Question 1

Since managers' central goal is to maximize stock price, managerial control issues do not interfere with mergers that would benefit the target firm's stockholders.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following statements about valuing a firm using the APV approach is most CORRECT?

Accepted Answer

A)   The value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows at the cost of equity.
B)   The value of equity is calculated by discounting the horizon value, the tax shields, and the free cash flows at the cost of equity.
C)   The value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows before the horizon date at the unlevered cost of equity.
D)   The value of equity is calculated by discounting the horizon value and the free cash flows at the cost of equity.
E)   The APV approach stands for the accounting pre-valuation approach.F) B) and C)
G) A) and E)

Question 3

Dunbar Hardware, a national hardware chain, is considering purchasing a smaller chain, Eastern Hardware. Dunbar's analysts project that the merger will result in incremental free flows and interest tax savings with a combined present value of $72.52 million, and they have determined that the appropriate discount rate for valuing Eastern is 16%. Eastern has 4 million shares outstanding and no debt. Eastern's current price is $16.25. What is the maximum price per share that Dunbar should offer?

Accepted Answer

A)   $16.25
B)   $16.97
C)   $17.42
D)   $18.13
E)   $19.00F) A) and C)
G) C) and D)

Question 4

Firms use defensive tactics to fight off undesired mergers. These tactics do not include

Accepted Answer

A)   raising antitrust issues.
B)   getting a white squire to purchase stock in the firm.
C)   getting white knights to bid for the firm.
D)   repurchasing their own stock.
E)   changing the bylaws to eliminate supermajority voting requirements.F) A) and E)
G) C) and D)

Question 5

Since the primary rationale for any operating merger is synergy, in planning such mergers, the development of accurate pro forma cash flows is the single most important action.

Accepted Answer

A) True 
 B)False

Question 6

Leveraged buyouts (LBOs) occur when a firm's managers, generally backed by private equity groups, try to gain control of a publicly owned company by buying out the public shareholders using large amounts of borrowed money.

Accepted Answer

A) True 
 B)False

Question 7

Although goodwill created in a merger may not be amortized for shareholder reporting purposes, it may be amortized for Federal tax purposes.

Accepted Answer

A) True 
 B)False

Question 8

A two-tier merger offer is one where the acquiring company offers to purchase the target company in a two-part transaction. Cash is paid to some stockholders, bonds are issued to others, but the total values of each part of the transaction are equal.

Accepted Answer

A) True 
 B)False

Question 9

Most defensive mergers occur as a result of managers' actions to maximize shareholders' wealth.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements is most CORRECT?

Accepted Answer

A)   A conglomerate merger is one where a firm combines with another firm in the same industry.
B)   Regulations in the United States prohibit acquiring firms from using common stock to purchase another firm.
C)   Defensive mergers are designed to make a company less vulnerable to a takeover.
D)   Hostle mergers always create value for the acquiring firm.
E)   In a tender offer, the target firm's management always remain after the merger is completed.F) B) and E)
G) None of the above

Question 11

Which of the following are legal and acceptable reasons for the high level of merger activity in the U.S. during the 1980s?

Accepted Answer

A)   Synergistic benefits arising from mergers.
B)   A profitable firm acquires a firm with large accumulated tax losses that my be carried forward.
C)   Attempts to stabilize earnings by diversifying.
D)   Purchase of assets below their replacement costs.
E)   Reduction in competition resulting from mergers.F) B) and C)
G) C) and D)

Question 12

Merger activity is likely to heat up when interest rates are high because target firms can expect to receive an especially high premium over the pre-announcement stock price.

Accepted Answer

A) True 
 B)False

Question 13

Since a manager's central goal is to maximize the firm's stock price, any merger offer that provides stockholders with significant gains over the current stock price will be approved by the current management team.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following statements about valuing a firm using the APV approach is most CORRECT?

Accepted Answer

A)   The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the levered cost of equity.
B)   The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the cost of debt.
C)   The horizon value is calculated by discounting the expected earnings at the WACC.
D)   The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the WACC.
E)   The horizon value must always be more than 20 years in the future.F) A) and C)
G) B) and C)

Question 15

Synergistic benefits can arise from a number of different sources, including operating economies of scale, financial economies, and increased managerial efficiency.

Accepted Answer

A) True 
 B)False

Question 16

Post-merger control and the negotiated price paid by the acquirer are 2 of the most important issues in agreeing on the terms of a merger.

Accepted Answer

A) True 
 B)False

Question 17

The primary reason managers give for most mergers is to acquire more assets so as to increase sales and market share.

Accepted Answer

A) True 
 B)False

Question 18

Currently (2007), mergers can be accounted for using either the purchase method or the pooling method.

Accepted Answer

A) True 
 B)False

Question 19

The distribution of synergistic gains between the stockholders of 2 merged firms is almost always based strictly on their respective market values before the announcement of the merger.

Accepted Answer

A) True 
 B)False

Question 20

Great Subs Inc., a regional sandwich chain, is considering purchasing a smaller chain, Eastern Pizza, which is currently financed using 20% debt at a cost of 8%. Great Subs' analysts project that the merger will result in incremental free cash flows and interest tax savings of $2 million in Year 1, $4 million in Year 2, $5 million in Year 3, and $117 million in Year 4. (The Year 4 cash flow includes a horizon value of $107 million.)  The acquisition would be made immediately, if it is to be undertaken. Eastern's pre-merger beta is 2.0, and its post-merger tax rate would be 34%. The risk-free rate is 8%, and the market risk premium is 4%. What is the appropriate rate for use in discounting the free cash flows and the interest tax savings?

