Question 1

The merger of two companies in the same industry that make products required at different stages of the production cycle is called:

Accepted Answer

A) economies of scope. 
B) vertical integration. 
C) economies of scale. 
D) horizontal integration. 
A) economies of scope. 
B) vertical integration. 
C) economies of scale. 
D) horizontal integration. B

Question 2

Use the following information to answer the question(s)below.
You work for a leveraged buyout firm and are evaluating a potential buyout of Associated Steel.Associated Steel's stock price is $15 and it has 10 million shares outstanding.You believe that if you buy the company and replace its management,its value will increase by 50%.You are planning on doing a leveraged buyout of Associated Steel,and will offer $20 per share for control of the company.
-Assuming you get 50% control of Associated Steel,then the price of the non-tendered shares will be closest to:

Accepted Answer

A) $12.50. 
B) $15.00. 
C) $17.50. 
D) $20.00. 
A) $12.50. 
B) $15.00. 
C) $17.50. 
D) $20.00. A

Question 3

In a ________ merger,the target and the acquirer operate in unrelated industries.

Accepted Answer

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

Question 4

Which of the following statements is FALSE?

Accepted Answer

A) Any acquirer shares received in full or partial exchange for target shares triggers an immediate tax liability for target shareholders. 
B) In a friendly takeover,the target board of directors supports the merger,negotiates with potential acquirers,and agrees on a price that is ultimately put to a shareholder vote. 
C) How the acquirer pays for the target affects the taxes of both the target shareholders and the combined firm. 
D) If the acquirer purchases the target assets directly (rather than the target stock),then it can step up the book value of the target's assets to the purchase price. 
A) Any acquirer shares received in full or partial exchange for target shares triggers an immediate tax liability for target shareholders. 
B) In a friendly takeover,the target board of directors supports the merger,negotiates with potential acquirers,and agrees on a price that is ultimately put to a shareholder vote. 
C) How the acquirer pays for the target affects the taxes of both the target shareholders and the combined firm. 
D) If the acquirer purchases the target assets directly (rather than the target stock),then it can step up the book value of the target's assets to the purchase price.

Question 5

Consider the following equation:   <     The term A in this equation refers to:

Accepted Answer

A) the premerger,or standalone,value of the acquirer. 
B) new shares to pay for the target. 
C) the value of the synergies created by the merger. 
D) the premerger (standalone)value of the target. 
A) the premerger,or standalone,value of the acquirer. 
B) new shares to pay for the target. 
C) the value of the synergies created by the merger. 
D) the premerger (standalone)value of the target.

Question 6

Which of the following statements is FALSE?

Accepted Answer

A) Chief among the costs associated with size is that larger firms are more difficult to manage. 
B) For most investors an investment in the stock market is a zero-NPV investment. 
C) Diversification benefits are by far the most common justification that bidders give for the premium they pay for a target. 
D) An acquirer might be able to add economic value,as a result of an acquisition,that an individual investor cannot add. 
A) Chief among the costs associated with size is that larger firms are more difficult to manage. 
B) For most investors an investment in the stock market is a zero-NPV investment. 
C) Diversification benefits are by far the most common justification that bidders give for the premium they pay for a target. 
D) An acquirer might be able to add economic value,as a result of an acquisition,that an individual investor cannot add.

Question 7

Consider two firms,Zoe Corporation and Marley Company.Both corporations will either make $20,000 or lose $5,000 every year with equal probability.The firms' profits are perfectly negatively correlated.If the corporate tax rate is 21%,what are the total expected after-tax profits of both firms when they are two separate firms,assuming no tax-loss carryforwards or carrybacks?

Accepted Answer

A) $15,000 
B) $10,800 
C) $9,750 
D) $4,000 
A) $15,000 
B) $10,800 
C) $9,750 
D) $4,000

Question 8

Which of the following statements regarding risk arbitrage is FALSE?

Accepted Answer

A) Once a tender offer is announced,the uncertainty about whether the takeover will succeed reduces the volatility of the stock price.This uncertainty creates an opportunity for investors to speculate on the outcome of the deal without bearing the risk of volatility. 
B) Traders known as risk-arbitrageurs,who believe that they can predict the outcome of a deal,take positions based on their beliefs. 
C) A potential profit arises from the difference between the target's stock price and the implied offer price,and is referred to as the merger-arbitrage spread. 
D) It is not true arbitrage because there is a risk that the deal will not go through.If the takeover did not ultimately succeed,the risk-arbitrageur would eventually have to unwind his position at whatever market prices prevailed. 
A) Once a tender offer is announced,the uncertainty about whether the takeover will succeed reduces the volatility of the stock price.This uncertainty creates an opportunity for investors to speculate on the outcome of the deal without bearing the risk of volatility. 
B) Traders known as risk-arbitrageurs,who believe that they can predict the outcome of a deal,take positions based on their beliefs. 
C) A potential profit arises from the difference between the target's stock price and the implied offer price,and is referred to as the merger-arbitrage spread. 
D) It is not true arbitrage because there is a risk that the deal will not go through.If the takeover did not ultimately succeed,the risk-arbitrageur would eventually have to unwind his position at whatever market prices prevailed.

