Question 1

A conglomerate merger occurs when two firms with either a horizontal or a vertical business relationship combine.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following statements is most CORRECT?

Accepted Answer

A)  Tax considerations often play a part in mergers. If one firm has excess cash, purchasing another firm exposes the purchasing firm to additional taxes. Thus, firms with excess cash rarely undertake mergers. 
B)  The smaller the synergistic benefits of a particular merger, the greater the scope for striking a bargain in negotiations, and the higher the probability that the merger will be completed. 
C)  Since mergers are frequently financed by debt rather than equity, a lower cost of debt or a greater debt capacity are rarely relevant considerations when considering a merger. 
D)  Managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification, including more stable earnings. However, since shareholders are free to diversify their own holdings, and at what's probably a lower cost, research of U.S. firms suggests that in most cases, diversification through mergers does not increase the firm's value. 
E)  Research of U.S. firms suggests that managers' personal motivations have had little, if any, impact on firms' decisions to merge. 
A)  Tax considerations often play a part in mergers. If one firm has excess cash, purchasing another firm exposes the purchasing firm to additional taxes. Thus, firms with excess cash rarely undertake mergers. 
B)  The smaller the synergistic benefits of a particular merger, the greater the scope for striking a bargain in negotiations, and the higher the probability that the merger will be completed. 
C)  Since mergers are frequently financed by debt rather than equity, a lower cost of debt or a greater debt capacity are rarely relevant considerations when considering a merger. 
D)  Managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification, including more stable earnings. However, since shareholders are free to diversify their own holdings, and at what's probably a lower cost, research of U.S. firms suggests that in most cases, diversification through mergers does not increase the firm's value. 
E)  Research of U.S. firms suggests that managers' personal motivations have had little, if any, impact on firms' decisions to merge.

Question 3

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)  The equity residual method values a target firm by discounting residual net cash flows at the acquiring firm's overall cost of capital reflecting the combined firm's post-merger capital structure. 
E)  A financial merger occurs when the operations of the firms involved are integrated in the hope of achieving synergistic benefits. 
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)  The equity residual method values a target firm by discounting residual net cash flows at the acquiring firm's overall cost of capital reflecting the combined firm's post-merger capital structure. 
E)  A financial merger occurs when the operations of the firms involved are integrated in the hope of achieving synergistic benefits.

Question 4

Simpson Inc. is considering a vertical merger with The Lachey Company. Simpson currently has a required return of 11%, while Lachey's required return is 15%. The market risk premium is 5% 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.

Accepted Answer

A)  1.46 
B)  1.54 
C)  1.61 
D)  1.69 
E)  1.78 
A)  1.46 
B)  1.54 
C)  1.61 
D)  1.69 
E)  1.78

Question 5

The purchase of assets at below their replacement cost and tax considerations are two factors that motivate mergers.

Accepted Answer

A) True 
 B)False

Question 6

Coca-Cola's acquisition of Columbia Pictures and its announcement that it would operate its new subsidiary separately could be described as primarily a financial merger.

Accepted Answer

A) True 
 B)False

Question 7

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 8

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 little debt. 
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 little debt.

Question 9

Gekko Properties is considering purchasing Teldar Properties. Gekko's analysts project that the merger will result in incremental after-tax net cash flows of $2 million, $4 million, $5 million, and $10 million over the next four years. The terminal value of the firm's operations, as of Year 4, is expected to be $107 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%. The risk-free rate is 6%, and the market risk premium is 5.5%. What is the value of Teldar to Gekko Properties?

Accepted Answer

A)  $66,680,846 
B)  $70,190,364 
C)  $73,699,883 
D)  $77,384,877 
E)  $81,254,121 
A)  $66,680,846 
B)  $70,190,364 
C)  $73,699,883 
D)  $77,384,877 
E)  $81,254,121

Question 10

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 11

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. 
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.

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

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 14

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 virtually halted cross-border mergers in the 1980s. 
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. 
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 virtually halted cross-border mergers in the 1980s. 
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.

Question 15

Only if a target firm's value is greater to the acquiring firm than its market value as a separate entity will a merger be financially justified.

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

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 18

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

A conglomerate merger occurs when two firms with either a horizontal or a vertical business relationship combine.

Which of the following statements is most CORRECT?

Which of the following statements is most CORRECT?

The purchase of assets at below their replacement cost and tax considerations are two factors that motivate mergers.

Coca-Cola's acquisition of Columbia Pictures and its announcement that it would operate its new subsidiary separately could be described as primarily a financial merger.

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

Which of the following statements is most CORRECT?

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.

Which of the following statements is most CORRECT?

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

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.

Which of the following statements is most CORRECT?

Only if a target firm's value is greater to the acquiring firm than its market value as a separate entity will a merger be financially justified.

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

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.

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.

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds and Their Valuation

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles

Financial Management and Stock Equilibrium

Filters

Exam 21: Mergers and Acquisitions

A conglomerate merger occurs when two firms with either a horizontal or a vertical business relationship combine.

Which of the following statements is most CORRECT?

Which of the following statements is most CORRECT?

The purchase of assets at below their replacement cost and tax considerations are two factors that motivate mergers.

Coca-Cola's acquisition of Columbia Pictures and its announcement that it would operate its new subsidiary separately could be described as primarily a financial merger.

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

Which of the following statements is most CORRECT?

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.

Which of the following statements is most CORRECT?

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

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.

Which of the following statements is most CORRECT?

Only if a target firm's value is greater to the acquiring firm than its market value as a separate entity will a merger be financially justified.

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

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.

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.

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds and Their Valuation

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles

Financial Management and Stock Equilibrium

Filters