Question 1

Consider the following equation:  
<  
 
The term S in this equation refers to:

Accepted Answer

A) the premerger (standalone)value of the target. 
B) the premerger,or standalone,value of the acquirer. 
C) the value of the synergies created by the merger. 
D) new shares to pay for the target. 
A) the premerger (standalone)value of the target. 
B) the premerger,or standalone,value of the acquirer. 
C) the value of the synergies created by the merger. 
D) new shares to pay for the target. C

Question 2

The merger of two companies in the same industry that make products required at different stages of the production cycle is called:

Accepted Answer

A) economies of scope. 
B) vertical integration. 
C) economies of scale. 
D) horizontal integration. 
A) economies of scope. 
B) vertical integration. 
C) economies of scale. 
D) horizontal integration. B

Question 3

If Rearden offers an exchange ratio such that,at current pre-announcement share prices for both firms,the offer represents a 20% premium to buy Associated Steel,then the price per share of Associated Steel immediately after the announcement will be closest to:

Accepted Answer

A) $15.00 
B) $17.20 
C) $18.60 
D) $19.10 
A) $15.00 
B) $17.20 
C) $18.60 
D) $19.10 B

Question 4

Use the following information to answer the question(s)below.
Rearden Metal has earnings per share of $2.It has 10 million shares outstanding and is trading at $20 per share.Rearden Metal is thinking of buying Associated Steel,which has earnings per share of $1.25,4 million shares outstanding,and a price per share of $15.Rearden Metal will pay for Associated Steel by issuing new shares.There are no expected synergies from the transaction.
-If Rearden offers an exchange ratio such that,at current pre-announcement share prices for both firms,the offer represents a 20% premium to buy Associated Steel,then the price per share of the combined corporation after the merger will be closest to:

Accepted Answer

A) $19.12 
B) $20.00 
C) $26.00 
D) $17.20 
A) $19.12 
B) $20.00 
C) $26.00 
D) $17.20

Question 5

When target shareholders exchange their old stock for new stock in the acquiring firm,this is known as a(n):

Accepted Answer

A) exchange swap. 
B) stock exchange. 
C) term swap. 
D) stock swap. 
A) exchange swap. 
B) stock exchange. 
C) term swap. 
D) stock swap.

Question 6

In a ________ merger,the target and the acquirer operate in unrelated industries.

Accepted Answer

A) conglomerate 
B) vertical 
C) horizontal 
D) diagonal 
A) conglomerate 
B) vertical 
C) horizontal 
D) diagonal

Question 7

Which of the following statements is FALSE?

Accepted Answer

A) In practice,most acquirers pay a substantial acquisition premium,which is the percentage difference between the acquisition price and the premerger price of the target firm. 
B) When a bid is announced,the target shareholders enjoy a gain of 15% on average in their stock price. 
C) In most U.S.states,the law requires that when existing shareholders of a target firm are forced to sell their shares,they receive the market price for their shares.In most cases,this concept is interpreted as the value inclusive of any value that arises because of the merger itself. 
D) A bidder is unlikely to acquire a target company for less than its current market value. 
A) In practice,most acquirers pay a substantial acquisition premium,which is the percentage difference between the acquisition price and the premerger price of the target firm. 
B) When a bid is announced,the target shareholders enjoy a gain of 15% on average in their stock price. 
C) In most U.S.states,the law requires that when existing shareholders of a target firm are forced to sell their shares,they receive the market price for their shares.In most cases,this concept is interpreted as the value inclusive of any value that arises because of the merger itself. 
D) A bidder is unlikely to acquire a target company for less than its current market value.

Question 8

Which of the following statements is FALSE?

Accepted Answer

A) Any acquirer shares received in full or partial exchange for target shares triggers an immediate tax liability for target shareholders. 
B) In a friendly takeover,the target board of directors supports the merger,negotiates with potential acquirers,and agrees on a price that is ultimately put to a shareholder vote. 
C) How the acquirer pays for the target affects the taxes of both the target shareholders and the combined firm. 
D) If the acquirer purchases the target assets directly (rather than the target stock),then it can step up the book value of the target's assets to the purchase price. 
A) Any acquirer shares received in full or partial exchange for target shares triggers an immediate tax liability for target shareholders. 
B) In a friendly takeover,the target board of directors supports the merger,negotiates with potential acquirers,and agrees on a price that is ultimately put to a shareholder vote. 
C) How the acquirer pays for the target affects the taxes of both the target shareholders and the combined firm. 
D) If the acquirer purchases the target assets directly (rather than the target stock),then it can step up the book value of the target's assets to the purchase price.

Question 9

In a ________ merger,the target's industry buys or sells to the acquirer's industry.

Accepted Answer

A) conglomerate 
B) vertical 
C) horizontal 
D) diagonal 
A) conglomerate 
B) vertical 
C) horizontal 
D) diagonal

Question 10

Use the information for the question(s)below.
Martin Manufacturing has earnings per share (EPS)of $3.00,5 million shares outstanding,and a share price of $32.Martin is considering buying Luther Industries,which has earnings per share of $2.50,2 million shares outstanding,and a share price of $20.Marin will pay for Luther by issuing new shares.There are no expected synergies from the transaction.
-If Martin pays no premium to acquire Luther,what will the earnings per share be after the merger?

Accepted Answer

First,since Martin is paying for the mer

Question 11

Which of the following statements is FALSE?

