Question 1

Which of the following is a poor justification for a merger?

Accepted Answer

A) Tax considerations 
B) Lowering cost of capital 
C) Reducing costs 
D) Increasing the size of the firm 
A) Tax considerations 
B) Lowering cost of capital 
C) Reducing costs 
D) Increasing the size of the firm

Question 2

Which of the following is NOT a source of value-enhancing synergy in a merger?

Accepted Answer

A) Cost reduction 
B) Revenue enhancement 
C) Increased marketing presence 
D) Tax considerations 
A) Cost reduction 
B) Revenue enhancement 
C) Increased marketing presence 
D) Tax considerations

Question 3

Which of the following is defined as a merged firm's ability to generate synergistic cost savings through the joint use of inputs in producing multiple products?

Accepted Answer

A) Economies of scale 
B) Economies of scope 
C) Economies of synergy 
D) X-efficiencies 
A) Economies of scale 
B) Economies of scope 
C) Economies of synergy 
D) X-efficiencies

Question 4

Baby Supplies is considering a merger with Tot Toy Stores. Baby's total operating costs of producing services are $450,000 for sales volume of $2.15 million. Tot's total operating costs of producing services are $250,000 for a sales volume (JP) of $975,000. For a sales volume of $3.125 million, calculate the reduction in production costs the merged firms need to experience such that the total average cost (TAC) for the merged firms is equal to 19.5 percent.

Accepted Answer

A) Decrease of $609,375 
B) Decrease of $90,625 
C) Decrease of $9,375 
D) Decrease of $159,375 
A) Decrease of $609,375 
B) Decrease of $90,625 
C) Decrease of $9,375 
D) Decrease of $159,375

Question 5

Which of these makes the following a true statement? Diversification resulting from a merger can:

Accepted Answer

A) make the debt of the merged firm more risky, thus lowering the cost of capital. 
B) make the debt of the merged firm less risky, thus lowering the cost of capital. 
C) make the debt of the merged firm less risky, thus raising the cost of capital. 
D) None of the options make the statement true. 
A) make the debt of the merged firm more risky, thus lowering the cost of capital. 
B) make the debt of the merged firm less risky, thus lowering the cost of capital. 
C) make the debt of the merged firm less risky, thus raising the cost of capital. 
D) None of the options make the statement true.

Question 6

Which of the following is a type of merger in which an entirely new firm is created?

Accepted Answer

A) Composition 
B) Synergy 
C) Consolidation 
D) Assignment 
A) Composition 
B) Synergy 
C) Consolidation 
D) Assignment

Question 7

Jewelry Designs is considering a merger with Beads Supply Stores. Jewelry's total operating costs of producing services are $300,000 for sales volume of $2 million. Beads' total operating costs of producing services are $125,000 for a sales volume (JP) of $2.25 million. Calculate the average cost of production for the Jewelry and Beads firms, respectively.

Accepted Answer

A) 15 percent, 5.56 percent 
B) 5.56 percent, 15 percent 
C) 15 percent, 55.56 percent 
D) 13.33 percent, 6.25 percent 
A) 15 percent, 5.56 percent 
B) 5.56 percent, 15 percent 
C) 15 percent, 55.56 percent 
D) 13.33 percent, 6.25 percent

Question 8

The Justice Department has been asked to review a merger request for a market with the following four firms.

If Firm C acquires Firm D, what is the HHI for the new market?

Accepted Answer

A) 100 
B) 160 
C) 6,796.875 
D) 17,400.00 
A) 100 
B) 160 
C) 6,796.875 
D) 17,400.00

Question 9

Which of the following is a combination of a firm with a supplier or distributor?

