Deck 27: Corporate Restructuring

Question 1

The acquisition of a company in which the buyer borrows a large amount of the purchase price, using the purchased assets as collateral for a large portion of the borrowings, is known as a ____.

A) pooling of interests
B) leveraged buyout
C) conglomerate merger
D) tender offer

Answer 1

B

Question 2

A combination of two or more companies that have a buyer-seller relationship with each other is known as a ____.

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

Answer 2

B

Question 3

The major methods typically used to value merger candidates include all except which of the following?

A) Comparative price-earnings ratio method
B) Adjusted book value method
C) Discounted cash flow method
D) Bottom line comparison method

Answer 3

D

Question 4

In a ____ form of business combination, a parent-subsidiary relationship exists between the acquiring and acquired companies.

A) leveraged buyout
B) holding company
C) consolidation
D) leveraged buyout or consolidation

Question 5

Once an unfriendly takeover attempt has been initiated, the target company's management can employ various other antitakeover measures to deter a takeover, including when the takeover candidate can attempt to buy back its shares, at a premium over the shares' market price, from the company or investor who initiated the unfriendly takeover attempt. The amount of this premium is called ____.

A) blackmail
B) greenmail
C) white knight
D) poison pills

Question 6

In the ____ method of accounting for mergers, the total value paid or exchanged for the acquired firm's assets is recorded on the acquiring company's books.

A) purchase
B) goodwill
C) pooling of interests
D) stockholders' equity

Question 7

In the ____ method for combining financial accounts in a merger, the total value paid or exchanged for the acquired company's assets is recorded on the acquiring company's books.

A) pooling of interests
B) goodwill consolidation
C) purchase
D) book value

Question 8

When the net income of the combined companies after merger exceeds the sum of the net incomes prior to the merger, ____ is said to exist.

A) goodwill
B) synergy
C) leverage
D) greenmail

Question 9

In the ____ method of combining financial accounts in a merger, the acquired company's assets are recorded on the acquiring company's books at their cost (net of depreciation) when originally acquired.

A) goodwill consolidation
B) purchase
C) pooling of interests
D) EVA

Question 10

The basic methods used in combining financial accounts in a merger include all except which of the following?

A) Goodwill consolidation method
B) Purchase method
C) Pooling of interests method
D) Book value method

Question 11

A combination of two or more companies that compete directly with each other is known as a ____.

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

Question 12

What is a form of business combination in which a company purchases all or a controlling block of another company's common shares and the two companies become affiliated?

A) Horizontal merger
B) Vertical merger
C) Conglomerate
D) Holding company

Question 13

In a(n) ____ common stock in a division or subsidiary is distributed to shareholders of the parent company on a pro rata basis.

A) spin-off
B) reverse LBO
C) equity carve-out
D) tender offer

Question 14

A form of business combination in which two (unaffiliated) companies contribute financial and/or physical assets, as well as personnel, to a new company to engage in some economic activity is known as a ____.

A) joint venture
B) conglomerate merger
C) merger
D) consolidation

Question 15

Forms of business combinations include ____.

A) mergers
B) consolidations
C) holding companies and consolidations
D) mergers, consolidations, and holding companies

Question 16

Which of the following terms are NOT associated with mergers and acquisitions?

A) White knight
B) Tender offers
C) Greenmail
D) Declaration of bankruptcy

Question 17

The reasons why a company may choose external growth by merger over internal growth include ____.

A) economies of scale
B) more rapid growth
C) tax considerations and rapid growth
D) economies of scale, tax considerations, and more rapid growth

Question 18

In general, the greatest economies of scale are possible with ____ mergers.

A) conglomerate
B) vertical
C) horizontal
D) integrated

Question 19

When the market value of a company's common stock is below the replacement value of the firm's net assets, this company is frequently referred to as a possible ____.

A) white knight
B) leveraged buyout
C) takeover candidate
D) conglomerate

Question 20

A combination of two or more companies in which neither competes directly with the other and no buyer-seller relationship exists is known as a ____.

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

Question 21

Chapter 11 bankruptcy proceedings may be initiated by ____ or more of its unsecured creditors who have aggregate claims of at least ____.

