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

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

Accepted Answer

A) True 
 B)False

Question 3

The text gives a number of valid,acceptable reasons for companies to merge.Which of the following is NOT acceptable?

Accepted Answer

A)  Synergistic benefits arising from mergers. 
B)  Reduction in competition resulting from mergers. 
C)  Acquisition of assets at below replacement value. 
D)  Attempts to minimize taxes by acquiring a firm with large accumulated losses that can be used immediately. 
E)  Using surplus cash to acquire another firm and prevent unfavorable tax consequences for shareholders. 
A)  Synergistic benefits arising from mergers. 
B)  Reduction in competition resulting from mergers. 
C)  Acquisition of assets at below replacement value. 
D)  Attempts to minimize taxes by acquiring a firm with large accumulated losses that can be used immediately. 
E)  Using surplus cash to acquire another firm and prevent unfavorable tax consequences for shareholders.

Question 4

Since managers' central goal is to maximize stock price,managers' personal incentives do not interfere with mergers that would benefit the target firm's stockholders.

Accepted Answer

A) True 
 B)False

Question 5

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 6

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 7

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

Accepted Answer

A) True 
 B)False

Question 8

The rate used to discount projected merger cash flows should be the overall cost of capital of the new consolidated firm because it incorporates the actual capital structure of the new firm.

Accepted Answer

A) True 
 B)False

Question 9

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 10

The value of the target firm is calculated by discounting residual cash flows that belong to the acquiring firm's shareholders at the target's cost of equity reflecting any changes to its capital structure as a result of the merger.

Accepted Answer

A) True 
 B)False

Question 11

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 12

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 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 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 13

Anacott Steel is acquiring Terafly Incorporated.Terafly is expected to provide Anacott with operating cash flows of $12,$21,$16,and $9 million over the next four years,respectively.In addition,the horizon value of all remaining cash flows at the end of Year 4 is estimated at $18 million.The merger will cost Anacott $47 million today.If the value of the merger is estimated at $8.00 per share and Anacott has 1,000,000 shares outstanding,what equity discount rate must the firm be using to value this acquisition?

Accepted Answer

A)  11.88% 
B)  10.22% 
C)  14.31% 
D)  12.77% 
E)  12.65% 
A)  11.88% 
B)  10.22% 
C)  14.31% 
D)  12.77% 
E)  12.65%

Question 14

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 15

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 16

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 task.

Accepted Answer

A) True 
 B)False

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

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 19

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.

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

The text gives a number of valid,acceptable reasons for companies to merge.Which of the following is NOT acceptable?

Since managers' central goal is to maximize stock price,managers' personal incentives do not interfere with mergers that would benefit the target firm's stockholders.

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 the terms to merger agreements.

The rate used to discount projected merger cash flows should be the overall cost of capital of the new consolidated firm because it incorporates the actual capital structure of the new firm.

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

The value of the target firm is calculated by discounting residual cash flows that belong to the acquiring firm's shareholders at the target's cost of equity reflecting any changes to its capital structure as a result of the merger.

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

Which of the following statements is most CORRECT?

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.

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

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 task.

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.

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.

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

Interest Rates

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 Share Repurchases

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Hybrid Financing: Preferred Stock,leasing,warrants,and Convertibles

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Exam 21: Mergers and Acquisitions

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

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

The text gives a number of valid,acceptable reasons for companies to merge.Which of the following is NOT acceptable?

Since managers' central goal is to maximize stock price,managers' personal incentives do not interfere with mergers that would benefit the target firm's stockholders.

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 the terms to merger agreements.

The rate used to discount projected merger cash flows should be the overall cost of capital of the new consolidated firm because it incorporates the actual capital structure of the new firm.

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

The value of the target firm is calculated by discounting residual cash flows that belong to the acquiring firm's shareholders at the target's cost of equity reflecting any changes to its capital structure as a result of the merger.

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

Which of the following statements is most CORRECT?

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.

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

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 task.

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.

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.

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

Interest Rates

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 Share Repurchases

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Hybrid Financing: Preferred Stock,leasing,warrants,and Convertibles

Filters