Question 9

Which of the following statements regarding efficiency gains is FALSE?

Accepted Answer

A) Takeovers relying on the improvement of target management are difficult to complete,and post-takeover resistance to change can be great.Thus,not all inefficiently run organizations are necessarily more efficient following a takeover. 
B) Although identifying poorly performing corporations is relatively easy,fixing them is another matter entirely. 
C) A justification that acquirers cite for paying a premium for a target is efficiency gains,which are often achieved through an elimination of duplication. 
D) A chief executive of an inefficiently run corporation can be ousted by current shareholders voting to replace the board of directors,and in fact a large number of ineffective managers are replaced in this way. 
A) Takeovers relying on the improvement of target management are difficult to complete,and post-takeover resistance to change can be great.Thus,not all inefficiently run organizations are necessarily more efficient following a takeover. 
B) Although identifying poorly performing corporations is relatively easy,fixing them is another matter entirely. 
C) A justification that acquirers cite for paying a premium for a target is efficiency gains,which are often achieved through an elimination of duplication. 
D) A chief executive of an inefficiently run corporation can be ousted by current shareholders voting to replace the board of directors,and in fact a large number of ineffective managers are replaced in this way.

Question 10

In a ________ merger,the target's industry buys or sells to the acquirer's industry.

Accepted Answer

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

Question 11

An extremely lucrative severance package that is guaranteed to a firm's senior managers in the event that the firm is taken over and the managers are let go is called a:

Accepted Answer

A) golden parachute. 
B) white knight. 
C) poison pill. 
D) classified board. 
A) golden parachute. 
B) white knight. 
C) poison pill. 
D) classified board.

Question 12

In a ________ merger,the target and the acquirer operate in the same industry.

Accepted Answer

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

Question 13

Which of the following statements regarding recapitalization as a takeover defense is FALSE?

Accepted Answer

A) Another defense against a takeover is a recapitalization,in which a company changes its capital structure to make itself less attractive as a target. 
B) Restructuring itself can produce efficiency gains,often removing the principal motivation for the takeover in the first place. 
C) By increasing leverage on its own,the target firm can reap the benefit of the interest tax shields. 
D) In many cases,a substantial portion of the synergy gains that an acquirer anticipates from a takeover are savings from a decrease in leverage as well as other cost reductions. 
A) Another defense against a takeover is a recapitalization,in which a company changes its capital structure to make itself less attractive as a target. 
B) Restructuring itself can produce efficiency gains,often removing the principal motivation for the takeover in the first place. 
C) By increasing leverage on its own,the target firm can reap the benefit of the interest tax shields. 
D) In many cases,a substantial portion of the synergy gains that an acquirer anticipates from a takeover are savings from a decrease in leverage as well as other cost reductions.

Question 14

Which of the following statements is FALSE?

Accepted Answer

A) SEC rules make it difficult for investors to buy much more than about 10% of a firm in secret.After an acquirer acquires such an initial stake in the target,called a toehold,they would have to make their intentions public by informing investors of this large stake. 
B) With the availability of both the freezeout merger and the leveraged buyout as acquisition strategies,most of the value added accrues to the acquiring shareholders. 
C) The laws on tender offers allow the acquiring company to freeze existing shareholders out of the gains from merging by forcing non-tendering shareholders to sell their shares for the tender offer price. 
D) Premiums in LBO transactions are often quite substantial-while they can avoid the free-rider problem acquirers must still get board approval to overcome other defenses such as poison pills,as well as outbid other potential acquirers. 
A) SEC rules make it difficult for investors to buy much more than about 10% of a firm in secret.After an acquirer acquires such an initial stake in the target,called a toehold,they would have to make their intentions public by informing investors of this large stake. 
B) With the availability of both the freezeout merger and the leveraged buyout as acquisition strategies,most of the value added accrues to the acquiring shareholders. 
C) The laws on tender offers allow the acquiring company to freeze existing shareholders out of the gains from merging by forcing non-tendering shareholders to sell their shares for the tender offer price. 
D) Premiums in LBO transactions are often quite substantial-while they can avoid the free-rider problem acquirers must still get board approval to overcome other defenses such as poison pills,as well as outbid other potential acquirers.

Question 15

Which of the following statements is FALSE?

