Deck 21: Mergers and Acquisitions Web Only

Question 1

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.

Answer 1

No;Diversification lowers unsystematic risk but has no real value to shareholders.

Question 2

Tropical Foods just paid $245,000 cash to acquire Southern Veggies.Prior to the acquisition Southern Veggies had a firm value of $228,000 and Tropical Foods was valued at $980,000.The acquisition created $46,000 of synergy from cost efficiencies.What is the value of Southern Veggies to Tropical Foods?

A)$245,000
B)$291,000
C)$46,000
D)$29,000
E)$274,000

Answer 2

$274,000

Question 3

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

Answer 3

II and III only

Question 4

Which one of these statements is true?

A)A stock acquisition must be approved by the board of directors of the target firm.
B)All shareholders tend to readily participate in a tender offer making this the ideal means of totally acquiring any firm.
C)Both the target firm's managers and shareholders must approve an acquisition of stock.
D)A stock acquisition must be approved by the managers of the target firm but not by its board of directors.
E)Resistance by a target firm's managers will generally increase the costs associated with a stock acquisition.

Question 5

Bakers Mart just acquired Liver Works in a stock transaction.The combined firm has a post-merger value of $314,500.As independent firms,Bakers Mart was worth $212,000 and Liver Works was worth $92,100.How much synergy was created by the merger?

A)$8,600
B)$102,500
C)$10,400
D)$2,500
E)$0

Question 6

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 7

Western Farms just paid $65,000 cash to acquire Northern Foods.Prior to the acquisition Western Farms had 15,000 shares of stock outstanding at a price per share of $38.Northern Foods had 5,500 shares outstanding at a price per share of $10.75.The acquisition created $12,000 of synergy.What is the value of Northern Foods to Western Farms?

A)$59,125
B)$136,125
C)$65,000
D)$6,125
E)$71,125

Question 8

On average,shareholders of the:

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

Question 9

XYZ has a market value of $287,400.ABC has a market value of $611,900.ABC believes it can create $57,000 of synergy if it acquires XYZ for $300,000 in cash.What is the value of ABC following the merger? Assume both firms are all-equity financed.

A)$656,300
B)$998,900
C)$956,300
D)$668,900
E)$368,900

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

Dog Treats has 6,500 shares of stock outstanding at a market price per share of $11.FIDO has 15,000 shares outstanding that sell for $18 a share.By merging,$9,600 of synergy can be created.What would be the post-merger value of the combined firm if FIDO pays $75,000 to acquire Dog Treats?

A)$341,500
B)$276,100
C)$156,100
D)$266,500
E)$351,100

Question 12

As it applies to an acquisition,the term goodwill is defined as the difference at the time of acquisition between the:

A)purchase price and the book value of a 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 a target firm.
E)market value and book value of the target firm's total assets.

Question 13

Which term is applied to the situation where a bidding firm agrees to a limitation on its holdings in the target firm?

A)Shark repellent
B)Countertender offer
C)Standstill agreement
D)Poison pill annulment
E)Fair price provision

Question 14

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 15

Low's has 12,000 shares of stock outstanding at a price per share of $16.40.Bert's has 21,000 shares outstanding at a price per share of $26.50.Bert's believes it can create $41,000 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)$794,300
B)$597,500
C)$753,300
D)$400,700
E)$636,800

Question 16

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

Question 17

Some of ABS's shareholders are dissatisfied with the company's performance.These shareholders are squaring off against the principal players in the firm with each side trying to garner sufficient votes to elect their preferred candidates to the board of directors.Which one of these terms best fits this situation?

A)Stock acquisition
B)Management buyout
C)Pooling of interests
D)Proxy contest
E)Dual class capitalization

Question 18

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 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

JLM has 6,000 shares of stock outstanding at a market price per share of $27.Hi-Tek has 30,000 shares outstanding that sell for $50 a share.By merging,$35,000 of synergy can be created.Hi-Tek is acquiring JLM for $200,000 worth of Hi-Tek stock.What is the post-merger value per share?

A)$50.00
B)$56.57
C)$49.91
D)$51.17
E)$48.83

Question 22

Carlisle's Market has a market value of $429,000 while Food World's market value is $191,000.Carlisle's just acquired Food World for $200,000 cash.What is the net present value of the acquisition if the merger creates $28,000 of synergy from cost efficiencies?

A)$19,000
B)$17,000
C)-$9,000
D)$37,000
E)$219,000

Question 23

Wilson's has 5,000 shares of stock outstanding at a market price per share of $16.Albertsen's has 20,000 shares outstanding that sell for $25 a share.By merging,$15,000 of synergy can be created.Albertsen's is acquiring Wilson's for $85,000 worth of Albertsen stock.What is the post-merger value per share?

A)$25.43
B)$25.00
C)$25.75
D)$24.25
E)$25.12

Question 24

The Glass Works has a market value of $311,000.Creative Pottery has 25,000 shares of stock outstanding at a price per share of $40.Creative Pottery is acquiring The Glass Works in exchange for 8,000 shares of Creative Pottery stock.The merger is expected to create $25,000 of synergy.What will be value received by The Glass Works shareholders?

A)$320,000
B)$324,608
C)$323,879
D)$319,600
E)$325,701

Question 25

Explain the pros and cons of a cash acquisition over a stock acquisition.

Question 26

Firm A has a market value of $212,000 while Firm B's market value is $87,000.Firm A just acquired Firm B for $92,500 cash.What is the net present value of the acquisition if the merger creates $7,500 of synergy?

A)$7,500
B)$94,500
C)-$5,500
D)$2,000
E)-$13,000

Question 27

Racing Motors has a market value of $210,000.PJ Racing has 20,000 shares of stock outstanding at a price per share of $40.PJ Racing is acquiring Racing Motors in an exchange for 5,625 shares of PJ Racing stock.The merger is expected to create $30,000 of synergy.The post-merger value of the firm will be ____ and the post-merger price per share will be ____.

A)$815,000;$40.75
B)$815,000;$31.80
C)$1,040,000;$40.75
D)$1,040,000;$52.00
E)$1,040,000;$40.59

Question 28

Explain a golden parachute and justify why a firm's shareholders may be willing to agree to such an arrangement.

Question 29

Global Network has a market value of $898,000.AG Communications has 50,000 shares of stock outstanding at a price per share of $60.AG is acquiring Global in an exchange for 15,000 shares of AG stock.The merger is expected to create $220,000 of synergy.What will be the post-merger value of the firm?

A)$3,218,000
B)$3,782,000
C)$4,118,000
D)$3,220,000
E)$3,898,000

Question 30

New Tech has a market value of $384,000.Emerson Electrics has 40,000 shares of stock outstanding at a price per share of $39.Emerson Electrics is acquiring New Tech in exchange for 10,000 shares of Emerson Electrics stock.The merger is expected to create $28,000 of synergy.What is the merger net present value?

A)-$81,000
B)-$10,400
C)$22,400
D)$17,600
E)$46,400

Question 31

Dog Treats has 6,500 shares of stock outstanding at a market price per share of $11.FIDO has 15,000 shares outstanding that sell for $18 a share.By merging,$9,600 of synergy can be created.What would be the post-merger value of the combined firm if FIDO acquires Dog Treats in a stock acquisition valued at $75,000?

A)$341,500
B)$276,100
C)$156,100
D)$266,500
E)$351,100