Deck 17: Corporate Restructuring

Question 1

Which of the following would not be a reason for the management of a target company to resist a takeover by an acquiring company?

A)Management of the target company may feel that the tender offer is too high.
B)Management of the target company may not think that the acquiring company's management style will be effective in the target company.
C)Management of the target company may be concerned about losing personal power and influence.
D)Neither a. nor b. would be a reason to resist a takeover.

Answer 1

A

Question 2

A combination of companies in which neither competes with the other, no buyer-seller relationship exists between them, and the firms' businesses are unrelated is a:

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

Answer 2

A

Question 3

In a ____, the acquiring company offers to buy the target company's shares at a price above market.

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

Answer 3

B

Question 4

Rank the various types of mergers from high to low with respect to their potential to raise antitrust issues.

A)Conglomerate, Horizontal, Vertical
B)Horizontal, Vertical, Conglomerate
C)Vertical, Horizontal, Conglomerate
D)Horizontal, Conglomerate, Vertical
E)Vertical, Conglomerate, Horizontal

Question 5

The broad term "corporate restructuring" refers to:

A)changes in ownership.
B)changes to capital structure.
C)mergers and divestitures.
D)All of the above

Question 6

Control of a target can be achieved through:

A)the sale of stock.
B)a tender offer.
C)a proxy solicitation.
D)b and c
E)All of the above

Question 7

Acquiring a firm with a tax loss can shelter the acquirer's earnings, unless the primary reason for the merger is:

A)diversification to reduce risk.
B)to benefit from economies of scale.
C)to lock in the acquired firm's source of critical supplies.
D)tax avoidance.

Question 8

Conglomerate mergers often occur when businesses are trying to:

A)increase their market share in their own product lines.
B)secure a source of supply for raw materials.
C)secure their distribution network.
D)diversify to stabilize financial results.
E)None of the above describes conglomerate mergers.

Question 9

The type of business combination in which the acquiring firm becomes the parent and the target a subsidiary is:

A)a consolidation.
B)an acquisition.
C)a merger.
D)b and c

Question 10

The category of business combination where the firms have a supplier-customer relationship is known as a:

A)vertical merger.
B)horizontal merger.
C)conglomerate merger.
D)none of the above

Question 11

Which of the following types of mergers would expand the acquiring firm's market share in its own industry?

A)Vertical
B)Horizontal
C)Conglomerate
D)a and b
E)All of the above

Question 12

Which of the following is not a factor that makes valuing a target's stock difficult and imprecise?

A)It's hard for an acquirer to get an accurate forecast of the target's future cash flows.
B)Terminal values vary dramatically in response to small changes in assumptions.
C)The acquirer's management generally doesn't know anything about the target's line of business.
D)Estimating a risk adjusted discount rate for the analysis is inherently imprecise.

Question 13

Companies A, B and C combine and continue as C. This is called a:

A)merger.
B)consolidation.
C)an acquisition of A and B by C.
D)both a. and c.

Question 14

A combination of two entities in which both legally cease to exist and a new legal entity is formed is:

A)an acquisition.
B)a merger.
C)a consolidation.
D)a partnership.

Question 15

When the net income of the combined companies after a 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 16

A combination of two entities in which only one legally ceases to exist is:

A)a subsidiary.
B)a parent company.
C)a consolidation.
D)a merger.

Question 17

Which of the following terms is not associated with mergers and acquisitions?

