Question 1

Which one of the following statements is correct?

Accepted Answer

A)  The IRS automatically approves acquisitions that are primarily designed to lower federal taxes. 
B)  The leverage associated with an acquisition increases the tax liability of the acquiring firm. 
C)  A firm may benefit from an acquisition if it can lower its capital requirements. 
D)  Firms can always benefit from economies of scale if they increase the size of their firm through acquisitions. 
E)  If a firm uses its surplus cash to acquire another firm, then the shareholders of the acquiring firm immediately incur a tax liability related to the transaction. 
A)  The IRS automatically approves acquisitions that are primarily designed to lower federal taxes. 
B)  The leverage associated with an acquisition increases the tax liability of the acquiring firm. 
C)  A firm may benefit from an acquisition if it can lower its capital requirements. 
D)  Firms can always benefit from economies of scale if they increase the size of their firm through acquisitions. 
E)  If a firm uses its surplus cash to acquire another firm, then the shareholders of the acquiring firm immediately incur a tax liability related to the transaction.

Question 2

Firm B is being acquired by Firm A for $166,000 worth of Firm A stock. The incremental value of the acquisition is $5,200. Firm A has 11,500 shares of stock outstanding at a price of $40 a share. Firm B has 6,500 shares of stock outstanding at a price of $25 a share. What is the value per share of Firm A after the acquisition?

Accepted Answer

A)  $39.97 
B)  $40.22 
C)  $40.00 
D)  $40.11 
E)  $40.04 
A)  $39.97 
B)  $40.22 
C)  $40.00 
D)  $40.11 
E)  $40.04

Question 3

Nadine's Home Fashions has $2.12 million in net working capital. The firm has fixed assets with a book value of $31.64 million and a market value of $33.9 million. The firm has no long-term debt. The Home Centre is buying Nadine's for $37.5 million in cash. The acquisition will be recorded using the purchase accounting method. What is the amount of goodwill that The Home Centre will record on its balance sheet as a result of this acquisition?

Accepted Answer

A)  $1.48 million 
B)  $3.34 million 
C)  $3.74 million 
D)  $4.14 million 
E)  $5.86 million 
A)  $1.48 million 
B)  $3.34 million 
C)  $3.74 million 
D)  $4.14 million 
E)  $5.86 million

Question 4

Davidson Global proposed splitting itself into four separate firms and its shareholders agreed. This split is referred to as a(n):

Accepted Answer

A)  lockup transaction. 
B)  divestiture. 
C)  equity carve-out. 
D)  spin-off. 
E)  split-up. 
A)  lockup transaction. 
B)  divestiture. 
C)  equity carve-out. 
D)  spin-off. 
E)  split-up.

Question 5

Family Travel is the sole shareholder in its subsidiary, FT Insurance. Family Travel has decided to divest itself of its insurance operations and does so by distributing the shares in the subsidiary to the shareholders of Family Travel. This distribution of shares is called a(n):

Accepted Answer

A)  lockup transaction. 
B)  bear hug. 
C)  equity carve-out. 
D)  spin-off. 
E)  split-up. 
A)  lockup transaction. 
B)  bear hug. 
C)  equity carve-out. 
D)  spin-off. 
E)  split-up.

Question 6

Rural Markets and Flo's Flowers are all-equity firms. Rural Markets has 2,300 shares outstanding at a market price of $16.50 a share. Flo's Flowers has 5,000 shares outstanding at a price of $17 a share. Flo's Flowers is acquiring Rural Markets for $39,000 in cash. The incremental value of the acquisition is $1,800. What is the net present value of acquiring Rural Markets to Flo's Flowers?

Accepted Answer

A)  $750 
B)  −$1,050 
C)  −$250 
D)  $400 
E)  $1,800 
A)  $750 
B)  −$1,050 
C)  −$250 
D)  $400 
E)  $1,800

Question 7

Firm X has total earnings of $49,000, a market value per share of $64, a book value per share of $38, and has 25,000 shares outstanding. Firm Y has total earnings of $34,000, a market value per share of $21, a book value per share of $12, and has 22,000 shares outstanding. Assume Firm X acquires Firm Y by paying cash for all the shares outstanding at a merger premium of $2 per share. Also assume neither firm has any debt before or after the merger. What is the value of the total equity of the combined firm, XY, if the purchase method of accounting is used?

Accepted Answer

A)  $1,274,000 
B)  $1,316,000 
C)  $1,456,000 
D)  $1,412,000 
E)  $1,427,000 
A)  $1,274,000 
B)  $1,316,000 
C)  $1,456,000 
D)  $1,412,000 
E)  $1,427,000

Question 8

Silver Enterprises has acquired All Gold Mining in a merger transaction. The pre-merger balance sheet for Silver Enterprises has current assets of $1,500, other assets of $400, net fixed assets of $2,300, current liabilities of $1,000, long-term debt of $500 and owners' equity of $,2700. The pre-merger balance sheet for All Gold Mining shows current assets of $600, other assets of $210, net fixed assets of $1,600, current liabilities of $500, and equity of $1,910. Assume the merger is treated as a purchase for accounting purposes. The market value of All Gold Mining's fixed assets is $2,900; the market values for current and other assets are the same as the book values. Assume that Silver Enterprises issues $4,000 in new long-term debt to finance the acquisition. The post-merger balance sheet will reflect goodwill of ________ and total equity of ________.

