,000 \\\text { Number of shares outstanding } & 400,000 & 100,000 \\\text { Earnings per share } & \$ 5.00 & \$ 10.00 \\\text { Price/earnings } & 6 \mathrm { X } & 3 \mathrm { X } \\\text { Market price/share } & 30.00 & \$ 30.00\end{array}$$

-Company A has a growth rate in EPS of 14%.Company B's growth rate in EPS is 10%.What is the post-merger growth rate assuming the facts as previously stated? (Assume no Synergy.)

A) 13.20%
B) 10.88%
C) 12.00%
D) 12.67%

Question 51

Leveraged buyout occur to firms that have an unusually large cash/total assets position.

Question 52

The potential of a tax loss carry-forward has no effect when considering the acquisition of a company.

Question 53

$$\begin{array} { l r r } &\underline{ \text { Company A }} &\underline{ \text { Company B }} \\\text { Total earnings } & \$ 2,000,000 & \$ 1,000,000 \\\text { Number of shares outstanding } & 400,000 & 100,000 \\\text { Earnings per share } & \$ 5.00 & \$ 10.00 \\\text { Price/earnings } & 6 \mathrm { X } & 3 \mathrm { X } \\\text { Market price/share } & 30.00 & \$ 30.00\end{array}$$

-Assume Company A pays a 20% premium for Company B in a pooling of interests' transaction.Calculate the post-merger EPS for Company

A) $10.00
B) $5.00
C) $7.50
D) $6.00

Question 54

Mergers after the financial crisis of 2008 were driven by which of the following factors?

A) High interest rates
B) Large cash positions
C) Less global competition
D) High price earnings ratios

Question 55

Which of the following is a form of compensation that selling shareholders could receive?

A) Non-taxable interest income
B) Retirement savings top up
C) Fixed income securities
D) Management stock options

Question 56

Synergy is said to take place when the whole is less than the sum of the parts.

Question 57

When analyzing a going concern acquisition the financial manager should consider:

A) the net present value of the firm post-acquisition.
B) the net book value of the firm post-acquisition.
C) the net present value of the firm pre-acquisition.
D) the net book value of the firm pre-acquisition.

Question 58

Shareholders of acquired firms in mergers tend to be more concerned with future earnings and dividends exchanged than with the market value exchanged.

Question 59

Laura's Design Corporation has $400,000 in tax loss carry-forwards.Vandenbosch Investment Consulting,a firm in the 40% tax bracket,would be willing to pay (on a non-discounted basis)the sum of ______________ for the carry-forward alone.

A) $240,000
B) $160,000
C) $400,000
D) $100,000

Question 60

A tender offer describes the attempted purchase of a firm with the consent of that firm's management.

Question 61

Too much diversification has led some companies to sell off companies previously acquired during the merger boom.

Question 62

An unfriendly takeover can always be stopped by invoking a poison pill under the Companies Act.

Question 63

Most mergers are horizontal in nature in order to avoid the potential complications involved with the elimination of competition.

Question 64

Leveraged buyouts are restricted to "outside" tender offers.

Question 65

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

Question 66

One advantage of receiving stock instead of cash in a buy-out is the deferment of the tax payment until the stock received is actually sold.

Question 67

The desire to expand management and marketing capabilities is a financial motive for merging.

Question 68

In a merger,the short-term and long-term effect on EPS varies according to the relative P/E ratios and the differential future growth rates of the two firms.

Question 69

Shareholders do not like a white knight since it always results in their receiving a lower share price.

Question 70

The subsidiaries of a holding company are separate legal entities,and one cannot force the bankruptcy of another.

Question 71

United States style mergers rarely happen in Canada.

Question 72

"Poison pills" are strategies that reduce the value of a firm if it is taken over by a corporate raider.

Question 73

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.

Question 74

Goodwill may be created when a pooling of interests' merger is utilized.

Question 75

When negotiating a merger offer,management and shareholders may disagree on whether a bid should be accepted.

Question 76

The earnings per share impact of a merger are influenced by relative price-earnings ratios and the terms of exchange.

Question 77

Statutory amalgamation under the Canada Business Corporations Act requires all merger combinations of two or more firms to form an entirely new entity.

Question 78

The write off of goodwill is a tax deductible expense.

Question 79

Poison pills are usually put in place when one shareholder acquires a certain number of outstanding shares.

Question 80

The primary advantage of a holding company is that it affords opportunities for leverage.