Question 1

Which of the following statements is most CORRECT?

Accepted Answer

A) Leveraged buyouts (LBOs) occur when a firm issues equity and uses the proceeds to take a firm public. 
B) In a typical LBO, bondholders do well but shareholders see their value decline. 
C) Firms are forbidden by law to sell any assets during the first five years following a leverage buyout. 
D) Not all target firms are acquired by publicly traded corporations. In recent years, an increasing number of firms have been acquired by private equity firms. Private equity firms raise capital from wealthy individuals and look for opportunities to make profitable investments. 
E) In an LBO sometimes the acquiring group plans to run the acquired company for a number of years, boost its sales and profits, and then take it public again as a stronger company. In other instances, the LBO firm plans to sell off divisions to other firms that can gain synergies. In either case, the acquiring group expects to make a substantial profit from the LBO, but the inherent risks are small due to the heavy use of venture capital and very little debt. 
A) Leveraged buyouts (LBOs) occur when a firm issues equity and uses the proceeds to take a firm public. 
B) In a typical LBO, bondholders do well but shareholders see their value decline. 
C) Firms are forbidden by law to sell any assets during the first five years following a leverage buyout. 
D) Not all target firms are acquired by publicly traded corporations. In recent years, an increasing number of firms have been acquired by private equity firms. Private equity firms raise capital from wealthy individuals and look for opportunities to make profitable investments. 
E) In an LBO sometimes the acquiring group plans to run the acquired company for a number of years, boost its sales and profits, and then take it public again as a stronger company. In other instances, the LBO firm plans to sell off divisions to other firms that can gain synergies. In either case, the acquiring group expects to make a substantial profit from the LBO, but the inherent risks are small due to the heavy use of venture capital and very little debt.

Question 2

Which of the following statements is most CORRECT?

Accepted Answer

A) A conglomerate merger is one where a firm combines with another firm in the same industry. 
B) Regulations in the United States prohibit acquiring firms from using common stock to purchase another firm. 
C) Defensive mergers are designed to make a company less vulnerable to a takeover. 
D) The equity residual method values a target firm by discounting residual cash flows at the acquiring firm's overall cost of capital reflecting the combined firm's post-merger capital structure. 
E) A financial merger occurs when the operations of the firms involved are integrated in the hope of achieving synergistic benefits. 
A) A conglomerate merger is one where a firm combines with another firm in the same industry. 
B) Regulations in the United States prohibit acquiring firms from using common stock to purchase another firm. 
C) Defensive mergers are designed to make a company less vulnerable to a takeover. 
D) The equity residual method values a target firm by discounting residual cash flows at the acquiring firm's overall cost of capital reflecting the combined firm's post-merger capital structure. 
E) A financial merger occurs when the operations of the firms involved are integrated in the hope of achieving synergistic benefits.

Question 3

One of the main reasons why foreign firms are interested in buying U.S.companies is to gain entrance to the U.S.market.A decline in the value of the dollar relative to most foreign currencies makes this competitive strategy especially attractive.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following actions does NOT help managers defend against a hostile takeover?

Accepted Answer

A) Establishing a poison pill provision. 
B) Granting lucrative golden parachutes to senior managers. 
C) Establishing a super-majority provision in the company's bylaws to raise the percentage of the board of directors that must approve an acquisition from 50% to 75%. 
D) Retiring long-term debt early to reduce total debt on the balance sheet which will increase the firm's financial position. 
E) Finding a "white squire" that will buy enough of the target firm's shares to block the hostile takeover. 
A) Establishing a poison pill provision. 
B) Granting lucrative golden parachutes to senior managers. 
C) Establishing a super-majority provision in the company's bylaws to raise the percentage of the board of directors that must approve an acquisition from 50% to 75%. 
D) Retiring long-term debt early to reduce total debt on the balance sheet which will increase the firm's financial position. 
E) Finding a "white squire" that will buy enough of the target firm's shares to block the hostile takeover.

Question 5

Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the discount rate can only be determined after the merger is consummated.

Accepted Answer

A) True 
 B)False

Question 6

Leveraged buyouts (LBOs)occur when a firm's managers,generally backed by private equity groups,try to gain control of a publicly owned company by buying shares in the company using large amounts of borrowed money.

Accepted Answer

A) True 
 B)False

Question 7

In a merger with true synergies,the post-merger value exceeds the sum of the separate companies' pre-merger values.

Accepted Answer

A) True 
 B)False

Question 8

A spin-off is a type of divestiture in which the assets of a division are sold to another firm.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements is most CORRECT?