Accepted Answer

A)  $640; $2,700 
B)  $790; $4,610 
C)  $790; $2,700 
D)  $890; $4,610 
E)  $890; $2,700 
A)  $640; $2,700 
B)  $790; $4,610 
C)  $790; $2,700 
D)  $890; $4,610 
E)  $890; $2,700

Question 9

Global Distributors has decided to sell its manufacturing operations and concentrate solely on its global distribution operations. This sale is referred to as a(n):

Accepted Answer

A)  liquidation. 
B)  divestiture. 
C)  merger. 
D)  allocation. 
E)  restructuring. 
A)  liquidation. 
B)  divestiture. 
C)  merger. 
D)  allocation. 
E)  restructuring.

Question 10

Sue's Bakery is planning on merging with Ted's Deli. Sue's will pay Ted's shareholders the current value of their stock in shares of Sue's Bakery. Sue's currently has 6,500 shares of stock outstanding at a market price of $26 a share. Ted's has 2,300 shares outstanding at a price of $18 a share. What is the value of the merged firm if the synergy created by the merger is $3,200?

Accepted Answer

A)  $206,500 
B)  $210,400 
C)  $225,400 
D)  $213,600 
E)  $231,300 
A)  $206,500 
B)  $210,400 
C)  $225,400 
D)  $213,600 
E)  $231,300

Question 11

All of the following represent potential gains from an acquisition except the:

Accepted Answer

A)  tax loss carryforwards acquired in the acquisition. 
B)  lower costs per unit realized. 
C)  diseconomies of scale related to increased labor demand. 
D)  use of surplus funds. 
E)  obtainment of a beachhead. 
A)  tax loss carryforwards acquired in the acquisition. 
B)  lower costs per unit realized. 
C)  diseconomies of scale related to increased labor demand. 
D)  use of surplus funds. 
E)  obtainment of a beachhead.

Question 12

Roger is a major shareholder in RB Industrial Supply. Currently, Roger is quite unhappy with the direction the firm is headed and is rumored to be considering an attempt to take over the firm by soliciting the votes of other shareholders. To head off this potential attempt, the board of RB Industrial Supply has decided to offer Roger $36 a share for all the shares he owns in the firm. The current market value per share is $32. This offer to purchase Roger's shares is commonly referred to as:

Accepted Answer

A)  a golden parachute. 
B)  standstill payments. 
C)  greenmail. 
D)  a poison pill. 
E)  a white knight. 
A)  a golden parachute. 
B)  standstill payments. 
C)  greenmail. 
D)  a poison pill. 
E)  a white knight.

Question 13

Which one of these statements is correct regarding acquisitions?

Accepted Answer

A)  The cost of a cash acquisition to the acquiring firm is equal to the cash paid minus the taxes incurred by the target firm's shareholders. 
B)  Neither cash nor share acquisitions affect the control of the acquiring firm. 
C)  Share financing is generally more common than cash financing for smaller acquisitions. 
D)  Target firm shareholders share in both the gains and losses resulting from a stock acquisition. 
E)  Cash acquisitions create a tax liability for the acquiring firm's shareholders. 
A)  The cost of a cash acquisition to the acquiring firm is equal to the cash paid minus the taxes incurred by the target firm's shareholders. 
B)  Neither cash nor share acquisitions affect the control of the acquiring firm. 
C)  Share financing is generally more common than cash financing for smaller acquisitions. 
D)  Target firm shareholders share in both the gains and losses resulting from a stock acquisition. 
E)  Cash acquisitions create a tax liability for the acquiring firm's shareholders.

Question 14

Alpha is planning on merging with Beta. Alpha will pay Beta's shareholders the current value of their stock in shares of Alpha. Alpha currently has 6,500 shares of stock outstanding at a market price of $44 a share. Beta has 2,100 shares outstanding at a price of $22 a share. The post-merger earnings will be $10,400. What will the earnings per share be after the merger?

Accepted Answer

A)  $1.43 
B)  $1.38 
C)  $1.25 
D)  $1.51 
E)  $1.16 
A)  $1.43 
B)  $1.38 
C)  $1.25 
D)  $1.51 
E)  $1.16

Question 15

Melvin was attempting to gain control of Western Wood Products until he realized that the existing shareholders in the firm had the right to purchase additional shares at a below-market price given his hostile takeover attempt. Thus, Melvin decided to forgo investing in this firm. What term applies to the tactic used by Western Wood Products to stave off this takeover attempt?