A) 2; $1,000
B) 2; $5,000
C) 3; $500
D) 3; $5,000

Question 22

The accounting method used in most mergers is the ____ method.

A) pooling of interests
B) purchase
C) consolidation
D) merger

Question 23

Legal bankruptcy proceedings focus on the decision of whether the firm's value as a going concern is greater than its ____ value.

A) liquidation
B) market
C) equity
D) historical

Question 24

Bankruptcy occurs when the firm ____.

A) is unable to pay its debts
B) files a bankruptcy petition in accordance with the Federal bankruptcy laws
C) is more than 6 months overdue to its creditors
D) is unable to pay its debts and files a bankruptcy petition in accordance with the Federal bankruptcy laws

Question 25

The process of liquidating a business outside of the jurisdiction of the bankruptcy courts is called a(n) ____.

A) assignment
B) composition
C) extension
D) voluntary insolvency

Question 26

One anti-takeover measure is the ____, where the target company makes a takeover bid for the stock of the bidder.

A) poison put
B) black knight defense
C) pacman defense
D) shark repellent

Question 27

A reorganization plan is reviewed by the ____ for fairness and feasibility.

A) bankruptcy court
B) Securities and Exchange Commission
C) Federal Trade Commission
D) bankruptcy court and the SEC

Question 28

____ equals the proceeds that would be received from the sale of the firm's assets minus its liabilities.

A) Market value
B) Equity value
C) Going-concern value
D) Liquidation value

Question 29

In a ____, the acquiring company effectively announces that it will pay a certain price above the current existing price for a merger candidate's shares.

A) leveraged buyout
B) tender offer
C) equity carve-out
D) divestiture

Question 30

Under Chapter(s) ____ of the bankruptcy laws, a company continues to operate while it attempts to work out a reorganization plan.

A) 11
B) 7
C) 4
D) 4 and 11

Question 31

____ equals the capitalized value of the company's operating earnings minus its liabilities.

A) Market value
B) Equity value
C) Going-concern value
D) Liquidation value

Question 32

All of the following are anti-takeover measures EXCEPT ____.

A) black knight
B) staggered board
C) super major voting rules
D) golden parachute

Question 33

In analyzing a merger, the ____ is the number of the acquiring company shares received per share of acquired company stock owned.

A) assignment
B) composition
C) price-purchase ratio
D) exchange ratio

Question 34

Under Chapter(s) ____ of the bankruptcy laws, a company's assets are sold off and the proceeds are distributed to the creditors.

A) 11
B) 7
C) 4
D) 7 and 11

Question 35

Legal insolvency occurs when the ____.

A) firm is unable to meet its current obligations as they come due, even though the value of its assets exceeds its liabilities
B) recorded value of the firm's assets is less than the recorded value of its liabilities
C) firm files a bankruptcy petition in accordance with the Federal bankruptcy laws
D) owners of the businesses lack experience

Question 36

A combination in which all of the combining companies are dissolved and a new firm is formed is known as a ____.

A) holding company
B) leveraged buyout
C) consolidation
D) composition

Question 37

Technical insolvency occurs when the ____.

A) firm is unable to meet its current obligations as they come due, even though the value of its assets exceeds its liabilities
B) recorded value of the firm's assets is less than the recorded value of its liabilities
C) firm files a bankruptcy petition in accordance with the Federal bankruptcy laws
D) owners of the businesses lack experience

Question 38

A bond that contains a put option that can be exercised only if an unfriendly takeover occurs is an example of a ____.

A) pacman defense
B) liability restructuring
C) poison pill
D) standstill option

Question 39

A(n) ____ is a situation in which a failing business is permitted to lengthen the amount of time it has to meet its obligations with creditors.

A) assignment
B) composition
C) extension
D) insolvency

Question 40

A(n) ____ is a situation in which a failing business is permitted to discharge its debt obligations by paying less than the full amounts owed to creditors.

A) assignment
B) composition
C) extension
D) insolvency

Question 41

The most correct method of valuing a merger candidate is ____.