Accepted Answer

A) Tax considerations often play a part in mergers. If one firm has excess cash, purchasing another firm exposes the purchasing firm to additional taxes. Thus, firms with excess cash rarely undertake mergers. 
B) The smaller the synergistic benefits of a particular merger, the greater the scope for striking a bargain in negotiations, and the higher the probability that the merger will be completed. 
C) Since mergers are frequently financed by debt rather than equity, a lower cost of debt or a greater debt capacity are rarely relevant considerations when considering a merger. 
D) Managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification, including more stable earnings. However, since shareholders are free to diversify their own holdings, and at what's probably a lower cost, research of U.S. firms suggests that in most cases, diversification through mergers does not increase the firm's value. 
E) Research of U.S. firms suggests that managers' personal motivations have had little, if any, impact on firms' decisions to merge. 
A) Tax considerations often play a part in mergers. If one firm has excess cash, purchasing another firm exposes the purchasing firm to additional taxes. Thus, firms with excess cash rarely undertake mergers. 
B) The smaller the synergistic benefits of a particular merger, the greater the scope for striking a bargain in negotiations, and the higher the probability that the merger will be completed. 
C) Since mergers are frequently financed by debt rather than equity, a lower cost of debt or a greater debt capacity are rarely relevant considerations when considering a merger. 
D) Managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification, including more stable earnings. However, since shareholders are free to diversify their own holdings, and at what's probably a lower cost, research of U.S. firms suggests that in most cases, diversification through mergers does not increase the firm's value. 
E) Research of U.S. firms suggests that managers' personal motivations have had little, if any, impact on firms' decisions to merge.

Question 10

Since a manager's central goal is to maximize the firm's stock price,any merger offer that provides stockholders with significant gains over the current stock price will be approved by the current management team.

Accepted Answer

A) True 
 B)False

Question 11

Firms use defensive tactics to fight off undesired mergers.These tactics do NOT include

Accepted Answer

A) raising antitrust issues. 
B) developing poison pills. 
C) getting white knights to bid for the firm. 
D) repurchasing their own stock. 
E) engaging in risk arbitrage. 
A) raising antitrust issues. 
B) developing poison pills. 
C) getting white knights to bid for the firm. 
D) repurchasing their own stock. 
E) engaging in risk arbitrage.

Question 12

Post-merger control and the negotiated price paid by the acquirer are two of the most important issues in the terms to merger agreements.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements is most CORRECT?

Accepted Answer

A) The high value of the U.S. dollar relative to Japanese and European currencies in the 1980s, made U.S. companies comparatively inexpensive to foreign buyers, spurring many mergers. 
B) During the 1980s, the Reagan and Bush administrations tried to foster greater competition and they were adamant about preventing the loss of competition; thus, most large mergers were disallowed. 
C) The expansion of the junk bond market made debt more freely available for large acquisitions and LBOs in the 1980s, and thus, it resulted in an increased level of merger activity. 
D) Increased nationalization of business and a desire to scale down and focus on producing in one's home country has virtually halted cross-border mergers today. 
E) Because strategic alliances and joint ventures are easy to form and enable firms to compete better in the global economy than would mergers, merger activity has virtually come to a halt in the 21st century. 
A) The high value of the U.S. dollar relative to Japanese and European currencies in the 1980s, made U.S. companies comparatively inexpensive to foreign buyers, spurring many mergers. 
B) During the 1980s, the Reagan and Bush administrations tried to foster greater competition and they were adamant about preventing the loss of competition; thus, most large mergers were disallowed. 
C) The expansion of the junk bond market made debt more freely available for large acquisitions and LBOs in the 1980s, and thus, it resulted in an increased level of merger activity. 
D) Increased nationalization of business and a desire to scale down and focus on producing in one's home country has virtually halted cross-border mergers today. 
E) Because strategic alliances and joint ventures are easy to form and enable firms to compete better in the global economy than would mergers, merger activity has virtually come to a halt in the 21st century.

Question 14

Since the primary rationale for any operating merger is synergy,in planning such mergers the development of accurate pro forma cash flows is the single most important task.

Accepted Answer

A) True 
 B)False

Question 15

Simpson Inc.is considering a vertical merger with The Lachey Company.Simpson currently has a required return of 11%,while Lachey's required return is 15%.The market risk premium is 5% and the risk-free rate is 5%.Assume the market is in equilibrium.If Simpson is going to make up 67% of the new firm (and Lachey will comprise the remaining 33%),what will be the beta of the new merged firm? There will be no additional infusion of debt in the merger.

