Question 1

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

Question 2

The three main advantages of holding companies are (1) control with fractional ownership, (2) taxation benefits, and (3) isolation of operating risks.

Accepted Answer

A) True 
 B)False

Question 3

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 4

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 5

The present value of the free cash flows discounted at the unlevered cost of equity is the value of the firm's operations if it had no debt.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements is most CORRECT?

Accepted Answer

A)  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. 
B)  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. 
C)  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, diversification benefits is generally not a valid motive for a publicly held firm. 
D)  Operating economies are never a motive for mergers. 
E)  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. 
A)  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. 
B)  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. 
C)  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, diversification benefits is generally not a valid motive for a publicly held firm. 
D)  Operating economies are never a motive for mergers. 
E)  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.

Question 7

Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV) 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 cost of debt. 
B)  The horizon value is calculated by discounting the expected earnings at the WACC. 
C)  The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the WACC. 
D)  The horizon value must always be more than 20 years in the future. 
E)  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. 
A)  The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the cost of debt. 
B)  The horizon value is calculated by discounting the expected earnings at the WACC. 
C)  The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the WACC. 
D)  The horizon value must always be more than 20 years in the future. 
E)  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.

Question 8

Currently (2018), mergers can be accounted for using either the purchase method or the pooling method.

Accepted Answer

A) True 
 B)False

Question 9

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 10

A congeneric merger is one where the merging firms operate in related businesses but do not necessarily produce the same products or have a producer-supplier relationship.

Accepted Answer

A) True 
 B)False

Question 11

Any goodwill created in a merger must be amortized over its expected life, usually 40 years, for shareholder reporting purposes.

Accepted Answer

A) True 
 B)False

Question 12

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 13

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 14

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 15

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 16

Juicers Inc.is thinking of acquiring Fast Fruit Company.Juicers has determined that Fast Fruit's current cost of equity is 17.5%; Fast Fruit currently has no debt outstanding.In Year 1, Juicers expects Fast Fruit to generate $9 million in NOPAT and invest $50 million in total net operating capital.Fast Fruit will borrow to finance this expansion, with the first interest payment ($5 million) due at Year 2.(There will be no interest due at Year 1.) In Year 2, Fast Fruit will generate $25 million in NOPAT and invest $10 million in total net operating capital.Fast Fruit's marginal tax rate is 25%.After the second year, the free cash flows and the tax shields each will grow at a constant rate of 4%.Assume that all cash flows occur at the end of the year.If Juicers must pay $90 million to acquire Fast Fruit, what is the NPV of the proposed acquisition? (Report your answer in millions of dollars.)

Accepted Answer

A)  $16.75 million 
B)  $17.63 million 
C)  $18.56 million 
D)  $19.53 million 
E)  $20.56 million 
A)  $16.75 million 
B)  $17.63 million 
C)  $18.56 million 
D)  $19.53 million 
E)  $20.56 million

Question 17

Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the discount rate can only be determined after the merger is consummated.

Accepted Answer

A) True 
 B)False

Question 18

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 19

Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV) approach is most CORRECT?

Accepted Answer

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

Question 20

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

Exam 22: Mergers and Corporate Control

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

The three main advantages of holding companies are (1) control with fractional ownership, (2) taxation benefits, and (3) isolation of operating risks.

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.

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.

The present value of the free cash flows discounted at the unlevered cost of equity is the value of the firm's operations if it had no debt.

Which of the following statements is most CORRECT?

Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV) approach is most CORRECT?

Currently (2018), mergers can be accounted for using either the purchase method or the pooling method.

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.

A congeneric merger is one where the merging firms operate in related businesses but do not necessarily produce the same products or have a producer-supplier relationship.

Any goodwill created in a merger must be amortized over its expected life, usually 40 years, for shareholder reporting purposes.

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.

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.

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.

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

Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the discount rate can only be determined after the merger is consummated.

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.

Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV) approach is most CORRECT?

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

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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