Question 1

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  True

Question 2

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  False

Question 3

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  False

Question 4

A parent holding company sells shares in its subsidiary such that the parent now owns only 65% of the subsidiary and, thus, the tax returns of the parent and its subsidiary can't be consolidated.The parent receives annual dividends from the subsidiary of $2,500,000.If the parent's marginal tax rate is 25% and if the exclusion on intercompany dividends is 50%, what is the effective tax rate on the intercompany dividends, and how much net dividends are received?

Accepted Answer

A)  12.5%; $2,187,500 
B)  12.5%; $2,135,000 
C)  23.8%; $1,905,000 
D)  12.5%; $1,750,000 
E)  25.0%; $1,650,000 
A)  12.5%; $2,187,500 
B)  12.5%; $2,135,000 
C)  23.8%; $1,905,000 
D)  12.5%; $1,750,000 
E)  25.0%; $1,650,000

Question 5

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 6

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 7

In a merger with true synergies, the post-merger value exceeds the sum of the separate companies' pre-merger values.

Accepted Answer

A) True 
 B)False

Question 8

In a financial merger, the relevant post-merger cash flows are simply the sum of the expected cash flows of the two companies, measured as if they were operated independently.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

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

Question 10

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 11

Borrowing funds on terms that would require immediate repayment of all funds if the firm is acquired, selling off valuable assets, and granting huge "golden parachutes" that open if the firm is acquired are three procedures used to defend against hostile takeovers.These strategies are known as "poison pills."

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements is most CORRECT?

Accepted Answer

A)  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. 
B)  Acquiring firms send a signal that their stock is undervalued if they choose to use stock to pay for the acquisition. 
C)  Cash payments are used in takeovers but never in mergers. 
D)  Managers often are fired in takeovers, but never in mergers. 
E)  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. 
A)  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. 
B)  Acquiring firms send a signal that their stock is undervalued if they choose to use stock to pay for the acquisition. 
C)  Cash payments are used in takeovers but never in mergers. 
D)  Managers often are fired in takeovers, but never in mergers. 
E)  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.

Question 13

Which of the following statements is most CORRECT?

Accepted Answer

A)  Regulations in the United States prohibit acquiring firms from using common stock to purchase another firm. 
B)  Defensive mergers are designed to make a company less vulnerable to a takeover. 
C)  Hostile mergers always create value for the acquiring firm. 
D)  In a tender offer, the target firm's management always remain after the merger is completed. 
E)  A conglomerate merger is one where a firm combines with another firm in the same industry. 
A)  Regulations in the United States prohibit acquiring firms from using common stock to purchase another firm. 
B)  Defensive mergers are designed to make a company less vulnerable to a takeover. 
C)  Hostile mergers always create value for the acquiring firm. 
D)  In a tender offer, the target firm's management always remain after the merger is completed. 
E)  A conglomerate merger is one where a firm combines with another firm in the same industry.

Question 14

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 15

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 16

The two principal advantages of holding companies are (1) the holding company can control a great deal of assets with limited equity and (2) the dividends received by the parent from the subsidiary are not taxed if the parent holds at least 50% of the subsidiary's stock.

Accepted Answer

A) True 
 B)False

Question 17

The owners of Arthouse Inc., a national artist supplies chain, are contemplating purchasing Craftworks Inc, a smaller chain.Arthouse'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 Craftworks is 16%.Craftworks has 4 million shares outstanding and no debt.Craftworks' current price is $16.25.What is the maximum price per share that Arthouse should offer?

Accepted Answer

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

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

If the capital structure is stable, and free cash flows are expected to be growing at a constant rate at the horizon date, then the horizon value is calculated by discounting the free cash flows plus the expected future tax shields at the weighted average cost of capital.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following statements is most CORRECT?

Accepted Answer

A)  Financial theory says that the choice of how to pay for a merger is really irrelevant because, although it may affect the firm's capital structure, it will not affect its overall required rate of return. 
B)  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. 
C)  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. 
D)  The primary rationale for most operating mergers is synergy. 
E)  The acquiring firm's required rate of return in most horizontal mergers will not be affected, because the 2 firms will have similar betas. 
A)  Financial theory says that the choice of how to pay for a merger is really irrelevant because, although it may affect the firm's capital structure, it will not affect its overall required rate of return. 
B)  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. 
C)  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. 
D)  The primary rationale for most operating mergers is synergy. 
E)  The acquiring firm's required rate of return in most horizontal mergers will not be affected, because the 2 firms will have similar betas.

Exam 22: Mergers and Corporate Control

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.

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

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

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

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.

In a merger with true synergies, the post-merger value exceeds the sum of the separate companies' pre-merger values.

In a financial merger, the relevant post-merger cash flows are simply the sum of the expected cash flows of the two companies, measured as if they were operated independently.

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

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.

Which of the following statements is most CORRECT?

Which of the following statements is most CORRECT?

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.

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

The two principal advantages of holding companies are (1) the holding company can control a great deal of assets with limited equity and (2) the dividends received by the parent from the subsidiary are not taxed if the parent holds at least 50% of the subsidiary's stock.

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

If the capital structure is stable, and free cash flows are expected to be growing at a constant rate at the horizon date, then the horizon value is calculated by discounting the free cash flows plus the expected future tax shields at the weighted average cost of capital.

Which of the following statements is most CORRECT?

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds, Bond Valuation, and Interest Rates

Risk and Return

Corporate Valuation and Stock Valuation

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Corporate Valuation and Financial Planning

Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, Seasoned Offerings, and Investment Banks

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Dynamic Capital Structures and Corporate Valuation

Enterprise Risk Management

Bankruptcy, Reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not-For-Profit Businesses

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