Question 1

Briefly discuss some of the more logical reasons for mergers to occur.

Accepted Answer

The overriding reason for mergers to occ

Question 2

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 3

Sensitivity analysis must be performed when estimating the liquidation value of an investment.

Accepted Answer

A) True 
 B)False

Question 4

Mergers that attempt to bootstrap earnings may obtain increased current earnings per share at the expense of:

Accepted Answer

A) A higher price-earnings ratio 
B) Higher total combined market value 
C) Reduced future growth prospects 
D) Increased free-cash-flow 
A) A higher price-earnings ratio 
B) Higher total combined market value 
C) Reduced future growth prospects 
D) Increased free-cash-flow

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

On average, shareholders in target firms earn higher returns from mergers than shareholders from acquiring firms.

Accepted Answer

A) True 
 B)False

Question 7

A merger adds value by creating synergies.Which of the following is not a possible source of synergy?

Accepted Answer

A) Economies of scale 
B) Economies of vertical integration 
C) Combining complementary resources 
D) Diversification 
A) Economies of scale 
B) Economies of vertical integration 
C) Combining complementary resources 
D) Diversification

Question 8

Which of the following motives for mergers make economic sense?

Accepted Answer

A) To achieve economies of scale 
B) To reduce risk by diversification 
C) Merging to redeploy cash 
D) To increase earnings per share 
A) To achieve economies of scale 
B) To reduce risk by diversification 
C) Merging to redeploy cash 
D) To increase earnings per share

Question 9

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 10

It is easier for individual investors to diversify their risk by buying shares in different firms than for the firms to combine their operations.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following is least likely to provide a motivation for vertical integration?

Accepted Answer

A) A continuous source of raw materials 
B) A desire to spread fixed costs across more output 
C) Access to an efficient distribution channel 
D) Acquisition of an established customer base 
A) A continuous source of raw materials 
B) A desire to spread fixed costs across more output 
C) Access to an efficient distribution channel 
D) Acquisition of an established customer base

Question 12

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 Pre-Announcement:
Cost of merger = Value of acquired firm
= ($8 x 1 million) - value of acquired firm
= $8 million - value of acquired firm
Post-Announcement:
Cost of merger = $7 million - value of acquired firm 
A) It increases by $1 million 
B) It decreases by $1 million 
C) It increases by $9 million 
D) It remains constant Pre-Announcement:
Cost of merger = Value of acquired firm
= ($8 x 1 million) - value of acquired firm
= $8 million - value of acquired firm
Post-Announcement:
Cost of merger = $7 million - value of acquired firm

Question 13

In merger terminology, a white knight is:

Accepted Answer

A) Any suitor willing to bid more than the current share price for a firm 
B) The successful bidder in a merger process 
C) A suitor who acquires with cash rather than with stock 
D) A friendly acquirer that will out-bid a hostile acquirer 
A) Any suitor willing to bid more than the current share price for a firm 
B) The successful bidder in a merger process 
C) A suitor who acquires with cash rather than with stock 
D) A friendly acquirer that will out-bid a hostile acquirer

Question 14

Why are firms with free cash flow attractive acquisition candidates?

Accepted Answer

In the case of acquisitions, firms are t

Question 15

121.Provide several synergistic motives for merging.

Accepted Answer

Increased revenues; economies

Question 16

Accounting for corporate combinations normally follows the purchase method.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

A merger is expected to produce cost savings of $50 million and the acquired firm's shareholders will receive a premium of 20% over the $150 million value of their firm.The gain of the merger to the acquirer is:

Accepted Answer

A) $20 million 
B) $30 million 
C) $50 million 
D) $130 million GainA = gain from merger less premium given to shareholders of B
= $50 million - $30 million 
A) $20 million 
B) $30 million 
C) $50 million 
D) $130 million GainA = gain from merger less premium given to shareholders of B
= $50 million - $30 million

Question 19

When one firm merges with another, the:

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 20

When a management team buys the firm from current shareholders while continuing to manage and often incurring large segments of debt, it is known as a:

Accepted Answer

A) Management buyout 
B) Spin-off 
C) Successful greenmail attempt 
D) Corporate break-up 
A) Management buyout 
B) Spin-off 
C) Successful greenmail attempt 
D) Corporate break-up

Exam 23: Options

Briefly discuss some of the more logical reasons for mergers to occur.

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?

Sensitivity analysis must be performed when estimating the liquidation value of an investment.

Mergers that attempt to bootstrap earnings may obtain increased current earnings per share at the expense of:

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

On average, shareholders in target firms earn higher returns from mergers than shareholders from acquiring firms.

A merger adds value by creating synergies.Which of the following is not a possible source of synergy?

Which of the following motives for mergers make economic sense?

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

It is easier for individual investors to diversify their risk by buying shares in different firms than for the firms to combine their operations.

Which of the following is least likely to provide a motivation for vertical integration?

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?

In merger terminology, a white knight is:

Why are firms with free cash flow attractive acquisition candidates?

121.Provide several synergistic motives for merging.

Accounting for corporate combinations normally follows the purchase method.

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

A merger is expected to produce cost savings of $50 million and the acquired firm's shareholders will receive a premium of 20% over the $150 million value of their firm.The gain of the merger to the acquirer is:

When one firm merges with another, the:

When a management team buys the firm from current shareholders while continuing to manage and often incurring large segments of debt, it is known as a:

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

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Risk Management

Conclusion

What We Do and Do Not Know About Finance

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