A) adjusted book value method
B) discounted cash flow method
C) pooling of interests method
D) comparative price-earnings ratio method

Question 42

Sunlite is considering a merger with Velo Blind by offering the equivalent of $21 a share in a stock-for-stock transaction. Sunlite's current common stock price is $30 a share and Velo's is $17. Other financial data on the two firms is as follows: $$\begin{array} { l r r } & \text { Sunlite } & \text { Velo Blind } \\\text { Sales (millions) } & \$ 100 & \$ 20 \\\text { Net income (millions) } & \$ 10 & \$ 3 \\\text { No. of shares outstanding (millions) } & 8 & 1.2 \\\text { Earnings per share } & \$ 1.25 & \$ 2.50\end{array}$$ ? Assuming no economies of scale or synergistic benefits, what will be the post-merger earnings per share?

A) $1.47
B) $1.41
C) $1.50
D) $1.25

Question 43

Millicom is acquiring Vikonic's outstanding common stock for $15 million. Financial information (in $ millions) on these two firms prior to the acquisition is as follows: ?
? $$\begin{array} { l r r } & \text { Millicom }& \text { Vikonic } \\\text { Total assets, book value } & \$ 90 & \$ 40 \\\text { Liabilities, book value } & 40 & 27 \\\text { Stockholders' equity, book value } & 50 & 13\end{array}$$ ?
What are the total assets and stockholders' equity (in $ millions) if the pooling of interests method had been used as the accounting method for this merger?

A) ?$130; $63
B) ?$130; $67
C) ?$132; $65
D) ?$132; $67

Question 44

Linpro Industries is considering the acquisition of Odetics Inc. in a stock-for-stock exchange. Assume no immediate synergistic benefits are expected. Selected financial data on the two companies are shown below: $$\begin{array} { l r r } & \text { Linpro } & \text { Odetics } \\\text { Sales (millions) } & \$ 480 & \$ 90 \\\text { Net income (millions) } & \$ 38 & \$ 10.4 \\\text { Common shares outstanding (millions) } & 10 & 2.1 \\\text { Earnings per share } & \$ 3.80 & \$ 4.95 \\\text { Common stock (price per share) } & \$ 45.60 & \$ 74.25\end{array}$$ ? Calculate Linpro's postmerger EPS if the Odetics shareholders accept an offer of $90 a share in a stock-for-stock exchange.

A) $4.38
B) $4.29
C) $3.42
D) $3.81

Question 45

Morgan Foods is considering the acquisition of Old Spaghetti Warehouse Inc. in a stock-for-stock exchange. Selected financial data for the two companies is shown below. An immediate synergistic earnings benefit of $1.5 million is expected in this merger, due to cost savings. $$\begin{array} { l r r } & \text { Morgan } & \text { Old Spaghetti } \\\text { Sales (millions) } & \$ 360 & \$ 80 \\\text { Net income (millions) } & \$ 30 & \$ 8 \\\text { Common stock outstanding (millions) } & 10 & 2 \\\text { Earnings per share } & \$ 3.00 & \$ 4.00 \\\text { Common stock (price per share) } & \$ 36.00 & \$ 44.00\end{array}$$ ? Calculate the postmerger EPS if the Old Spaghetti shareholders accept an offer of $54 per share in a stock-for-stock exchange.

A) $3.04
B) $2.92
C) $3.29
D) $3.17

Question 46

The ____ is the number of acquiring company shares received per share of acquiring company stock owned.

A) stock equity ratio
B) exchange ratio
C) dividend exchange ratio
D) interest parity ratio

Question 47

Whipple Industries is considering the acquisition of Blanchard Company in a stock-for-stock exchange. Selected financial data for the two companies is shown below. No synergy is expected in this merger. $$\begin{array} { l r r } & \text { Whipple } & \text { Blanchard } \\\text { Sales (millions) } & \$ 150 & \$ 30 \\\text { Net income (millions) } & \$ 25 & \$ 3.5 \\\text { Common shares outstanding (millions) } & 8 & 2 \\\text { Earnings per share } & \$ 3.125 & \$ 1.75 \\\text { Dividends per share } & \$ 1.50 & \$ 0.75 \\\text { Common stock price per share } & \$ 40 & \$ 19.50\end{array}$$ ? Determine the post-merger earnings per share if the Blanchard company shareholders accept an offer of $22 per share in a stock-for-stock exchange.

