Question 1

Firms that are acquired to take advantage of bootstrapping often have:

Accepted Answer

A) A lower price-earnings ratio than the acquirer 
B) A higher price-earnings ratio than the acquirer 
C) More outstanding shares than the acquirer 
D) A higher market valuation than the acquirer 
A) A lower price-earnings ratio than the acquirer 
B) A higher price-earnings ratio than the acquirer 
C) More outstanding shares than the acquirer 
D) A higher market valuation than the acquirer

Question 2

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 3

In certain circumstances, the competition tribunal will allow a merger that substantially lessens competition.

Accepted Answer

A) True 
 B)False

Question 4

What type of financing is typically instrumental in bringing about leveraged buyouts?

Accepted Answer

A) Common-stock financing 
B) Preferred-stock financing 
C) Investment-grade bonds 
D) Speculative-grade bonds 
A) Common-stock financing 
B) Preferred-stock financing 
C) Investment-grade bonds 
D) Speculative-grade bonds

Question 5

An increase in earnings per share after a merger may not indicate increased value if the:

Accepted Answer

A) Number of shares has increased 
B) Price of the acquirer's stock increases 
C) Price/earnings ratios were different in the pre-merger firms 
D) Firm's additional earnings are spent on legal expenses of the merger 
A) Number of shares has increased 
B) Price of the acquirer's stock increases 
C) Price/earnings ratios were different in the pre-merger firms 
D) Firm's additional earnings are spent on legal expenses of the merger

Question 6

The cost of a merger may outweigh the potential gain if the:

Accepted Answer

A) Present value of the acquired firm exceeds the price paid for it 
B) Present value of the merged firms is greater than the sum of their individual values 
C) Merger allows cost savings to occur 
D) Acquired firm's shareholders receive more than the value of their firm 
A) Present value of the acquired firm exceeds the price paid for it 
B) Present value of the merged firms is greater than the sum of their individual values 
C) Merger allows cost savings to occur 
D) Acquired firm's shareholders receive more than the value of their firm

Question 7

Why might shareholders of an acquiring firm prefer to finance mergers with stock rather than with cash?

Accepted Answer

A) Stock financing is always less costly due to tax consequences 
B) EPS fall when mergers are financed with cash 
C) Target-firm shareholders will bear part of the cost if merger benefits were overestimated 
D) All merger gains go to the acquirer when financed with stock 
A) Stock financing is always less costly due to tax consequences 
B) EPS fall when mergers are financed with cash 
C) Target-firm shareholders will bear part of the cost if merger benefits were overestimated 
D) All merger gains go to the acquirer when financed with stock

Question 8

The most likely interpretation of headlines that read, "ABC Corp.adopts shark repellent" is that:

Accepted Answer

A) ABC wants to increase the difficulty of a takeover 
B) ABC has made a tender offer for the shares of another firm 
C) ABC will only merge with small-sized partners 
D) ABC Corp.desires to reduce the costs of being acquired 
A) ABC wants to increase the difficulty of a takeover 
B) ABC has made a tender offer for the shares of another firm 
C) ABC will only merge with small-sized partners 
D) ABC Corp.desires to reduce the costs of being acquired

Question 9

One of the reasons why proxy fights are rarely successful is that:

Accepted Answer

A) Management is always viewed as performing their jobs well 
B) Management can use corporate resources to defend against the fight 
C) Mergers are a cheaper form of changing management 
D) Shareholders are unconcerned with corporate management 
A) Management is always viewed as performing their jobs well 
B) Management can use corporate resources to defend against the fight 
C) Mergers are a cheaper form of changing management 
D) Shareholders are unconcerned with corporate management

Question 10

Splitting AT&T in 1996 into four separate firms is an example of:

Accepted Answer

A) Leveraged buyout 
B) Spin-off 
C) Management buyout 
D) Tender offer 
A) Leveraged buyout 
B) Spin-off 
C) Management buyout 
D) Tender offer

Question 11

Diversification is often a poor motive for mergers because:

Accepted Answer

A) Vertical integration is rarely successful 
B) Investors can diversify on their own account 
C) It does not produce economies of scale 
D) The increase in taxes overcomes gains in earnings 
A) Vertical integration is rarely successful 
B) Investors can diversify on their own account 
C) It does not produce economies of scale 
D) The increase in taxes overcomes gains in earnings

Question 12

Who is typically the primary beneficiary(ies) in a merger?

Accepted Answer

While there are certainly exceptions to

Question 13

Which of the following is not correct concerning a proposed merger of firms?

Accepted Answer

A) The acquired firm will cease to exist 
B) Shareholders of the acquired firm may receive securities in the acquiring firm 
C) Mergers are sometimes combinations of equals 
D) Shareholder approval to merge is not required 
A) The acquired firm will cease to exist 
B) Shareholders of the acquired firm may receive securities in the acquiring firm 
C) Mergers are sometimes combinations of equals 
D) Shareholder approval to merge is not required

Question 14

If two merged firms are shown to have a higher combined market value than the sum of the individual market values, then:

Accepted Answer

A) Economic gains are said to have taken place 
B) The firms were previously underpriced 
C) The merger provides diversification to investors 
D) There is no cost involved in the merger 
A) Economic gains are said to have taken place 
B) The firms were previously underpriced 
C) The merger provides diversification to investors 
D) There is no cost involved in the merger

Question 15

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 16

GrowFast 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 GrowFast 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 GrowFast's price per share? Will any of the shareholders experience a change in wealth?
c.What will happen to GrowFast's price per share if the market does not realize that the P/E ratio of the merged firm ought to differ from GrowFast's premerger ratio? Who gains and by how much in this case?

Accepted Answer

* EPS = Price divided by P/E r

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

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 19

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 20

Mergers may provide reductions in average production cost as a result of:

Accepted Answer

A) Increased market share 
B) A more efficient management 
C) Economies of scale 
D) Diversification 
A) Increased market share 
B) A more efficient management 
C) Economies of scale 
D) Diversification

Exam 23: Options

Firms that are acquired to take advantage of bootstrapping often have:

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

In certain circumstances, the competition tribunal will allow a merger that substantially lessens competition.

What type of financing is typically instrumental in bringing about leveraged buyouts?

An increase in earnings per share after a merger may not indicate increased value if the:

The cost of a merger may outweigh the potential gain if the:

Why might shareholders of an acquiring firm prefer to finance mergers with stock rather than with cash?

The most likely interpretation of headlines that read, "ABC Corp.adopts shark repellent" is that:

One of the reasons why proxy fights are rarely successful is that:

Splitting AT&T in 1996 into four separate firms is an example of:

Diversification is often a poor motive for mergers because:

Who is typically the primary beneficiary(ies) in a merger?

Which of the following is not correct concerning a proposed merger of firms?

If two merged firms are shown to have a higher combined market value than the sum of the individual market values, then:

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

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

A conglomerate merger occurs when:

Mergers may provide reductions in average production cost as a result of:

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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