A)White knight
B)Tender offers
C)Greenmail
D)Stock dividend

Question 18

A combination of companies that compete directly is a:

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

Question 19

A combination in which all of the combining companies are dissolved and a new firm is formed is a:

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

Question 20

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

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

Question 21

Anti-trust legislation:

A)is enforced by the Justice Department as well as the Federal Trade Commission.
B)no longer applies to business combinations.
C)does not apply to conglomerate mergers.
D)a and c
E)None of the above

Question 22

When a target company's management and board of directors feel that a combination would be a good idea and agree to cooperate with an acquirer, the result is commonly called:

A)a friendly merger.
B)a friendly consolidation.
C)an agreement in principle.
D)None of the above

Question 23

An investment banker's role in a merger might include:

A)counseling reluctant targets on defensive measures.
B)assisting the acquiring company in raising the capital necessary to pay for the target.
C)assisting the acquiring company in establishing a value for the target.
D)All of the above

Question 24

The best rationale for a merger is that the value of the firms combined is:

A)at least equal to the sum of their separate values.
B)greater than the sum of their separate values.
C)less than the sum of their separate values.
D)None of the above

Question 25

A competent merger analysis calculates the maximum per share price that should be paid for an acquisition as:

A)the pre-merger market price plus the per share value of synergies.
B)the NPV of the incremental cash flows coming from the acquisition divided by the number of shares of the target's stock that are outstanding.
C)the targets terminal value.
D)the NPV of the target's terminal value divided by the number of share tendered.

Question 26

Which of the following justifications for mergers is arguably for the benefit of management rather than stockholders?

A)Synergies
B)External growth
C)Diversification to reduce risk
D)Economies of scale
E)Guaranteed sources and markets

Question 27

Defensive measures to prevent an unfriendly merger do not include:

A)convincing the shareholders of the target company not to approve the deal.
B)seeking a preemptive merger with another acquirer the target's management feels is more desirable.
C)suing the would-be acquirer for unjust interference with business operations.
D)trying to get the justice department to view the proposed merger as an antitrust violation.

Question 28

All of the following are defensive measures except:

A)black night.
B)staggered board elections.
C)super majority voting rules.
D)poison pills.

Question 29

The appropriate discount rate in merger analysis is:

A)the acquirer's cost of capital because a merger is essentially a capital budgeting project.
B)the acquirer's cost of equity because mergers are risky and a rate above the cost of capital is appropriate.
C)the target's cost of equity because it best approximates the usually high risk inherent in this type of equity transaction.
D)a judgmental rate reflecting the risk inherent in the transaction.

Question 30

A merger of two airlines is an example of:

A)a vertical merger.
B)a product extension merger.
C)a conglomerate merger.
D)a horizontal merger.

Question 31

The Antitrust Laws:

A)may prevent mergers.
B)have been enforced with varying strictness at different times by the Justice Dept. and the FTC.
C)are aimed at keeping the economy competitive.
D)All of the above

Question 32

Which of the following is true of a strategic merger?

A)It is undertaken to make money by selling the acquired firm piece by piece.
B)It is undertaken to enhance the business position of the acquiring company.
C)It never has an effect on competition in the acquirer's industry.
D)It usually involves business acquisitions in a completely different industry.

Question 33

In a financial merger, the acquisition is intended to:

A)achieve technical expertise in developing existing products.
B)achieve economies of scale in operations and administration.
C)enhance reputation of the combined firm.
D)buy an undervalued target and sell its pieces off at a profit.

Question 34

In a congeneric merger:

A)the combining companies are in unrelated businesses.
B)the combining companies are competitors.
C)the combining companies are in related but not competing businesses.
D)one of the combining companies is a supplier of the other.

Question 35

A group of companies that acts like a monopoly is a:

A)oligopoly.
B)conglomerate.
C)trust.
D)None of the above

Question 36

Landmark Hotels is in the hospitality industry. Management is considering acquiring Wind Flower, a small chain of luxury resorts. In this way, Landmark can save the expense of starting its own line of resorts from scratch. What kind of a merger will this be?

A)Horizontal merger
B)Conglomerate merger
C)Strategic merger
D)Financial merger

Question 37

Status Investment Bank Inc. is considering acquiring a fifty percent stake in a company that manages mutual funds. This will probably be a:

A)horizontal merger.
B)consolidation merger.
C)conglomerate merger.
D)congeneric merger.