Accepted Answer

A) Vertical merger 
B) Conglomerate merger 
C) Product extension merger 
D) Market extension merger 
A) Vertical merger 
B) Conglomerate merger 
C) Product extension merger 
D) Market extension merger

Question 10

Suppose that the financial ratios of a potential borrowing firm took the following values: X1 = Net working capital/Total assets = 0.65, X2 = Retained earnings/Total assets = 1.10, X3 = Earnings before interest and taxes/Total assets = 0.10, X4 = Market value of equity/Book value of long-term debt = 2.05, X5 = Sales/Total assets ratio = 0.45. Calculate the Altman's Z-score for this firm.

Accepted Answer

A) 8.70 
B) 4.35 
C) 4.33 
D) 2.33 
A) 8.70 
B) 4.35 
C) 4.33 
D) 2.33

Question 11

A survey of a local market has provided the following average cost data: Johnson Construction Corp. (JCC) has assets of $3 million and an average cost of 22 percent. Anderson Architects (AA) has assets of $4 million and an average cost of 31 percent. Cole Home Builders (CHB) has assets of $5 million and an average cost of 28 percent. For each firm, average costs are measured as a proportion of assets. JCC is planning to acquire AA and CHB with the expectation of reducing overall average costs by eliminating the duplication of services. If JCC plans to reduce operating costs by $500,000 after the merger, what will the average cost be for the new firm?

Accepted Answer

A) 23.33 percent 
B) 23.87 percent 
C) 24.12 percent 
D) 22.50 percent 
A) 23.33 percent 
B) 23.87 percent 
C) 24.12 percent 
D) 22.50 percent

Question 12

All of the following are problems associated with using the Z-score model to make credit risk evaluations EXCEPT:

Accepted Answer

A) the model does not benchmark firms to the average in the industry. 
B) the model does not use important data that is difficult to quantify such as the phase of the business cycle. 
C) the model categorizes firms as either high risk or low risk. 
D) All of the options are problems associated with using the Z-score model. 
A) the model does not benchmark firms to the average in the industry. 
B) the model does not use important data that is difficult to quantify such as the phase of the business cycle. 
C) the model categorizes firms as either high risk or low risk. 
D) All of the options are problems associated with using the Z-score model.

Question 13

Which of the following is a type of merger in which two firms that sell the same products in different market areas are combined?

Accepted Answer

A) Vertical 
B) Conglomerate 
C) Product extension 
D) Market extension 
A) Vertical 
B) Conglomerate 
C) Product extension 
D) Market extension

Question 14

Suppose that the financial ratios of a potential borrowing firm took the following values: X1 = Net working capital/Total assets = 0.25, X2 = Retained earnings/Total assets = 0.30, X3 = Earnings before interest and taxes/Total assets = 0.35, X4 = Market value of equity/Book value of long-term debt = 0.50, X5 = Sales/Total assets ratio = 0.9. Calculate the Altman's Z-score for this firm.

Accepted Answer

A) 2.30 
B) 3.075 
C) 9.8 
D) 1.96 
A) 2.30 
B) 3.075 
C) 9.8 
D) 1.96

Question 15

Which of the following is defined as the purchase of one firm by another firm?

Accepted Answer

A) Merger 
B) Synergy 
C) Acquisition 
D) Assignment 
A) Merger 
B) Synergy 
C) Acquisition 
D) Assignment

Question 16

Which of the following is NOT a tax consideration motive for a merger?

Accepted Answer

A) Tax gains from net operating losses 
B) Tax gains from used debt capacity 
C) Tax gains from used equity capacity 
D) Tax gains from surplus firms 
A) Tax gains from net operating losses 
B) Tax gains from used debt capacity 
C) Tax gains from used equity capacity 
D) Tax gains from surplus firms

Question 17

If Walmart acquires Target, this would be an example of a:

Accepted Answer

A) horizontal merger. 
B) vertical merger. 
C) market extension merger. 
D) conglomerate merger. 
A) horizontal merger. 
B) vertical merger. 
C) market extension merger. 
D) conglomerate merger.

