Question 1

The value of the target firm's bonds goes down when a leveraged buyout is announced.

Accepted Answer

A) True 
 B)False

Question 2

ABC Corp.has offered one million shares having a total market value of $8 million for XYZ Corp.After the merger is announced, shares in ABC trade for $7 each.If ABC is confident about XYZ's value, what has happened to the cost of the merger?

Accepted Answer

A) It increases by $1 million 
B) It decreases by $1 million 
C) It increases by $9 million 
D) It remains constant 
A) It increases by $1 million 
B) It decreases by $1 million 
C) It increases by $9 million 
D) It remains constant

Question 3

What does it mean when a company is said to have been merged under the term acquisition?

Accepted Answer

A) Boards of directors will merge also. 
B) Merger must be approved by 75% of the shareholders of the target firm. 
C) Merger must be approved by at least 50% of the shareholders of the target firm. 
D) Target firm will cease to exist. 
A) Boards of directors will merge also. 
B) Merger must be approved by 75% of the shareholders of the target firm. 
C) Merger must be approved by at least 50% of the shareholders of the target firm. 
D) Target firm will cease to exist.

Question 4

An acquiring firm has a value of $500 million and a P/E ratio of 15.The target company has a value of $200 million and a P/E ratio if 10.It is expected that there will be $8 million gain from the merger.Given this information, determine the P/E of the merged firm and whether the P/E.

Accepted Answer

The answer of An acquiring firm has a value of...

Question 5

Grow Fast currently sells at a price-earnings multiple of 10.The firm has 2 million shares outstanding, and sells at a price per share of $40.Steady & Stable has a P/E multiple of 8, has 1 million shares outstanding, and sells at a price per share of $20.
a.If Grow Fast acquires the other firm by exchanging one of its shares for every two of Steady & Stable's, what will be the earnings per share of the merged firm?
b.If the merger has no economic gain, what will be the P/E of the new firm? What will happen to Grow Fast's price per share? Will any of the shareholders experience a change in wealth?
c.What will happen to Grow Fast's price per share if the market does not realize that the P/E ratio of the merged firm ought to differ from Grow Fast's premerger ratio? Who gains and by how much in this case?
 $\begin{array}{|l|c|c|c|c|c|}
\hline &\text { P/E } & \text { Shares } & \text { Price } & \text { EPS }^{*} & \text { Earnings }^{* *} \
\hline \text { GrowFast } & 10 & 2 \text { million } & \$ 40 & \$ 4.00 & \$ 8.0 \text { million } \
\hline \text { Steady \& Stable } & 8 & 1 \text { million } & \$ 20 & \$ 2.50 & \$ 2.5 \text { million } \
\hline
\end{array}$

Accepted Answer

* EPS = Price divided by P/E r

Question 6

When analyzing a potential merger's cash flows, the most appropriate discount rate is the acquiring firms cost of capital.

Accepted Answer

A) True 
 B)False

Question 7

"Junk bonds" are not very desirable because of the low yields these securities provide.

Accepted Answer

A) True 
 B)False

Question 8

In vertical mergers, the goal is to benefit from the economies of scale.

Accepted Answer

A) True 
 B)False

Question 9

A conglomerate merger occurs when:

Accepted Answer

A) both partners are large in size. 
B) large synergies are expected to develop. 
C) firms from different industries merge. 
D) both management teams remain intact after the merger. 
A) both partners are large in size. 
B) large synergies are expected to develop. 
C) firms from different industries merge. 
D) both management teams remain intact after the merger.

Question 10

The free-cash-flow theory of takeovers predicts that:

Accepted Answer

A) Firms without free cash flow will become the most common LBOs. 
B) Firms with free cash flow will continue to be the acquirers. 
C) Firms with excess cash do not have a tendency to use it wisely. 
D) The riskiest takeover candidates are those with large amounts of free cash flow. 
A) Firms without free cash flow will become the most common LBOs. 
B) Firms with free cash flow will continue to be the acquirers. 
C) Firms with excess cash do not have a tendency to use it wisely. 
D) The riskiest takeover candidates are those with large amounts of free cash flow.

Question 11

Why is it stated that the safest way of evaluating the potential gains from a merger is to focus on changes in cash flow that will transpire as a result of the merger?

Accepted Answer

The alternative to this approach is to d

Question 12

An acquiring company is considering a takeover of a target company.The acquiring company has 10 million shares outstanding with $40 per share.The target company has 5 million shares outstanding which sell for $20 per share.If the acquiring company estimates that merger gains will be $20 million, determine what the highest price will be paid per share for the target.