Accepted Answer

A)  "Pac-man" defense 
B)  Bear hug 
C)  Golden parachute provision 
D)  Greenmail provision 
E)  Share rights plan 
A)  "Pac-man" defense 
B)  Bear hug 
C)  Golden parachute provision 
D)  Greenmail provision 
E)  Share rights plan

Question 16

The balance sheet of MT Co. shows current assets of $14,000, net fixed assets of $21,800, current liabilities of $4,300, long-term debt of $2,600, and equity of $28,900. The balance sheet of LF Inc. has current assets of $4,700, net fixed assets of $8,100, current liabilities of $2,200, long-term debt of $1,200, and equity of $9,400. The market value of LF's fixed assets is $14,100. MT purchases LF for $20,000 and raises the funds through an issue of long-term debt. What will be the value of the equity account on the post- merger balance sheet assuming the purchase accounting method is used?

Accepted Answer

A)  $29,600 
B)  $33,600 
C)  $28,900 
D)  $39,600 
E)  $43,000 
A)  $29,600 
B)  $33,600 
C)  $28,900 
D)  $39,600 
E)  $43,000

Question 17

The balance sheet of Meat Co. reflects current assets of $6,000, net fixed assets of $8,400, current liabilities of $1,800, long-term debt of $1,100, and equity of $11,500. The balance sheet of Loaf Inc. shows current assets of $2,000, net fixed assets of $3,300, current liabilities of $900, long-term debt of $500, and equity of $3,900. Suppose the fair market value of Loaf's fixed assets is $4,100 versus the $3,300 book value shown. Meat pays $5,200 for Loaf and raises the needed funds through an issue of long-term debt. Assume the purchase method of accounting is used. The post-merger balance sheet of Meat Co. will have total debt of ________ and total equity of ________.

Accepted Answer

A)  $1,600; $11,500 
B)  $1,600; $15,400 
C)  $10,200; $15,400 
D)  $9,500; $11,500 
E)  $14,500; $15,400 
A)  $1,600; $11,500 
B)  $1,600; $15,400 
C)  $10,200; $15,400 
D)  $9,500; $11,500 
E)  $14,500; $15,400

Question 18

Which one of these is the least probable reason why a firm may want to divest itself of some of its assets?

Accepted Answer

A)  To cash out a profitable operation 
B)  To raise cash 
C)  To improve the strategic fit of its various divisions 
D)  To comply with antitrust regulations 
E)  To increase market share 
A)  To cash out a profitable operation 
B)  To raise cash 
C)  To improve the strategic fit of its various divisions 
D)  To comply with antitrust regulations 
E)  To increase market share

Question 19

A potential merger that produces synergy:

Accepted Answer

A)  should be rejected due to the projected negative cash flows. 
B)  should be rejected because the synergy will dilute the benefits of the merger. 
C)  has a net present value of zero. 
D)  creates value and therefore should be pursued. 
E)  reduces the anticipated net income from the target firm. 
A)  should be rejected due to the projected negative cash flows. 
B)  should be rejected because the synergy will dilute the benefits of the merger. 
C)  has a net present value of zero. 
D)  creates value and therefore should be pursued. 
E)  reduces the anticipated net income from the target firm.

Question 20

Johnson Co. and Peabody Enterprises are both manufacturers of plastic products. These two firms have decided to work together to find a more efficient way to recycle rejected products. Thus, the two companies are each going to assign two engineers to this project and have agreed to share any and all costs. This project is an example of a:

Accepted Answer

A)  consolidation. 
B)  merged alliance. 
C)  joint venture. 
D)  takeover project. 
E)  strategic alliance. 
A)  consolidation. 
B)  merged alliance. 
C)  joint venture. 
D)  takeover project. 
E)  strategic alliance.

Which one of the following statements is correct?

Davidson Global proposed splitting itself into four separate firms and its shareholders agreed. This split is referred to as a(n):

Family Travel is the sole shareholder in its subsidiary, FT Insurance. Family Travel has decided to divest itself of its insurance operations and does so by distributing the shares in the subsidiary to the shareholders of Family Travel. This distribution of shares is called a(n):

Global Distributors has decided to sell its manufacturing operations and concentrate solely on its global distribution operations. This sale is referred to as a(n):

All of the following represent potential gains from an acquisition except the:

Which one of these statements is correct regarding acquisitions?

Which one of these is the least probable reason why a firm may want to divest itself of some of its assets?

A potential merger that produces synergy:

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working with Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Some Lessons from Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Option Valuation

Leasing

Filters

Exam 26: Mergers and Acquisitions

Which one of the following statements is correct?

Davidson Global proposed splitting itself into four separate firms and its shareholders agreed. This split is referred to as a(n):

Family Travel is the sole shareholder in its subsidiary, FT Insurance. Family Travel has decided to divest itself of its insurance operations and does so by distributing the shares in the subsidiary to the shareholders of Family Travel. This distribution of shares is called a(n):

Global Distributors has decided to sell its manufacturing operations and concentrate solely on its global distribution operations. This sale is referred to as a(n):

All of the following represent potential gains from an acquisition except the:

Which one of these statements is correct regarding acquisitions?

Which one of these is the least probable reason why a firm may want to divest itself of some of its assets?

A potential merger that produces synergy:

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working with Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Some Lessons from Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Option Valuation

Leasing

Filters