Question 1

A spin-off is a type of divestiture in which the assets of a division are sold to another firm.

Accepted Answer

A) True 
 B)False

Question 2

The distribution of synergistic gains between the stockholders of two 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 3

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 shares in the company using large amounts of borrowed money.

Accepted Answer

A) True 
 B)False

Question 4

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  False

Question 5

The primary reason given by managers for most mergers is the acquisition of more assets so as to increase sales and market share.

Accepted Answer

A) True 
 B)False

Question 6

Gekko Properties is considering purchasing Teldar Properties.Gekko's analysts project that the merger will result in incremental after-tax cash flows of $2 million,$4 million,$5 million,and $10 million over the next four years.The horizon value of the firm's operations,as of Year 4,is expected to be $108 million.Assume all cash flows occur at the end of the year.The acquisition would be made immediately,if it is undertaken.Teldar's post-merger beta is estimated to be 2.0,and its post-merger tax rate would be 35.00%.The risk-free rate is 6.00%,and the market risk premium is 5.70%.What is the value of Teldar to Gekko Properties? Do not round intermediate calculations.

Accepted Answer

A)   $78,888,332
B)   $69,812,683
C)   $76,793,952
D)   $82,378,966
E)   $56,548,273F) A) and B)
G) D) and E)

Question 7

One of the main reasons why foreign firms are interested in buying U.S.companies is to gain entrance to the U.S.market.A decline in the value of the dollar relative to most foreign currencies makes this competitive strategy especially attractive.

Accepted Answer

A) True 
 B)False

Question 8

A joint venture is one in which two,or sometimes more,independent companies agree to combine resources in order to achieve a specific objective,usually limited in scope.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements is most CORRECT?

Accepted Answer

A)   Leveraged buyouts (LBOs) occur when a firm issues equity and uses the proceeds to take a firm public.
B)   In a typical LBO,bondholders do well but shareholders see their value decline.
C)   Firms are forbidden by law to sell any assets during the first five years following a leverage buyout.
D)   Not all target firms are acquired by publicly traded corporations.In recent years,an increasing number of firms have been acquired by private equity firms.Private equity firms raise capital from wealthy individuals and look for opportunities to make profitable investments.
E)   In an LBO sometimes the acquiring group plans to run the acquired company for a number of years,boost its sales and profits,and then take it public again as a stronger company.In other instances,the LBO firm plans to sell off divisions to other firms that can gain synergies.In either case,the acquiring group expects to make a substantial profit from the LBO,but the inherent risks are small due to the heavy use of venture capital and very little debt.F) None of the above
G) B) and E)

Question 10

Borrowing funds on terms that would require immediate repayment of all loans if the firm is acquired,selling off at bargain prices the assets that originally made the firm a desirable target,and granting huge "golden parachutes" that open if the firm is acquired are 3 procedures used to defend against hostile takeovers.These strategies are known as "poison pills."

Accepted Answer

A) True 
 B)False

Question 11

At the beginning of the year Giant Inc.'s management is considering making an offer to buy Micro Corporation.Micro's projected operating income (EBIT) for the current year is $31.0 million,but Giant believes that if the two firms were merged,it could consolidate some operations,reduce Micro's expenses,and raise its EBIT to $37.0 million.Neither company uses any debt,and they both pay income taxes at a 35% rate.Giant has a better reputation among investors,who regard it as very well managed and not very risky,so its stock has a P/E ratio of 13 versus a P/E of 9 for Micro.Since Giant's management would be running the entire enterprise after a merger,investors would value the resulting corporation based on Giant's P/E.If Micro has 10 million shares outstanding,by how much should the merger increase its share price,assuming all of the synergy will go to its stockholders? Do not round your intermediate calculations.

Accepted Answer

A)   $15.10
B)   $11.16
C)   $16.41
D)   $13.79
E)   $13.13F) D) and E)
G) A) and B)

Question 12

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

Accepted Answer

A)   raising antitrust issues.
B)   developing poison pills.
C)   getting white knights to bid for the firm.
D)   repurchasing their own stock.
E)   engaging in risk arbitrage.F) A) and B)
G) B) and D) E

Question 13

Which of the following statements is most CORRECT?