Accepted Answer

A) In practice,most acquirers pay a substantial acquisition premium,which is the percentage difference between the acquisition price and the premerger price of the target firm. 
B) When a bid is announced,the target shareholders enjoy a gain of 15% on average in their stock price. 
C) In most U.S.states,the law requires that when existing shareholders of a target firm are forced to sell their shares,they receive the market price for their shares.In most cases,this concept is interpreted as the value inclusive of any value that arises because of the merger itself. 
D) A bidder is unlikely to acquire a target company for less than its current market value. 
A) In practice,most acquirers pay a substantial acquisition premium,which is the percentage difference between the acquisition price and the premerger price of the target firm. 
B) When a bid is announced,the target shareholders enjoy a gain of 15% on average in their stock price. 
C) In most U.S.states,the law requires that when existing shareholders of a target firm are forced to sell their shares,they receive the market price for their shares.In most cases,this concept is interpreted as the value inclusive of any value that arises because of the merger itself. 
D) A bidder is unlikely to acquire a target company for less than its current market value.

Question 16

Consider two firms,Zoe Corporation and Marley Company.Both corporations will either make $20,000 or lose $5,000 every year with equal probability.The firms' profits are perfectly negatively correlated.If the corporate tax rate is 21%,what are the total expected after-tax profits if the two firms are combined into one corporation,assuming no tax-loss carryforwards or carrybacks?

Accepted Answer

A) $15,000 
B) $8,000 
C) $9,750 
D) $4,000 
A) $15,000 
B) $8,000 
C) $9,750 
D) $4,000

Question 17

Use the following information to answer the question(s)below.
Rearden Metal has earnings per share of $2.It has 10 million shares outstanding and is trading at $20 per share.Rearden Metal is thinking of buying Associated Steel,which has earnings per share of $1.25,4 million shares outstanding,and a price per share of $15.Rearden Metal will pay for Associated Steel by issuing new shares.There are no expected synergies from the transaction.
-If Rearden offers an exchange ratio such that,at current pre-announcement share prices for both firms,the offer represents a 20% premium to buy Associated Steel,then the price per share of the combined corporation after the merger will be closest to:

Accepted Answer

A) $19.12. 
B) $20.00. 
C) $26.00. 
D) $17.20. 
A) $19.12. 
B) $20.00. 
C) $26.00. 
D) $17.20.

Question 18

Use the following information to answer the question(s)below.
You work for a leveraged buyout firm and are evaluating a potential buyout of Associated Steel.Associated Steel's stock price is $15 and it has 10 million shares outstanding.You believe that if you buy the company and replace its management,its value will increase by 50%.You are planning on doing a leveraged buyout of Associated Steel,and will offer $20 per share for control of the company.
-Assuming you get 50% control of Associated Steel,then your gain from this transaction will be closest to:

Accepted Answer

A) $50.0 million. 
B) $62.5 million. 
C) $75 million. 
D) $125 million. 
A) $50.0 million. 
B) $62.5 million. 
C) $75 million. 
D) $125 million.

Question 19

Consider the following equation:   <     The term T in this equation refers to:

Accepted Answer

A) the premerger,or standalone,value of the acquirer. 
B) the value of the synergies created by the merger. 
C) the premerger (standalone)value of the target. 
D) the number of new shares to pay for the target. 
A) the premerger,or standalone,value of the acquirer. 
B) the value of the synergies created by the merger. 
C) the premerger (standalone)value of the target. 
D) the number of new shares to pay for the target.

Question 20

Which of the following statements regarding monopoly mergers is FALSE?

Accepted Answer

A) It is often argued that merging with or acquiring a major rival enables a firm to substantially reduce competition within the industry and thereby increase profits. 
B) Financial researchers have found that the share prices of other firms in the same industry did not significantly increase following the announcement of a merger within the industry. 
C) While only the merging company benefits when competition is reduced,all companies in an industry pay the associated costs. 
D) Society,as a whole,bears the cost of monopoly strategies,so most countries have antitrust laws that limit such activity. 
A) It is often argued that merging with or acquiring a major rival enables a firm to substantially reduce competition within the industry and thereby increase profits. 
B) Financial researchers have found that the share prices of other firms in the same industry did not significantly increase following the announcement of a merger within the industry. 
C) While only the merging company benefits when competition is reduced,all companies in an industry pay the associated costs. 
D) Society,as a whole,bears the cost of monopoly strategies,so most countries have antitrust laws that limit such activity.

Exam 28: Mergers and Acquisitions

The merger of two companies in the same industry that make products required at different stages of the production cycle is called:

In a ________ merger,the target and the acquirer operate in unrelated industries.

Which of the following statements is FALSE?

Consider the following equation: < The term A in this equation refers to:

Which of the following statements is FALSE?

Which of the following statements regarding risk arbitrage is FALSE?

Which of the following statements regarding efficiency gains is FALSE?

In a ________ merger,the target's industry buys or sells to the acquirer's industry.

An extremely lucrative severance package that is guaranteed to a firm's senior managers in the event that the firm is taken over and the managers are let go is called a:

In a ________ merger,the target and the acquirer operate in the same industry.

Which of the following statements regarding recapitalization as a takeover defense is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Consider the following equation: < The term T in this equation refers to:

Which of the following statements regarding monopoly mergers is FALSE?

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Corporate Governance

Risk Management

International Corporate Finance

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