Question 1

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.

Accepted Answer

A) True 
 B)False

Question 2

The King Solomon Mining Company is contemplating a cash tender offer for the outstanding shares of Roanoke Coal Corporation. Roanoke Coal is expected to provide $162,500 in after-tax cash flow (after tax income plus CCA) each year for the next 20 years. In addition, Roanoke has a $630,000 tax loss carry-forward that King Solomon Mining can use over the next two years ($315,000 per year).
If King Solomon Mining's corporate tax rate is 34% and its cost of capital is 12%, what is the maximum cash price it should be willing to pay to acquire Roanoke?
Present value of after-tax cash flows:

Accepted Answer

The answer of The King Solomon Mining Company is contemplating...

Question 3

When one company offers a large premium for another company, most of the upward movement in share price occurs after the public announcement of the merger offer and thus offers the best opportunity for profit to small investors.

Accepted Answer

A) True 
 B)False

Question 4

Following a merger, the change in the risk profile of the merged companies may influence the P/E ratio as much as the change in the overall growth rate.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

Synergy is said to occur when the whole is:

Accepted Answer

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

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.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

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 9

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

Accepted Answer

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

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

In light of accounting considerations, the acquiring company has some inducement to offer cash, and the acquired company would rather receive cash than face possible dilution.

Accepted Answer

A) True 
 B)False

Question 12

A tax loss carry-forward is a benefit to the acquired firm's shareholders.

Accepted Answer

A) True 
 B)False

Question 13

Non-financial motives for mergers include:

Accepted Answer

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

Question 14

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

Accepted Answer

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 15

If the potential buyer cannot come to agreement on merger terms with the potential seller's management and board of directors describe which two alternatives are still open to the potential buyer.

Accepted Answer

The answer of If the potential buyer cannot come to...

Question 16

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

Accepted Answer

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

Question 17

Vertical integration is usually prohibited or severely restricted by government competition regulations.

Accepted Answer

A) True 
 B)False

Question 18

The stock market reaction to divestitures may actually be positive if the divestiture is perceived to rid the company of an unprofitable business, or if it seems to sharpen the company's focus.

Accepted Answer

A) True 
 B)False

Question 19

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.

Accepted Answer

A) True 
 B)False

Question 20

Simon Manufacturing Co. is planning to acquire Garfunkel Engineering in a cash plus stock buyout. Garfunkel has 2,000,000 shares of common stock currently outstanding, and the market price is currently at $25 per share. The buyout would offer to purchase Garfunkel Engineering common stock for $19.50 per share, plus a newly issued share of Simon Manufacturing convertible preferred stock, valued at $13.75 per share.
Simon Manufacturing's investment dealer has suggested, as an alternative, a single-stage buyout at $32.50 per share for all of Garfunkel's common stock.
A) What is the total cost of the cash plus stock buyout?
B) What is the total cost of the cash only proposal?
C) If it wants to minimize the total cost of the acquisition, what should Simon Manufacturing do?

Accepted Answer

The answer of Simon Manufacturing Co. is planning to acquire...

Exam 20: External Growth Through Mergers

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.

When one company offers a large premium for another company, most of the upward movement in share price occurs after the public announcement of the merger offer and thus offers the best opportunity for profit to small investors.

Following a merger, the change in the risk profile of the merged companies may influence the P/E ratio as much as the change in the overall growth rate.

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

Synergy is said to occur when the whole is:

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.

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

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

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

In light of accounting considerations, the acquiring company has some inducement to offer cash, and the acquired company would rather receive cash than face possible dilution.

A tax loss carry-forward is a benefit to the acquired firm's shareholders.

Non-financial motives for mergers include:

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

If the potential buyer cannot come to agreement on merger terms with the potential seller's management and board of directors describe which two alternatives are still open to the potential buyer.

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

Vertical integration is usually prohibited or severely restricted by government competition regulations.

The stock market reaction to divestitures may actually be positive if the divestiture is perceived to rid the company of an unprofitable business, or if it seems to sharpen the company's focus.

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.