Accepted Answer

A)   The high value of the U.S.dollar relative to Japanese and European currencies in the 1980s,made U.S.companies comparatively inexpensive to foreign buyers,spurring many mergers.
B)   During the 1980s,the Reagan and Bush administrations tried to foster greater competition and they were adamant about preventing the loss of competition;thus,most large mergers were disallowed.
C)   The expansion of the junk bond market made debt more freely available for large acquisitions and LBOs in the 1980s,and thus,it resulted in an increased level of merger activity.
D)   Increased nationalization of business and a desire to scale down and focus on producing in one's home country has virtually halted cross-border mergers today.
E)   Because strategic alliances and joint ventures are easy to form and enable firms to compete better in the global economy than would mergers,merger activity has virtually come to a halt in the 21st century.F) None of the above
G) D) and E)

Question 14

Which of the following actions does NOT help managers defend against a hostile takeover?

Accepted Answer

A)   Establishing a poison pill provision.
B)   Granting lucrative golden parachutes to senior managers.
C)   Establishing a super-majority provision in the company's bylaws to raise the percentage of the board of directors that must approve an acquisition from 50% to 75%.
D)   Retiring long-term debt early to reduce total debt on the balance sheet which will increase the firm's financial position.
E)   Finding a "white squire" that will buy enough of the target firm's shares to block the hostile takeover.F) A) and D)
G) B) and D)

Question 15

Which of the following statements is most CORRECT?

Accepted Answer

A)   If a company that produces military equipment merges with a company that manages a chain of motels,this is an example of a horizontal merger.
B)   A defensive merger is one where the firm's managers decide to merge with another firm to avoid or lessen the possibility of being acquired through a hostile takeover.
C)   Acquiring firms send a signal that their stock is undervalued if they choose to use stock to pay for the acquisition.
D)   In a liquidation,the firm's existing stockholders are given new stock representing separate ownership rights in the division that was divested.The division establishes its own board of directors and officers,and it becomes a separate company.
E)   If there are no synergistic benefits to be gained from a merger,the acquiring company will stop its plans for the merger.However,if synergistic gains are large,plans for the merger will continue.In fact,the greater the synergistic gains,the smaller the gap between the target's current price and the maximum the acquiring company could pay because of the acquiring company's upper hand in the merger.F) A) and D)
G) None of the above

Question 16

Simpson Inc.is considering a vertical merger with The Lachey Company.Simpson currently has a required return of 9%,while Lachey's required return is 14%.The market risk premium is 5.10% and the risk-free rate is 5%.Assume the market is in equilibrium.If Simpson is going to make up 67% of the new firm (and Lachey will comprise the remaining 33%) ,what will be the beta of the new merged firm? There will be no additional infusion of debt in the merger.Do not round your intermediate calculations.

Accepted Answer

A)   1.05
B)   1.38
C)   1.11
D)   0.83
E)   1.16F) A) and E)
G) A) and B)

Question 17

A company seeking to fight off a hostile takeover might employ the services of an investment banking firm to develop a defensive strategy.

Accepted Answer

A) True 
 B)False  True

Question 18

At the beginning of the year Ham Inc.'s management is considering making an offer to buy Egg Corporation.Egg's projected operating income (EBIT) for the current year is $25.0 million,but Ham believes that if the two firms were merged,it could consolidate some operations,reduce Egg's expenses,and raise its EBIT to $39.0 million.Neither company uses any debt,and they both pay income taxes at a 40% rate.Ham has a better reputation among investors,who regard it as better managed and also less risky,so Ham's stock has a P/E ratio of 18 versus a P/E of 12 for Egg.Since Ham's management will be running the entire enterprise after a merger,investors will value the resulting corporation based on Ham's P/E.Based on expected market values,how much synergy should the merger create? Do not round your intermediate calculations.