Question 38

A merger between a tire manufacturer and an automobile manufacturer is an example of:

A)a horizontal merger.
B)a vertical merger.
C)a product extension merger.
D)None of the above

Question 39

The price at which a merger target's stock is acquired virtually always reflects a premium over its pre-merger market value because:

A)the acquirer is trying to fairly divide the gain it will make on the acquisition between its own stockholders and the target's.
B)it takes a substantial premium to get a large number of shareholders to sell at one time.
C)the combined firm generally has an increased value because of additional leverage.
D)the acquirer wants the target's shareholders to be happy about the merger because they will be among its shareholders after the transaction.

Question 40

Which of the following is true of a congeneric merger?

A)The combining companies sell the same product or service.
B)The merger is likely to improve the acquirer's competitive position.
C)The combining companies are in completely different industries.
D)The level of competition in the acquirer's industry is drastically reduced.

Question 41

Which of the following is incorrect? Merger analysis is:

A)a straightforward capital budgeting exercise.
B)difficult because it's hard for the acquirer to get an accurate estimate of the target's cash flows.
C)imprecise because of the variability of terminal value estimates.
D)not always performed rationally judging by the price premiums paid for many acquisitions.

Question 42

Which of the following is true of the fourth wave of mergers from 1981 to 1989?

A)It was characterized as a period of congeneric mergers and hostile takeovers the mergers of very large companies.
B)It reflected the globalization of businesses.
C)It was characterized by private equity groups buying up companies for purely financial reasons.
D)It was characterized by conglomerate mergers.

Question 43

Management's propensity to overestimate the value of the target company in a merger can lead to:

A)financial disaster for the acquiring company.
B)a financial windfall for the stockholders of the target company.
C)an irrational transfer of wealth from the shareholders of the acquirer to those of the target.
D)All of the above

Question 44

Which of the following is not a characteristic of the merger wave that started in about 1981 and ended in 1989?

A)Mergers financed by the junk bonds
B)Congeneric mergers
C)Corporate raiders
D)Hostile takeovers

Question 45

In discounting the forecasted future cash flows of a target company for valuation purposes, which discount rate should be used?

A)WACC of the acquiring company
B)Cost of equity of the acquiring company
C)Cost of debt of the target company
D)Cost of equity of the target company
E)WACC of the target company

Question 46

To be acceptable to the acquirer, the total premium paid must be:

A)exactly the pre-merger value of the target firm.
B)zero.
C)no greater than the additional value to the acquirer created by the merger.
D)negative.
E)None of the above

Question 47

A parent or holding company operates acquired businesses as:

A)divisions of a larger corporation which is the holding company itself.
B)fully integrated parts of the acquiring firm.
C)separate legal entities.
D)a and c.

Question 48

The success of junk bonds in the 1980s was based on a rationale that was eventually proven wrong. That rationale was:

A)the failure rate of risky companies is only slightly higher than that of more reputable firms.
B)risky firms fail only slightly more often than highly rated firms in good economic times.
C)during hard times, risky companies fail a lot more frequently than higher rated firms.
D)None of the above correctly states the junk bond rationale.

Question 49

The stock of a target company is considered "in play" when:

A)an acquiring company begins working on a takeover plan.
B)an acquiring company makes a tender offer.
C)it becomes known that a company is an acquisition target.
D)a tender offer is endorsed by the target's management.
E)the acquiring company announces that it wants the target company.

Question 50

In merger analysis, a terminal value represents:

A)the estimated value of the target company exactly three years in the future.
B)the book value of the target's assets at the end of the period of cash flow estimation.
C)the target's value after a period of detailed cash flow estimation, generally assuming it will grow at a constant rate indefinitely.
D)the net income of the target company during its last full year prior to acquisition.
E)None of the above describes the terminal value concept.