Accepted Answer

A)   12.0%
B)   13.9%
C)   14.4%
D)   16.0%
E)   16.9%F) D) and E)
G) B) and D)

Exam 21: Mergers, Lbos, Divestitures, and Holding Companies

Currently (2007), mergers can be accounted for using either the purchase method or the pooling method.

Correct Answer
verified

Correct Answer
verified

Since a manager's central goal is to maximize the firm's stock price, any merger offer that provides stockholders with significant gains over the current stock price will be approved by the current management team.

Correct Answer
verified

Correct Answer
verified

Most defensive mergers occur as a result of managers' actions to maximize shareholders' wealth.

Correct Answer
verified

Which of the following statements about valuing a firm using the APV approach is most CORRECT?

Correct Answer
verified

Which of the following are legal and acceptable reasons for the high level of merger activity in the U.S. during the 1980s?

Correct Answer
verified

Since the primary rationale for any operating merger is synergy, in planning such mergers, the development of accurate pro forma cash flows is the single most important action.

Correct Answer
verified

Which of the following statements about valuing a firm using the APV approach is most CORRECT?

Correct Answer
verified

Although goodwill created in a merger may not be amortized for shareholder reporting purposes, it may be amortized for Federal tax purposes.

Correct Answer
verified

Since managers' central goal is to maximize stock price, managerial control issues do not interfere with mergers that would benefit the target firm's stockholders.

Correct Answer
verified

The distribution of synergistic gains between the stockholders of 2 merged firms is almost always based strictly on their respective market values before the announcement of the merger.

Correct Answer
verified

The primary reason managers give for most mergers is to acquire more assets so as to increase sales and market share.

Correct Answer
verified

A two-tier merger offer is one where the acquiring company offers to purchase the target company in a two-part transaction. Cash is paid to some stockholders, bonds are issued to others, but the total values of each part of the transaction are equal.

Correct Answer
verified

Synergistic benefits can arise from a number of different sources, including operating economies of scale, financial economies, and increased managerial efficiency.

Correct Answer
verified

Merger activity is likely to heat up when interest rates are high because target firms can expect to receive an especially high premium over the pre-announcement stock price.

Correct Answer
verified

Which of the following statements is most CORRECT?

Correct Answer
verified

Leveraged buyouts (LBOs) occur when a firm's managers, generally backed by private equity groups, try to gain control of a publicly owned company by buying out the public shareholders using large amounts of borrowed money.

Correct Answer
verified

Post-merger control and the negotiated price paid by the acquirer are 2 of the most important issues in agreeing on the terms of a merger.

Correct Answer
verified

Firms use defensive tactics to fight off undesired mergers. These tactics do not include

Correct Answer
verified

Exam 21: Mergers, Lbos, Divestitures, and Holding Companies

Currently (2007), mergers can be accounted for using either the purchase method or the pooling method.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Since a manager's central goal is to maximize the firm's stock price, any merger offer that provides stockholders with significant gains over the current stock price will be approved by the current management team.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Most defensive mergers occur as a result of managers' actions to maximize shareholders' wealth.

Correct AnswerverifiedShow Answer

Which of the following statements about valuing a firm using the APV approach is most CORRECT?

Correct AnswerverifiedShow Answer

Which of the following are legal and acceptable reasons for the high level of merger activity in the U.S. during the 1980s?

Correct AnswerverifiedShow Answer

Since the primary rationale for any operating merger is synergy, in planning such mergers, the development of accurate pro forma cash flows is the single most important action.

Correct AnswerverifiedShow Answer

Which of the following statements about valuing a firm using the APV approach is most CORRECT?

Correct AnswerverifiedShow Answer

Although goodwill created in a merger may not be amortized for shareholder reporting purposes, it may be amortized for Federal tax purposes.

Correct AnswerverifiedShow Answer

Since managers' central goal is to maximize stock price, managerial control issues do not interfere with mergers that would benefit the target firm's stockholders.

Correct AnswerverifiedShow Answer

The distribution of synergistic gains between the stockholders of 2 merged firms is almost always based strictly on their respective market values before the announcement of the merger.

Correct AnswerverifiedShow Answer

The primary reason managers give for most mergers is to acquire more assets so as to increase sales and market share.

Correct AnswerverifiedShow Answer

A two-tier merger offer is one where the acquiring company offers to purchase the target company in a two-part transaction. Cash is paid to some stockholders, bonds are issued to others, but the total values of each part of the transaction are equal.

Correct AnswerverifiedShow Answer

Synergistic benefits can arise from a number of different sources, including operating economies of scale, financial economies, and increased managerial efficiency.

Correct AnswerverifiedShow Answer

Merger activity is likely to heat up when interest rates are high because target firms can expect to receive an especially high premium over the pre-announcement stock price.

Correct AnswerverifiedShow Answer

Which of the following statements is most CORRECT?

Correct AnswerverifiedShow Answer

Leveraged buyouts (LBOs) occur when a firm's managers, generally backed by private equity groups, try to gain control of a publicly owned company by buying out the public shareholders using large amounts of borrowed money.

Correct AnswerverifiedShow Answer

Post-merger control and the negotiated price paid by the acquirer are 2 of the most important issues in agreeing on the terms of a merger.

Correct AnswerverifiedShow Answer

Firms use defensive tactics to fight off undesired mergers. These tactics do not include

Correct AnswerverifiedShow Answer

Correct Answer
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