A) $2.85
B) $3.175
C) $3.13
D) $1.75

Question 48

Buggy Whip Industries is being liquidated under Chapter 7 of the bankruptcy code. When it filed for bankruptcy, its balance sheet was as follows: ? $\begin{array}{lclr}\text { Current assets } & \$ 22,000,000 & \text { Accounts payable } & \$ 18,000,000 \\\text { Fixed assets } & & \text { Acctued taxes } & 3,000,000 \\\text { Land and buildings } & 9,000,000 & \text { Notes payable (bank)* } & 3,000,000\\\text { Equipment } & 11,500,000 & \text { Total current liabilities } & \$ 24,000,000 \\\text { Total assets }& \$ 42,500,000 & \text { Mortgage bonds* } & 8,000,000 \\& & \text { Debentures } & 4,000,000 \\& & \text { Stockholders' equity } & 6,500,000\\&&\text { Total liabilities }\\&&\text { and equity }&\$42,500,000\end{array}$ *Bank loan is unsecured
**Mortgage bonds are secured by land and buildings
Assume that the liquidation is a voluntary petition, that no unpaid contributions to employee benefit plans exist, and that no customer layaway deposits are involved. The proceeds from the liquidation of the company's assets are as follows: $\begin{array}{lr}\text { Current assets } & \$ 12,000,000 \\\text { Land and buildings } & 5,000,000 \\\text { Equipment } & 7,500,000\\\text { Total }&\$24,500,000\end{array}$ ?
Bankruptcy administration charges are $2,500,000. Determine the amount that the mortgage bondholders will receive in this liquidation.

A) $5,000,000
B) $6,500,000
C) $8,000,000
D) $10,500,000

Question 49

Endevco is considering the acquisition of Geothermal Resources in a stock-for-stock exchange. Assume no immediate synergistic benefits are expected. Selected financial data on the two companies are shown below: $$\begin{array} { l r r } & \text { Endevco } & \text { Geothermal } \\\text { Sales (millions) } & \$ 720 & \$ 140 \\\text { Net income (millions) } & \$ 58 & \$ 16 \\\text { Common shares outstanding (millions) } & 10 & 3 \\\text { Earnings per share } & \$ 5.80 & \$ 5.33 \\\text { Common stock (price per share) } & \$ 70.00 & \$ 48\end{array}$$ ? If Endevco is not willing to incur an initial dilution in its EPS, and if Endevco also feels that it must offer Geothermal shareholders a minimum of 20% over Geothermal's current market price, what is the maximum price per share that Endevco must pay for Geothermal's stock?

A) $57.60
B) $64.33
C) $52.23
D) $60.00

Question 50

Osicom Tech is acquiring Rexon's outstanding common stock for $32 million. Before acquisition financial information on these two firms is given as follows (in $ millions): $$\begin{array} { l r r } & \text { Osicom Tech } & \text { Rexon } \\\text { Total assets } & \$ 120 & \$ 50 \\\text { Liabilities } & 60 & 25 \\\text { Stockholders' equity } & 60 & 25\end{array}$$ ? What are the total assets and stockholders' equity (in $ millions) if the purchase method is used as the accounting method for this merger?

A) $170; $85
B) $177; $92
C) $170; $92
D) $85; $92

Question 51

A plan of reorganization must be all of the following EXCEPT ____.

A) feasible
B) fair
C) a plan that allows the firm a chance to reestablish successful business operations
D) a plan whereby the creditors that are due the most money are paid first

Question 52

Millicom is acquiring Vikonic's outstanding common stock for $15 million. Financial information (in $ millions) on these two firms prior to the acquisition is as follows: ?
? $$\begin{array} { l r r } & \text { Millicom}& \text { Vikonic } \\\text { Total assets, book value } & \$ 90 & \$ 40 \\\text { Liabilities, book value } & 40 & 27 \\\text { Stockholders' equity, book value } & 50 & 13\end{array}$$ ?
What are the total assets and stockholders' equity (in $ millions) if the purchase method is used as the accounting method for this merger?

