Question 1

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 2

Firm B's 1 million shares of stock currently sell for $20 each. Firm A estimates the economic gain from the merger to be $10 million and is prepared to offer $22 cash for each share of B. What percentage of the merger gain will be captured by firm B's shareholders?

Accepted Answer

A)  20.00% 
B)  33.33% 
C)  50.00% 
D)  60.00% 
A)  20.00% 
B)  33.33% 
C)  50.00% 
D)  60.00%

Question 3

One common explanation for the success of MBOs is the incentive effect of leverage. Explain.

Accepted Answer

In an MBO the management becomes the equ

Question 4

Which one 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 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 premerger 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 premerger firms. 
D) firm's additional earnings are spent on legal expenses of the merger.

Question 6

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

@#IMG-DLM& * EPS = Price divided by P/E ratio
** E

Question 7

If Georgia Pacific (lumber products) were to acquire a national homebuilding firm, the combination would be termed a:

Accepted Answer

A)  horizontal merger. 
B)  vertical merger. 
C)  conglomerate merger. 
D) spin-off by the national homebuilding firm. 
A)  horizontal merger. 
B)  vertical merger. 
C)  conglomerate merger. 
D) spin-off by the national homebuilding firm.

Question 8

The "Bootstrap Game" is played somewhat in defiance of traditional merger logic in that it:

Accepted Answer

A)  provides immediate benefit through improved management. 
B)  does not offer a positive NPV from the merger. 
C)  stays in effect only until EPS are increased. 
D) does not require the approval of a majority of shareholders. 
A)  provides immediate benefit through improved management. 
B)  does not offer a positive NPV from the merger. 
C)  stays in effect only until EPS are increased. 
D) does not require the approval of a majority of shareholders.

Question 9

A spinoff 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 is 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 is sold off to form a new company.

Question 10

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

Accepted Answer

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

Question 11

Target firms frequently deter potential bidders by devising poison pills, which make the company unappetizing.

Accepted Answer

A) True 
 B)False

Question 12

Management buyouts are generally all-equity financed by the new shareholders.

Accepted Answer

A) True 
 B)False

Question 13

ABC Corp. has offered 1 million shares having a total market value of $8 million for XYZ. After the merger is announced, shares in ABC trade for $7 each. If ABC is confident about XYZ's value, then the cost of the merger:

Accepted Answer

A)  increased by $1 million. 
B)  decreased by $1 million. 
C)  increased by $9 million. 
D) remained constant. 
A)  increased by $1 million. 
B)  decreased by $1 million. 
C)  increased by $9 million. 
D) remained constant.

Question 14

What are the common motivations for leveraged and management buyouts of the firm?

Accepted Answer

In a leveraged buyout (LBO) or managemen

Question 15

In what ways can companies change the composition of their ownership or management?

Accepted Answer

If the board of directors fails to repla

Question 16

Firms with substantial amounts of free cash flow often discover that:

Accepted Answer

A)  conglomerate mergers are the best use for the funds. 
B)  accounting profits are what truly matter. 
C)  they have become takeover targets. 
D) their capital budgets have been too low. 
A)  conglomerate mergers are the best use for the funds. 
B)  accounting profits are what truly matter. 
C)  they have become takeover targets. 
D) their capital budgets have been too low.

Question 17

Carve-outs and spin-offs both provide shares of the new firm to the divesting firm's shareholders.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

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

Question 19

Proxy fights generally occur when a group is trying to:

Accepted Answer

A)  rewrite the corporate charter. 
B)  bring about economies of scale. 
C)  replace the current board and management team. 
D) pursue a public tender offer. 
A)  rewrite the corporate charter. 
B)  bring about economies of scale. 
C)  replace the current board and management team. 
D) pursue a public tender offer.

Question 20

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

Exam 21: Mergers, Acquisitions, and Corporate Control

A conglomerate merger occurs when:

Firm B's 1 million shares of stock currently sell for $20 each. Firm A estimates the economic gain from the merger to be $10 million and is prepared to offer $22 cash for each share of B. What percentage of the merger gain will be captured by firm B's shareholders?

One common explanation for the success of MBOs is the incentive effect of leverage. Explain.

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

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

If Georgia Pacific (lumber products) were to acquire a national homebuilding firm, the combination would be termed a:

The "Bootstrap Game" is played somewhat in defiance of traditional merger logic in that it:

A spinoff is an action in which:

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

Target firms frequently deter potential bidders by devising poison pills, which make the company unappetizing.

Management buyouts are generally all-equity financed by the new shareholders.

ABC Corp. has offered 1 million shares having a total market value of $8 million for XYZ. After the merger is announced, shares in ABC trade for $7 each. If ABC is confident about XYZ's value, then the cost of the merger:

What are the common motivations for leveraged and management buyouts of the firm?

In what ways can companies change the composition of their ownership or management?

Firms with substantial amounts of free cash flow often discover that:

Carve-outs and spin-offs both provide shares of the new firm to the divesting firm's shareholders.

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

Proxy fights generally occur when a group is trying to:

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

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