Accepted Answer

A) 1.46 
B) 1.54 
C) 1.61 
D) 1.69 
E) 1.78 
A) 1.46 
B) 1.54 
C) 1.61 
D) 1.69 
E) 1.78

Question 16

The purchase of assets at below their replacement cost and tax considerations are two factors that motivate mergers.

Accepted Answer

A) True 
 B)False

Question 17

Most defensive mergers occur as a result of managers' actions to maximize shareholders' wealth.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements is most CORRECT?

Accepted Answer

A) If a company that produces military equipment merges with a company that manages a chain of motels, this is an example of a horizontal merger. 
B) A defensive merger is one where the firm's managers decide to merge with another firm to avoid or lessen the possibility of being acquired through a hostile takeover. 
C) Acquiring firms send a signal that their stock is undervalued if they choose to use stock to pay for the acquisition. 
D) In a liquidation, the firm's existing stockholders are given new stock representing separate ownership rights in the division that was divested. The division establishes its own board of directors and officers, and it becomes a separate company. 
E) If there are no synergistic benefits to be gained from a merger, the acquiring company will stop its plans for the merger. However, if synergistic gains are large, plans for the merger will continue. In fact, the greater the synergistic gains, the smaller the gap between the target's current price and the maximum the acquiring company could pay because of the acquiring company's upper hand in the merger. 
A) If a company that produces military equipment merges with a company that manages a chain of motels, this is an example of a horizontal merger. 
B) A defensive merger is one where the firm's managers decide to merge with another firm to avoid or lessen the possibility of being acquired through a hostile takeover. 
C) Acquiring firms send a signal that their stock is undervalued if they choose to use stock to pay for the acquisition. 
D) In a liquidation, the firm's existing stockholders are given new stock representing separate ownership rights in the division that was divested. The division establishes its own board of directors and officers, and it becomes a separate company. 
E) If there are no synergistic benefits to be gained from a merger, the acquiring company will stop its plans for the merger. However, if synergistic gains are large, plans for the merger will continue. In fact, the greater the synergistic gains, the smaller the gap between the target's current price and the maximum the acquiring company could pay because of the acquiring company's upper hand in the merger.

Question 19

Only if a target firm's value is greater to the acquiring firm than its market value as a separate entity will a merger be financially justified.

Accepted Answer

A) True 
 B)False

Exam 21: Mergers and Acquisitions

Which of the following statements is most CORRECT?

Which of the following statements is most CORRECT?

One of the main reasons why foreign firms are interested in buying U.S.companies is to gain entrance to the U.S.market.A decline in the value of the dollar relative to most foreign currencies makes this competitive strategy especially attractive.

Which of the following actions does NOT help managers defend against a hostile takeover?

Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the discount rate can only be determined after the merger is consummated.

Leveraged buyouts (LBOs)occur when a firm's managers,generally backed by private equity groups,try to gain control of a publicly owned company by buying shares in the company using large amounts of borrowed money.

In a merger with true synergies,the post-merger value exceeds the sum of the separate companies' pre-merger values.

A spin-off is a type of divestiture in which the assets of a division are sold to another firm.

Which of the following statements is most CORRECT?

Since a manager's central goal is to maximize the firm's stock price,any merger offer that provides stockholders with significant gains over the current stock price will be approved by the current management team.

Firms use defensive tactics to fight off undesired mergers.These tactics do NOT include

Post-merger control and the negotiated price paid by the acquirer are two of the most important issues in the terms to merger agreements.

Which of the following statements is most CORRECT?

Since the primary rationale for any operating merger is synergy,in planning such mergers the development of accurate pro forma cash flows is the single most important task.

The purchase of assets at below their replacement cost and tax considerations are two factors that motivate mergers.

Most defensive mergers occur as a result of managers' actions to maximize shareholders' wealth.

Which of the following statements is most CORRECT?

Only if a target firm's value is greater to the acquiring firm than its market value as a separate entity will a merger be financially justified.

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements, cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Interest Rates

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and Share Repurchases

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Hybrid Financing: Preferred Stock, leasing, warrants, and Convertibles

Continuous Compounding and Discounting

Zero Coupon Bonds

Bankruptcy and Reorganization

Calculating Beta Coefficients

Using the Capm to Estimate the Risk-Adjusted Cost of Capital

Techniques for Measuring Beta Risk

Degree of Leverage

Filters