Question 18

If Verizon buys the Green Bay Packers, this would be an example of a:

Accepted Answer

A) horizontal merger. 
B) vertical merger. 
C) market extension merger. 
D) conglomerate merger. 
A) horizontal merger. 
B) vertical merger. 
C) market extension merger. 
D) conglomerate merger.

Question 19

The managers of BSW Inc. have been approached by EAG Corp. for a possible merger. EAG Corp. is asking a price of $50 million to be purchased by BSW Inc. The two firms currently have cumulative total cash flows of $2.5 million that are growing at 2 percent annually. Managers of EAG estimate that because of synergies the merged firm's cash flows will increase by an additional 5 percent for the first three years following the merger. After the first three years, managers of EAG have estimated that cash flows will grow at a rate of 2 percent. The WACC for the merged firms is 12 percent. Managers of BSW Inc. agree that cash flows should grow at an additional 5 percent for the first three years, but are unsure of the long-term growth rate in cash flows estimated by EAG. Calculate the minimum growth rate needed after the first three years such that BSW Inc. would see this merger as a positive NPV project.

Accepted Answer

A) 5.00 percent 
B) 6.925 percent 
C) 1.728 percent 
D) 12.00 percent 
A) 5.00 percent 
B) 6.925 percent 
C) 1.728 percent 
D) 12.00 percent

Question 20

Building Supplies is considering a merger with Tools and More. Building's total operating costs of producing services are $4 million for a sales volume of $20 million. Tools' total operating costs of producing services are $1 million for a sales volume of $5 million. Suppose that synergies in the production process result in a cost of production for the merged firms totalling $4.8 million with total sales remaining unchanged. Calculate the total average cost for the merged firm.

Accepted Answer

A) 9.6 percent 
B) 40.0 percent 
C) 19.2 percent 
D) 20.0 percent 
A) 9.6 percent 
B) 40.0 percent 
C) 19.2 percent 
D) 20.0 percent

Which of the following is a poor justification for a merger?

Which of the following is NOT a source of value-enhancing synergy in a merger?

Which of the following is defined as a merged firm's ability to generate synergistic cost savings through the joint use of inputs in producing multiple products?

Which of these makes the following a true statement? Diversification resulting from a merger can:

Which of the following is a type of merger in which an entirely new firm is created?

The Justice Department has been asked to review a merger request for a market with the following four firms. If Firm C acquires Firm D, what is the HHI for the new market?

Which of the following is a combination of a firm with a supplier or distributor?

All of the following are problems associated with using the Z-score model to make credit risk evaluations EXCEPT:

Which of the following is a type of merger in which two firms that sell the same products in different market areas are combined?

Which of the following is defined as the purchase of one firm by another firm?

Which of the following is NOT a tax consideration motive for a merger?

If Walmart acquires Target, this would be an example of a:

If Verizon buys the Green Bay Packers, this would be an example of a:

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, Equity, and Capital Structure

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Filters

Exam 20: Mergers and Acquisitions and Financial Distress

Which of the following is a poor justification for a merger?

Which of the following is NOT a source of value-enhancing synergy in a merger?

Which of the following is defined as a merged firm's ability to generate synergistic cost savings through the joint use of inputs in producing multiple products?

Which of these makes the following a true statement? Diversification resulting from a merger can:

Which of the following is a type of merger in which an entirely new firm is created?

The Justice Department has been asked to review a merger request for a market with the following four firms. If Firm C acquires Firm D, what is the HHI for the new market?

Which of the following is a combination of a firm with a supplier or distributor?

All of the following are problems associated with using the Z-score model to make credit risk evaluations EXCEPT:

Which of the following is a type of merger in which two firms that sell the same products in different market areas are combined?

Which of the following is defined as the purchase of one firm by another firm?

Which of the following is NOT a tax consideration motive for a merger?

If Walmart acquires Target, this would be an example of a:

If Verizon buys the Green Bay Packers, this would be an example of a:

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, Equity, and Capital Structure

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Filters