Question 1

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. D

Question 2

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  True

Question 3

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  True

Question 4

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 5

Currently (2012),mergers can be accounted for using either the purchase method or the pooling method.

Accepted Answer

A) True 
 B)False

Question 6

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 7

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 8

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 9

Raymond Supply,a national hardware chain,is considering purchasing a smaller chain,Strauss & Glazer Parts (SGP).Raymond's analysts project that the merger will result in the following incremental free cash flows,tax shields,and horizon values: $$\begin{array} { l c c c c } 
\text { Year } & 1 & 2 & 3 & 4 \
\hline \text { Free cash flow } & \$ 1 & \$ 3 & \$ 3 & 4 \
\text { Unlevered horizon value } & & & & 75 \
\text { Tax shield }  & 1 & 1 & 2 & 3 \
\text { Horizon value of tax shield }  & & & & 3
\end{array}$$
Assume that all cash flows occur at the end of the year.SGP is currently financed with 30% debt at a rate of 10%.The acquisition would be made immediately,and if it is undertaken,SGP would retain its current $15 million of debt and issue enough new debt to continue at the 30% target level.The interest rate would remain the same.SGP's pre-merger beta is 2.0,and its post-merger tax rate would be 34%.The risk-free rate is 8% and the market risk premium is 4%.What is the value of SGP to Raymond?

Accepted Answer

A)  $53.40 million 
B)  $61.96 million 
C)  $64.64 million 
D)  $76.96 million 
E)  $79.64 million 
A)  $53.40 million 
B)  $61.96 million 
C)  $64.64 million 
D)  $76.96 million 
E)  $79.64 million

Question 10

Holland Auto Parts is considering a merger with Workman Car Parts.Workman's market-determined beta is 0.9,and the firm currently is financed with 20% debt,at an interest rate of 8%,and its tax rate is 25%.If Holland acquires Workman,it will increase the debt to 60%,at an interest rate of 9%,and the tax rate will increase to 35%.The risk-free rate is 6% and the market risk premium is 4%.What will Workman's required rate of return on equity be after it is acquired?

Accepted Answer

A)  7.4% 
B)  8.9% 
C)  9.3% 
D)  9.6% 
E)  9.7% 
A)  7.4% 
B)  8.9% 
C)  9.3% 
D)  9.6% 
E)  9.7%

Question 11

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 12

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

Question 13

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 14

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

Question 15

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 16

Which of the following statements about valuing a firm using the APV 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 17

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 18

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 19

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

Accepted Answer

A) True 
 B)False

Question 20

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.

Exam 22: Mergers and Corporate Control

Which of the following statements is most CORRECT?

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.

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.

Currently (2012),mergers can be accounted for using either the purchase method or the pooling method.

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.

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.

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

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

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

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.

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

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.

Which of the following statements about valuing a firm using the APV approach is most CORRECT?

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.

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.

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

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

Valuation of Stocks and Corporations

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

Agency Conflicts and 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

Extension 18 A: Rights Offerings

Lease Financing

Hybrid Financing: Preferred Stock, warrants, and Convertibles

Dynamic Capital Structures

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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