Accepted Answer

A) $24 
B) $26 
C) $28 
D) $30 
A) $24 
B) $26 
C) $28 
D) $30

Question 13

Provide several synergistic motives for merging.

Accepted Answer

Increased revenues; economies

Question 14

When shareholders are issued rights to buy shares if a bidder acquires a large stake in the firm is best defined as:

Accepted Answer

A) Leveraged Buyout. 
B) Poison Pill. 
C) Shark Repellent. 
D) Proxy Contest. 
A) Leveraged Buyout. 
B) Poison Pill. 
C) Shark Repellent. 
D) Proxy Contest.

Question 15

According to the free-cash-flow theory of takeovers, post-merger gains in market value represent:

Accepted Answer

A) an illogical assessment of earnings prospects. 
B) the remaining costs of the merger. 
C) the present value of free-cash-flow that will no longer be misused. 
D) losses experienced by arbitrageurs and other speculators. 
A) an illogical assessment of earnings prospects. 
B) the remaining costs of the merger. 
C) the present value of free-cash-flow that will no longer be misused. 
D) losses experienced by arbitrageurs and other speculators.

Question 16

If Snapper Lawnmowers were to acquire Briggs and Stratton (gasoline-powered engines), the merger would be:

Accepted Answer

A) a conglomerate. 
B) a divestiture. 
C) horizontal. 
D) vertical. 
A) a conglomerate. 
B) a divestiture. 
C) horizontal. 
D) vertical.

Question 17

A tender offer is an attempt by outsiders to buy the stock of the target firm's shareholders with the help of target firm's managers.

Accepted Answer

A) True 
 B)False

Question 18

Empirical studies show that the operating efficiency of firms having undergone a leverage buyout, ______ over the following 3 years.

Accepted Answer

A) increases 
B) decreases 
C) does not change 
D) shows no clear trend 
A) increases 
B) decreases 
C) does not change 
D) shows no clear trend

Question 19

A spin-off is an action in which:

Accepted Answer

A) the management bids for and acquires the firm. 
B) one firm issues stock to acquire another firm. 
C) successful product lines are sold to competitors. 
D) a portion of the firm's assets are sold off to form a new company. 
A) the management bids for and acquires the firm. 
B) one firm issues stock to acquire another firm. 
C) successful product lines are sold to competitors. 
D) a portion of the firm's assets are sold off to form a new company.

Question 20

Contrary to logic, firms that enjoy complementary resources in the production process are rarely good candidates for merger.

Accepted Answer

A) True 
 B)False

Exam 23: Mergers, Acquisitions, and Corporate Control

The value of the target firm's bonds goes down when a leveraged buyout is announced.

ABC Corp.has offered one million shares having a total market value of $8 million for XYZ Corp.After the merger is announced, shares in ABC trade for $7 each.If ABC is confident about XYZ's value, what has happened to the cost of the merger?

What does it mean when a company is said to have been merged under the term acquisition?

An acquiring firm has a value of $500 million and a P/E ratio of 15.The target company has a value of $200 million and a P/E ratio if 10.It is expected that there will be $8 million gain from the merger.Given this information, determine the P/E of the merged firm and whether the P/E.

When analyzing a potential merger's cash flows, the most appropriate discount rate is the acquiring firms cost of capital.

"Junk bonds" are not very desirable because of the low yields these securities provide.

In vertical mergers, the goal is to benefit from the economies of scale.

A conglomerate merger occurs when:

The free-cash-flow theory of takeovers predicts that:

Why is it stated that the safest way of evaluating the potential gains from a merger is to focus on changes in cash flow that will transpire as a result of the merger?

Provide several synergistic motives for merging.

When shareholders are issued rights to buy shares if a bidder acquires a large stake in the firm is best defined as:

According to the free-cash-flow theory of takeovers, post-merger gains in market value represent:

If Snapper Lawnmowers were to acquire Briggs and Stratton (gasoline-powered engines), the merger would be:

A tender offer is an attempt by outsiders to buy the stock of the target firm's shareholders with the help of target firm's managers.

Empirical studies show that the operating efficiency of firms having undergone a leverage buyout, ______ over the following 3 years.

A spin-off is an action in which:

Contrary to logic, firms that enjoy complementary resources in the production process are rarely good candidates for merger.

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, Ipos, and Seasoned Offerings

Debt Policy

Leasing

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Credit Management and Collection

International Financial Management

Options

Risk Management

Filters