A) ?$130; $63
B) ?$130; $67
C) ?$132; $65
D) ?$132; $67

Question 53

Quarter Staff is being liquidated under Chapter 7 of the bankruptcy code. When it filed for bankruptcy, its balance sheet (in millions) was as follows: $\begin{array}{lclr}\text { Assets }&&\text { Liabilities \& Capital }\\\text { Current assets } & \$ 14.9 & \text { Accounts payable } & \$ 4.6 \\\text { Land \& buildings } & 10 & \text { Accrued wages } & 0.1 \\\text { Equipment } & 6 & \text { Accrued taxes } & 0.4 \\\text { Total assets } & \$ 30.9 & \text { Notes payable } & 5.0\\&&\text { Mortgage bonds } & 5.2 \\&&\text { Stockholders' equity } & 15.6 \\&&\text { Total liabilities \& equity } & \$ 30.9\end{array}$ ? The notes payable are an unsecured bank loan, and the mortgage bond is secured by the land and building. The proceeds from the liquidation of the company's assets are as follows: $$\begin{array} { l r } \text { Current assets } & \$ 7.2 \\\text { Land \& buil ding } & 4.5 \\\text { Equipment } & { 2.1 } \\\text { Total } & \$ 13.8\end{array}$$ ?
If the bankruptcy administration charges were $500,000, what dollar amount will the trade creditors (accounts payable) receive in the liquidation?

A) $1.65 million
B) $3.71 million
C) $4.60 million
D) $2.55 million

Question 54

Koala Technologies is considering the acquisition of Laser Industries in a stock-for-stock exchange. Selected financial data for the two companies is shown below. An immediate synergistic earnings benefit of $2.5 million is expected in this merger. $$\begin{array} { l r r } & \text { Koala } & \text { Laser } \\\text { Sales (millions) } & \$ 90 & \$ 10 \\\text { Net income (millions) } & \$ 9.4 & \$ 1.2 \\\text { Common shares outstanding (millions) } & 4.0 & 0.8 \\\text { Earnings per share } & \$ 2.35 & \$ 1.50 \\\text { Common stock (price per share) } & \$ 35.00 & \$ 27.00\end{array}$$ ? Calculate the postmerger EPS if the Laser shareholders accept an offer of $33.25 a share in a stock-for-stock exchange.

A) $2.21
B) $2.25
C) $2.75
D) $2.23

Question 55

Essex Industries is considering the acquisition of Twinsburg Company in a stock-for-stock exchange. The following financial data are available on both companies. (Assume no synergy is expected with this merger.) Calculate answers to nearest 0.001. ?? $\begin{array}{lrr} & \text { Essex } &{\text { Twinsburg }} \\\text { Sales } & \$ 500 \text { million } & \$ 50 \text { million } \\\text { Net income } & \$ 40 \text { million } & \$ 3.74 \text { million } \\\text { Common shares outstanding } & 5 \text { million } & 1 \text { million }\\\text { Earnings per share } & \$ 8.00 & \$ 3.74 \\\text { Dividends per share } & \$ 3.00 & \$ 1.00 \\\text { Common stock market price } & \$ 64 & \$ 24 \\\text { Pricelearnings ratio } & 8 & 6.42\end{array}$ ?
Calculate the post-merger earnings per share if the exchange ratio is 0.4 shares of Essex for each share of Twinsburg. (Assume total post-merger earnings are $43,740,000.)

A) ?$8.10
B) ?$7.33
C) ?$7.29
D) ?$7.42

Question 56

The annual after-tax free cash flow from the acquisition by Pacific Care of Universal Health is projected to be $12 million. These flows are expected to continue for 20 years. No value is placed on cash flows beyond 20 years. If the appropriate risk-adjusted discount rate for the merged firm is 15%, what is the maximum amount Pacific Care should pay to acquire Universal Health?

A) $79,476,000
B) $70,164,000
C) $75,108,000
D) Cannot be determined from the information provided.

Question 57

Essex Industries is considering the acquisition of Twinsburg Company in a stock-for-stock exchange. The following financial data are available on both companies. (Assume no synergy is expected with this merger.) Calculate answers to nearest 0.001. ? $\begin{array}{lrr} & \text { Essex } &{\text { Twinsburg }} \\\text { Sales } & \$ 500 \text { million } & \$ 50 \text { million } \\\text { Net income } & \$ 40 \text { million } & \$ 3.74 \text { million } \\\text { Common shares outstanding } & 5 \text { million } & 1 \text { million }\\\text { Earnings per share } & \$ 8.00 & \$ 3.74 \\\text { Dividends per share } & \$ 3.00 & \$ 1.00 \\\text { Common stock market price } & \$ 64 & \$ 24 \\\text { Pricelearnings ratio } & 8 & 6.42\end{array}$ ?
EPS = $43,740,000/5,400,000 = $8.10
?
What is Essex's post-merger share price if the post-merger price/earnings ratio is 7.5, and the exchange ratio is 0.4? Assume total post-merger earnings are $43,740,000.

