Question 1

If Microsoft were to acquire Dell Computer, it would be an example of a:

Accepted Answer

A)  vertical merger. 
B)  horizontal merger. 
C)  conglomerate merger. 
D) distribution-channel merger. 
A)  vertical merger. 
B)  horizontal merger. 
C)  conglomerate merger. 
D) distribution-channel merger. A

Question 2

In which one of the following ways can the management teams of many corporations influence the board of directors?

Accepted Answer

A)  By merging with another firm 
B)  Through appointment of shareholders to replace current board members 
C)  Through management's nomination of board candidates 
D) By declaring a liquidating cash dividend 
A)  By merging with another firm 
B)  Through appointment of shareholders to replace current board members 
C)  Through management's nomination of board candidates 
D) By declaring a liquidating cash dividend C

Question 3

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

Accepted Answer

The overriding reason for mergers to occur is when the value of the combined firm exceeds the combined value of the separate firms. There are several reasons that this could occur, including economies of scale, economies of vertical integration, the combining of complementary resources, or as a use for surplus funds. Economies of scale occur most frequently in horizontal mergers, but can also occur in conglomerate mergers. These economies occur due to spreading fixed costs out over larger production bases such that average production cost is reduced. With vertical integration, a firm basically adds profit potential to the extent that a step before or a step after in the production or distribution system is no longer needed. The combination of complementary resources can of course take several forms but, specifically, when it would not be cost-effective for one firm to obtain a resource in the quantity that would be most appropriate, it may make sense to combine operations. Finally, when a firm has few attractive investment options of its own, and for one reason or another is not entertaining the option of repurchasing shares, it may make sense to buy another's attractive investment opportunities. The key here is whether these opportunities can be obtained without giving away all the gains to the sellers.

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

Evidence shows that investors will generally pay a premium for diversified firms, thus firms should merge for this reason.

Accepted Answer

A) True 
 B)False

Question 6

After analyzing the particulars of firms A and B and their proposed merger, comment on the desirability of the merger:
A. The merged firms are expected to be worth $26,000. Be sure to mention EPS of the merged entity, and so on.
From the value of the merged firms, it can be seen that this merger has no expected synergies. Namely, the sum of the premerger values is equal to the postmerger value. After the merger, there will be 1,625 shares of the new stock outstanding, and total earnings should be $4,000, which is precisely the previous sum of earnings. However, now the earnings per share are $2.46, which appears attractive relative to either of the previous EPS amounts. The P/E ratio should be 6.5, which is between the firms' previous P/Es. It may be possible to fool some investors; however, this merger does not appear to have accomplished anything of financial consequence, and represents an example of the bootstrap effect.

Accepted Answer

@#IMG-DLM& Firm A will purchase firm B by offering

Question 7

A public offer to purchase the shares of existing stockholders in order to take the firm over is called a:

Accepted Answer

A)  tender offer. 
B)  carve-out. 
C)  spin-off. 
D) divestiture. 
A)  tender offer. 
B)  carve-out. 
C)  spin-off. 
D) divestiture.

Question 8

A tender offer is one in which the firm's:

Accepted Answer

A)  management offers to sell the company to an acquirer. 
B)  board of directors offers to sell the company to the public. 
C)  shareholders are propositioned to sell their shares to outsiders. 
D) management offers to buy all outstanding shares of the corporation. 
A)  management offers to sell the company to an acquirer. 
B)  board of directors offers to sell the company to the public. 
C)  shareholders are propositioned to sell their shares to outsiders. 
D) management offers to buy all outstanding shares of the corporation.

Question 9

Instead of selling part of its operations, companies sometimes spin off a business by separating it from the parent firm and distributing to its shareholders the stock in the newly independent company.

Accepted Answer

A) True 
 B)False

Question 10

Synergy is equal to the value of a combined firm minus the total value of the firms prior to merger.

Accepted Answer

A) True 
 B)False

Question 11

Which one of the following might you recommend to a firm with excessive free cash flow?

Accepted Answer

A)  Acquire a firm to diversify 
B)  Acquire a firm to bootstrap earnings 
C)  A leveraged buyout 
D) A repurchase of shares 
A)  Acquire a firm to diversify 
B)  Acquire a firm to bootstrap earnings 
C)  A leveraged buyout 
D) A repurchase of shares

Question 12

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

Accepted Answer

The alternative to this approach is to d

Question 13

When two firms merge, the value of the acquiring firm will change by the:

Accepted Answer

A)  gain from the merger. 
B)  NPV minus the cost of the merger. 
C)  NPV of the merger. 
D) cost of the merger. 
A)  gain from the merger. 
B)  NPV minus the cost of the merger. 
C)  NPV of the merger. 
D) cost of the merger.

Question 14

In general, shareholders of the target firm benefit from takeovers.

Accepted Answer

A) True 
 B)False

Question 15

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 breakup. 
A)  management buyout. 
B)  spin-off. 
C)  successful greenmail attempt. 
D) corporate breakup.

Question 16

Other things equal, which one of the following groups of stakeholders should expect to lose value as a result of an LBO?

Accepted Answer

A)  Selling stockholders 
B)  Buying stockholders 
C)  Pre-LBO bondholders 
D) Investment bankers 
A)  Selling stockholders 
B)  Buying stockholders 
C)  Pre-LBO bondholders 
D) Investment bankers

Question 17

In mergers financed by cash, the merger cost is not affected by the size of the merger gain.

Accepted Answer

A) True 
 B)False

Question 18

In the case of a merger that is stock financed, the assumed merger cost may be incorrect if the:

Accepted Answer

A)  value of the acquired firm's shares changes after the merger announcement. 
B)  value of the acquiring firm's shares changes after the merger announcement. 
C)  long-term interest rates increase. 
D) merger is either horizontal or vertical. 
A)  value of the acquired firm's shares changes after the merger announcement. 
B)  value of the acquiring firm's shares changes after the merger announcement. 
C)  long-term interest rates increase. 
D) merger is either horizontal or vertical.

Question 19

If two merged firms are shown to have a higher combined market value than the sum of their 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 20

Many companies are finding it more efficient to vertically integrate than to outsource many of their activities.

Accepted Answer

A) True 
 B)False

Exam 21: Mergers, Acquisitions, and Corporate Control

If Microsoft were to acquire Dell Computer, it would be an example of a:

In which one of the following ways can the management teams of many corporations influence the board of directors?

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

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

Evidence shows that investors will generally pay a premium for diversified firms, thus firms should merge for this reason.

A public offer to purchase the shares of existing stockholders in order to take the firm over is called a:

A tender offer is one in which the firm's:

Instead of selling part of its operations, companies sometimes spin off a business by separating it from the parent firm and distributing to its shareholders the stock in the newly independent company.

Synergy is equal to the value of a combined firm minus the total value of the firms prior to merger.

Which one of the following might you recommend to a firm with excessive free cash flow?

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

When two firms merge, the value of the acquiring firm will change by the:

In general, shareholders of the target firm benefit from takeovers.

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:

Other things equal, which one of the following groups of stakeholders should expect to lose value as a result of an LBO?

In mergers financed by cash, the merger cost is not affected by the size of the merger gain.

In the case of a merger that is stock financed, the assumed merger cost may be incorrect if the:

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

Many companies are finding it more efficient to vertically integrate than to outsource many of their activities.

Goals and Governance of the Corporation

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

How Corporations Raise Venture Capital and Issue Securities

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

International Financial Management

Options

Risk Management

Filters