Accepted Answer

A)   $301.50 million
B)   $277.38 million
C)   $241.2 million
D)   $205.02 million
E)   $229.14 millionF) B) and C)
G) A) and E)

Question 19

If a petrochemical firm that used oil as feedstock merged with an oil producer that had large oil reserves and a drilling subsidiary,this would be a vertical merger.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following statements is most CORRECT?

Accepted Answer

A)   The acquiring firm's required rate of return in most horizontal mergers will not be affected,because the two firms will have similar betas.
B)   The goal of merger valuation is to value the target firm's total capital at the target firm's weighted average cost of capital because a firm is acquired from all of its investors--both shareholders and creditors.
C)   The basic rationale for any financial merger is synergy and,thus,the estimation of pro forma cash flows is the single most important part of the analysis.
D)   In most mergers,the benefits of synergy and the premium the acquirer pays over the market price are summed and then divided equally between the shareholders of the acquiring and target firms.
E)   The primary rationale for most operating mergers is synergy.F) A) and D)
G) B) and D)

Exam 21: Mergers and Acquisitions

A spin-off is a type of divestiture in which the assets of a division are sold to another firm.

Correct Answer
verified

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

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 shares in the company using large amounts of borrowed money.

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
False

The primary reason given by managers for most mergers is the acquisition of more assets so as to increase sales and market share.

Correct Answer
verified

Correct Answer
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One of the main reasons why foreign firms are interested in buying U.S.companies is to gain entrance to the U.S.market.A decline in the value of the dollar relative to most foreign currencies makes this competitive strategy especially attractive.

Correct Answer
verified

A joint venture is one in which two,or sometimes more,independent companies agree to combine resources in order to achieve a specific objective,usually limited in scope.

Correct Answer
verified

Which of the following statements is most CORRECT?

Correct Answer
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Correct Answer
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Firms use defensive tactics to fight off undesired mergers.These tactics do NOT include

Correct Answer
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E

Which of the following statements is most CORRECT?

Correct Answer
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Which of the following actions does NOT help managers defend against a hostile takeover?

Correct Answer
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Which of the following statements is most CORRECT?

Correct Answer
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Correct Answer
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A company seeking to fight off a hostile takeover might employ the services of an investment banking firm to develop a defensive strategy.

Correct Answer
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True

Correct Answer
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If a petrochemical firm that used oil as feedstock merged with an oil producer that had large oil reserves and a drilling subsidiary,this would be a vertical merger.

Correct Answer
verified

Which of the following statements is most CORRECT?

Correct Answer
verified

Exam 21: Mergers and Acquisitions

A spin-off is a type of divestiture in which the assets of a division are sold to another firm.

Correct AnswerverifiedShow Answer

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

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 shares in the company using large amounts of borrowed money.

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 AnswerverifiedFalse

The primary reason given by managers for most mergers is the acquisition of more assets so as to increase sales and market share.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

One of the main reasons why foreign firms are interested in buying U.S.companies is to gain entrance to the U.S.market.A decline in the value of the dollar relative to most foreign currencies makes this competitive strategy especially attractive.

Correct AnswerverifiedShow Answer

A joint venture is one in which two,or sometimes more,independent companies agree to combine resources in order to achieve a specific objective,usually limited in scope.

Correct AnswerverifiedShow Answer

Which of the following statements is most CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedE

Which of the following statements is most CORRECT?

Correct AnswerverifiedShow Answer

Which of the following actions does NOT help managers defend against a hostile takeover?

Correct AnswerverifiedShow Answer

Which of the following statements is most CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A company seeking to fight off a hostile takeover might employ the services of an investment banking firm to develop a defensive strategy.

Correct AnswerverifiedTrue

Correct AnswerverifiedShow Answer

If a petrochemical firm that used oil as feedstock merged with an oil producer that had large oil reserves and a drilling subsidiary,this would be a vertical merger.

Correct AnswerverifiedShow Answer

Which of the following statements is most CORRECT?

Correct AnswerverifiedShow Answer

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False

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Correct Answer
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Correct Answer
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E

Correct Answer
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True

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