A) ?$60.75
B) ?$54.98
C) ?$64.80
D) ?$30.42

Question 58

Essex Industries is considering the acquisition of Twinsburg Company in a stock-for-stock exchange. The following financial data are available on both companies. (Assume no synergy is expected with this merger.) Calculate answers to nearest 0.001.? ? $\begin{array}{lrr} & \text { Essex } &{\text { Twinsburg }} \\\text { Sales } & \$ 500 \text { million } & \$ 50 \text { million } \\\text { Net income } & \$ 40 \text { million } & \$ 3.74 \text { million } \\\text { Common shares outstanding } & 5 \text { million } & 1 \text { million }\\\text { Earnings per share } & \$ 8.00 & \$ 3.74 \\\text { Dividends per share } & \$ 3.00 & \$ 1.00 \\\text { Common stock market price } & \$ 64 & \$ 24 \\\text { Pricelearnings ratio } & 8 & 6.42\end{array}$ ?
Calculate the exchange ratio if Essex offers the Twinsburg stockholders a 20% premium over Twinsburg's current market price.

A) ?0.375
B) ?2.22
C) ?0.45
D) ?0.288

Question 59

After a merger with Velo Blind, Sunlite's earnings per share are $1.50. If Sunlite had a P/E ratio of 14 times before the merger and a price of $28 a share after the merger, what is Sunlite's post-merger P/E?

A) 16.8
B) 14.3
C) 20.2
D) 18.7

Question 60

A firm is technically insolvent when it is unable to meet it current obligations, and ____.

A) the value of its assets exceeds the value of its liabilities
B) the value of its assets is less than the value of its liabilities
C) it files a bankruptcy petition
D) it merges with another firm

Question 61

An alternative to a spin-off is a(n) ____, which allows a large company to capture the value of a high-growth business buried within the organization.

A) equity carve-out
B) holding company
C) tracking stock
D) stock synergy

Question 62

Explain the difference between a stock purchase and an asset purchase in a merger transaction. Which is preferred and why?

Question 63

An anti-takeover measure that is inserted in the corporate charter stating that 80% of the stock shares must approve the takeover proposal is a(n) ____.

A) golden parachute
B) supermajority voting rules
C) poison puts
D) standstill agreement

Question 64

An antitakeover measure that is employed after the takeover has been initiated is ____.

A) golden parachute
B) staggered board
C) white knight
D) poison put

Question 65

One reason for a company to spin-off a division is to ____.

A) consolidate expenses
B) remove an underperforming unit
C) create a better distribution unit
D) achieve synergy

Question 66

An antitakeover measure where a company attempts to buy back its shares of stock at a premium from the company or investor who initiated the unfriendly takeover is ____.

A) pacman defense
B) boardmail
C) white squire
D) greenmail

Question 67

Which of the following about an asset purchase merger transaction is (are) correct?
I. Only the assets are purchased.
II. The buying firm receives 100% of the assets and incurs only 50% of the liabilities.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements I and II are correct.
D) Neither statement I nor II is correct.

Question 68

An example of a passive institutional investor is a ____.

A) pension fund
B) private equity investor
C) parent company
D) third-party administrator

Question 69

Which of the following would be considered a reason for corporate restructuring?
I. Availability of credit
II. Low cost of credit

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements I and II are correct.
D) Neither statement I nor II is correct.

Question 70

How does a joint venture differ from a holding company?

Question 71

Explain the motivation for a company to divest through a spin-off or equity carve-out.

Question 72

In response to the merger and acquisitions boom of the late 1980s, many companies adopted various measures designed to discourage unfriendly takeover attempts. One of these antitakeover measures, sometimes referred to as shark repellents, is called a ​staggered board.​ Describe how this works.