Question 1

The 1980s were a time of little merger activity.

Accepted Answer

A) True 
 B)False

Question 2

If a segment of a business is unrelated to the rest of the firm's activities, that segment is more likely to be spun off or carved out.

Accepted Answer

A) True 
 B)False

Question 3

A merger must have the approval of at least 51% of the shareholders of each firm.

Accepted Answer

A) True 
 B)False

Question 4

One motive for acquiring a firm is the acquisition of the target firm's cash reserves.

Accepted Answer

A) True 
 B)False

Question 5

A vertical merger is one between firms at different levels of the production process.

Accepted Answer

A) True 
 B)False

Question 6

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 any 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 any gains in earnings.

Question 7

Bank of America's shareholders would have been better off if the firm had not acquired Countrywide Financial in 2007.

Accepted Answer

A) True 
 B)False

Question 8

An economic gain is derived from mergers when two firms are worth more combined than separate.

Accepted Answer

A) True 
 B)False

Question 9

According to the free-cash-flow theory of takeovers, postmerger gains in market value represent:

Accepted Answer

A)  an illogical assessment of earnings prospects. 
B)  the remaining costs of the merger. 
C)  the belief that free cash flow that will no longer be misused. 
D) losses experienced by arbitrageurs and other speculators. 
A)  an illogical assessment of earnings prospects. 
B)  the remaining costs of the merger. 
C)  the belief that free cash flow that will no longer be misused. 
D) losses experienced by arbitrageurs and other speculators.

Question 10

Economies of vertical integration are one possible source of synergy in mergers.

Accepted Answer

A) True 
 B)False

Question 11

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 12

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)  The EPS decreases 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)  The EPS decreases 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 13

Discuss how tactics such as shark repellents or poison pills accomplish their intent.

Accepted Answer

A shark repellent is a less serious tact

Question 14

By offering to buy shares directly from shareholders, the acquiring firm can bypass the target firm's management altogether.

Accepted Answer

A) True 
 B)False

Question 15

Which one of the following statements is most apt to apply to a firm that has made a cash tender offer for 2 million shares of ABC Corp. at a price of $20, which is $6 higher than ABC's current value?

Accepted Answer

A)  The economic gain of the merger exceeds $40 million. 
B)  The economic gain of the merger exceeds $28 million. 
C)  The economic gain of the merger exceeds $12 million. 
D) The economic gain of the merger would be zero after accounting for merger cost. 
A)  The economic gain of the merger exceeds $40 million. 
B)  The economic gain of the merger exceeds $28 million. 
C)  The economic gain of the merger exceeds $12 million. 
D) The economic gain of the merger would be zero after accounting for merger cost.

Question 16

The shareholders of firm A have offered 1 million shares valued at $10 each to acquire firm B. After the merger is announced, stock A trades for $9 per share. Which of the following statements is false?

Accepted Answer

A)  Firm A appears to have overbid for firm B. 
B)  The NPV of the merger may differ from expectations. 
C)  Shareholders of firm A absorb all the additional "cost." 
D)  Firm A's stockholders are better off than if the merger were cash financed for $10 million. 
A)  Firm A appears to have overbid for firm B. 
B)  The NPV of the merger may differ from expectations. 
C)  Shareholders of firm A absorb all the additional "cost." 
D)  Firm A's stockholders are better off than if the merger were cash financed for $10 million.

Question 17

The observation that cash-rich firms often make questionable acquisitions in diverse industries, rather than increase dividends, indicates that:

Accepted Answer

A)  diversification is too costly for individuals. 
B)  growth is often valued for the sake of growth alone. 
C)  diversification is synergistic. 
D) dividend-pricing models are of questionable value. 
A)  diversification is too costly for individuals. 
B)  growth is often valued for the sake of growth alone. 
C)  diversification is synergistic. 
D) dividend-pricing models are of questionable value.

Question 18

If an automobile manufacturer were to acquire one of the firms listed below, which acquisition would be called a horizontal merger?

Accepted Answer

A)  A steel mill 
B)  A rival manufacturer 
C)  A tire producer 
D) A bank 
A)  A steel mill 
B)  A rival manufacturer 
C)  A tire producer 
D) A bank

Question 19

When shareholders attempt to garner additional votes in an attempt to oust management, it is called a:

Accepted Answer

A)  management buyout. 
B)  tender offer. 
C)  proxy contest. 
D) poison pill. 
A)  management buyout. 
B)  tender offer. 
C)  proxy contest. 
D) poison pill.

Exam 21: Mergers, Acquisitions, and Corporate Control

The 1980s were a time of little merger activity.

If a segment of a business is unrelated to the rest of the firm's activities, that segment is more likely to be spun off or carved out.

A merger must have the approval of at least 51% of the shareholders of each firm.

One motive for acquiring a firm is the acquisition of the target firm's cash reserves.

A vertical merger is one between firms at different levels of the production process.

Diversification is often a poor motive for mergers because:

Bank of America's shareholders would have been better off if the firm had not acquired Countrywide Financial in 2007.

An economic gain is derived from mergers when two firms are worth more combined than separate.

According to the free-cash-flow theory of takeovers, postmerger gains in market value represent:

Economies of vertical integration are one possible source of synergy in mergers.

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

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

Discuss how tactics such as shark repellents or poison pills accomplish their intent.

By offering to buy shares directly from shareholders, the acquiring firm can bypass the target firm's management altogether.

Which one of the following statements is most apt to apply to a firm that has made a cash tender offer for 2 million shares of ABC Corp. at a price of $20, which is $6 higher than ABC's current value?

The shareholders of firm A have offered 1 million shares valued at $10 each to acquire firm B. After the merger is announced, stock A trades for $9 per share. Which of the following statements is false?

The observation that cash-rich firms often make questionable acquisitions in diverse industries, rather than increase dividends, indicates that:

If an automobile manufacturer were to acquire one of the firms listed below, which acquisition would be called a horizontal merger?

When shareholders attempt to garner additional votes in an attempt to oust management, it is called a:

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