Question 51

The advantage of the parent(holding company)-subsidiary organization is that it:

A)can keep the liabilities of subsidiaries away from the parent and other subsidiaries.
B)enables the parent to effectively control a subsidiary company without owning all of its stock.
C)makes it easier to merge the operations of the acquired company with those of the parent.
D)a and b

Question 52

In a merger, the minimum total price acceptable to the target's shareholders is:

A)more than the pre-merger value of the firm.
B)the additional value created by the merger in the eyes of the acquirer.
C)the pre-merger value of the firm.
D)b plus c
E)None of the above

Question 53

The price premium in a merger is the difference between the price offered for the target company's stock and:

A)the target's book value before news of the acquisition got out.
B)the target's book value after news of the acquisition got out.
C)the target's market value before news of the acquisition got out.
D)the target's market value after news of the acquisition got out.

Question 54

Which of the following defensive tactics is not appropriate after a takeover attempt is underway?

A)Issue debt and repurchase its own shares
B)Adopt a poison pill
C)Claim an antitrust violation
D)Seek a white knight

Question 55

If an acquiring company is willing to pay $20 per share for a target's stock, and its own stock is selling for $10, which of the following is not a reasonable payment for 100 shares of the target?

A)$2000, all cash
B)$1000 cash and 100 shares of acquiring company's stock
C)200 shares of acquiring company's stock
D)$1000 in bonds and 200 shares of the acquiring company's stock

Question 56

Economies of scale in production and distribution would generally be highest in:

A)vertical mergers.
B)product extension mergers.
C)horizontal mergers.
D)any form of merger.

Question 57

A junk bond is:

A)a low risk bond that pays high yields.
B)a high-risk bond that pays low yields.
C)a high-risk bond that pays high yields.
D)a low risk bond that pays low yields.

Question 58

Which of the merger waves in the United States resulted in the concentration of several major industries into oligopolies?

A)Wave I: 1897 - 1904
B)Wave II: 1916 - 1929
C)Wave III: 1965 - 1981
D)Wave IV: 1981 - 1989

Question 59

When a recession came along in the late 1980s:

A)the junk bond market collapsed.
B)the merger wave beginning in 1981 accelerated.
C)the mastermind of the junk bond market, Michael Milken, received the Nobel Peace Prize in Economics.
D)All of the above

Question 60

The maximum purchase price acceptable to the acquiring firm in a merger:

A)cannot exceed the pre-merger value of the target firm.
B)is always equal to the pre-merger value of the target firm.
C)is always less than the pre-merger value of the target firm.
D)a and c
E)None of the above

Question 61

Although the courts usually permit bankrupt firms to continue in business, they protect creditors' interests by requiring:

A)that all disbursements be approved by the court.
B)that all checks be countersigned by a bankruptcy judge.
C)that a trustee oversees the company's operation while it is in bankruptcy.
D)All of the above

Question 62

A reorganization in bankruptcy primarily:

A)restructures the firm's business operations to enhance performance.
B)reorganizes management to get rid of poor performers and put more competent people in charge so the firm will do better in the future.
C)restructures capital to lower interest payments.
D)reorganizes customers.

Question 63

In a liquidation, the trustee:

A)supervises the sale of the business's assets.
B)distributes the available funds to the various claimants.
C)finds and recovers any illegal payments made before the bankruptcy filing.
D)All of the above

Question 64

AMAY's mining division does not fit well strategically with the remainder of the firm. Conversely, the mining division would fit well with the mission of Nuccar Minerals. A good way for AMAY to divest of its mining unit is through:

A)consolidation.
B)liquidation.
C)sale for cash.
D)spinoff.

Question 65

Ajax Corp recently entered bankruptcy proceedings during which the court decided the firm should be liquidated. Just before the bankruptcy filing, the firm's owners transferred most of its remaining assets into their own names without paying the company anything for them. Creditors are now claiming that those assets should rightfully be used to satisfy their claims. Which of the following is true?

A)The assets can be recovered by the trustee in bankruptcy for the benefit of the creditors.
B)The creditors are out of luck since the assets were legally transferred before the bankruptcy filing.
C)The creditors can sue the owners for the assets in a separate court proceeding, but it will be expensive and time consuming to do so.
D)The transfer will stand if it was done in accordance with the rules for prefilling transfers established in Chapter 11 of the bankruptcy code.

Question 66

A reorganization in bankruptcy is a business plan that enables a bankrupt firm to continue operating. The acceptability of a plan depends upon the following criteria:

A)fairness and timeliness of debt repayment.
B)feasibility and timeliness of debt repayment.
C)feasibility and fairness of debt repayment.
D)the reasonability of the debt restructuring scheme and the timeliness of debt repayment.

Question 67

An agreement under which creditors accept partial payment in settlement of their claims is a:

A)subordination.
B)composition.
C)extension.
D)funding.

Question 68

The distinction between bankruptcy and insolvency is:

A)unimportant, the terms mean essentially the same thing.
B)bankruptcy means a firm can't pay its bills, insolvency means its liabilities exceed its assets.
C)bankruptcy means a firm's liabilities exceed its assets, insolvency means it can't pay its bills.
D)bankruptcy is a court procedure, insolvency is a financial condition that may make bankruptcy appropriate.

Question 69

The first and last priorities for receiving funds in a bankruptcy are:

A)administrative expenses of the bankruptcy proceedings; common stockholders.
B)unpaid employees, unsecured creditors.
C)secured creditors; common stockholders
D)customers; preferred stockholders.

Question 70

In a(n)____, stock in a subsidiary or a newly incorporated division is distributed to shareholders of the parent company.

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

Question 71

A divestiture is unlikely to be undertaken because of:

A)high debt from an LBO.
B)the need to diversify.
C)poor performance.
D)a lack of strategic fit.

Question 72

When unhappy, shareholders solicit other shareholders to join them in removing certain board members, the action is called a:

A)a staggering of the election of directors.
B)seeking a white knight.
C)a proxy fight.
D)the board's adoption of a poison pill.

Question 73

In a Leveraged buyout (LBO):

A)an acquiring company uses a great deal of debt to acquire a debt free target.
B)private investors buy the company's stock using debt that's secured by the firm's own assets.
C)the target's debt is eliminated by the buyer's leverage resulting in a debt free company.
D)the buyers purchase the stock with their own money which leaves them free to borrow heavily using their stock as collateral.

Question 74

A firm can be insolvent because:

A)its liabilities exceed its assets.
B)it can't pay its bills when they're due.
C)the court issues an insolvency order.
D)either a or b.

Question 75

The aftermath of a leveraged buyout might include:

A)the immediate sale of the some of the firm's assets or divisions to pay down excessive debt.
B)the prospect of failure from an inability to service the excessive debt.
C)an imminent proxy fight.
D)a or b.

Question 76

Incompatible operations can be separated without damaging either or altering stockholders positions through a:

A)sale for cash.
B)spinoff.
C)subsidiary divestiture.
D)breakout.

Question 77

The acquisition of a company in which the buyer borrows most of the purchase price using the firm's own assets as collateral is a:

A)consolidation.
B)leveraged buyout.
C)conglomerate merger.
D)tender offer.

Question 78

Which of the following defensive tactics is not appropriate before a takeover attempt is underway?

A)Poison pills
B)Staggered election of directors
C)Golden parachutes
D)Greenmail

Question 79

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 is 15 percent, what is the maximum amount Pacific Care should pay to acquire Universal Health?

A)$79,476,000
B)$70,164,000
C)$75,111,600
D)Cannot be determined

Question 80

In a Leveraged Buy Out (LBO)the leverage is usually collateralized by:

A)there is no collateral, that's why it's "leveraged."
B)the firm's assets.
C)the new owner's personal assets.
D)stockholder's equity.