Accepted Answer

A) Once the acquirer has completed the valuation process,it is in the position to make a tender offer - that is,a public announcement of its intention to purchase a large block of shares for a specified price. 
B) If we view the pre-bid market capitalization as the stand-alone value of the target,then from the bidder's perspective,the takeover is a positive-NPV project only if the synergies created do not exceed the premium it pays. 
C) Purchasing a corporation usually constitutes a very large capital investment decision,so it requires a more accurate estimate of value that includes careful analysis of both operational aspects of the firm and the ultimate cash flows the deal will generate. 
D) A stock-swap merger is a positive-NPV investment for the acquiring shareholders if the share price of the merged firm (the acquirer's share price after the takeover)exceeds the premerger price of the acquiring firm. 
A) Once the acquirer has completed the valuation process,it is in the position to make a tender offer - that is,a public announcement of its intention to purchase a large block of shares for a specified price. 
B) If we view the pre-bid market capitalization as the stand-alone value of the target,then from the bidder's perspective,the takeover is a positive-NPV project only if the synergies created do not exceed the premium it pays. 
C) Purchasing a corporation usually constitutes a very large capital investment decision,so it requires a more accurate estimate of value that includes careful analysis of both operational aspects of the firm and the ultimate cash flows the deal will generate. 
D) A stock-swap merger is a positive-NPV investment for the acquiring shareholders if the share price of the merged firm (the acquirer's share price after the takeover)exceeds the premerger price of the acquiring firm.

Question 12

Which of the following statements regarding risk arbitrage is FALSE?

Accepted Answer

A) Once a tender offer is announced,the uncertainty about whether the takeover will succeed reduces the volatility of the stock price.This uncertainty creates an opportunity for investors to speculate on the outcome of the deal without bearing the risk of volatility. 
B) Traders known as risk-arbitrageurs,who believe that they can predict the outcome of a deal,take positions based on their beliefs. 
C) A potential profit arises from the difference between the target's stock price and the implied offer price,and is referred to as the merger-arbitrage spread. 
D) It is not true arbitrage because there is a risk that the deal will not go through.If the takeover did not ultimately succeed,the risk-arbitrageur would eventually have to unwind his position at whatever market prices prevailed. 
A) Once a tender offer is announced,the uncertainty about whether the takeover will succeed reduces the volatility of the stock price.This uncertainty creates an opportunity for investors to speculate on the outcome of the deal without bearing the risk of volatility. 
B) Traders known as risk-arbitrageurs,who believe that they can predict the outcome of a deal,take positions based on their beliefs. 
C) A potential profit arises from the difference between the target's stock price and the implied offer price,and is referred to as the merger-arbitrage spread. 
D) It is not true arbitrage because there is a risk that the deal will not go through.If the takeover did not ultimately succeed,the risk-arbitrageur would eventually have to unwind his position at whatever market prices prevailed.

Question 13

Consider two firms,Zoe Corporation and Marley Company.Both corporations will either make $20,000 or lose $5,000 every year with equal probability.The firms' profits are perfectly negatively correlated.If the corporate tax rate is 35%,what are the total expected after-tax profits of both firms when they are two separate firms,assuming no tax-loss carryforwards or carrybacks?

Accepted Answer

A) $15,000 
B) $8,000 
C) $9,750 
D) $4,000 
A) $15,000 
B) $8,000 
C) $9,750 
D) $4,000

Question 14

In a ________ merger,the target and the acquirer operate in the same industry.

Accepted Answer

A) conglomerate 
B) vertical 
C) horizontal 
D) diagonal 
A) conglomerate 
B) vertical 
C) horizontal 
D) diagonal

Question 15

Which of the following statements regarding efficiency gains is FALSE?

Accepted Answer

A) Takeovers relying on the improvement of target management are difficult to complete,and post-takeover resistance to change can be great.Thus not all inefficiently run organizations are necessarily more efficient following a takeover. 
B) Although identifying poorly performing corporations is relatively easy,fixing them is another matter entirely. 
C) A justification that acquirers cite for paying a premium for a target is efficiency gains,which are often achieved through an elimination of duplication. 
D) A chief executive of an inefficiently run corporation can be ousted by current shareholders voting to replace the board of directors,and in fact a large number of ineffective managers are replaced in this way. 
A) Takeovers relying on the improvement of target management are difficult to complete,and post-takeover resistance to change can be great.Thus not all inefficiently run organizations are necessarily more efficient following a takeover. 
B) Although identifying poorly performing corporations is relatively easy,fixing them is another matter entirely. 
C) A justification that acquirers cite for paying a premium for a target is efficiency gains,which are often achieved through an elimination of duplication. 
D) A chief executive of an inefficiently run corporation can be ousted by current shareholders voting to replace the board of directors,and in fact a large number of ineffective managers are replaced in this way.

Question 16

Use the following information to answer the question(s)below.
You work for a leveraged buyout firm and are evaluating a potential buyout of Associated Steel.Associated Steel's stock price is $15 and it has 10 million shares outstanding.You believe that if you buy the company and replace its management,its value will increase by 50%.You are planning on doing a leveraged buyout of Associated Steel,and will offer $20 per share for control of the company.
-Assuming you get 50% control of Associated Steel,then the price of the non-tendered shares will be closest to:

Accepted Answer

A) $12.50 
B) $15.00 
C) $17.50 
D) $20.00 
A) $12.50 
B) $15.00 
C) $17.50 
D) $20.00

Question 17

The savings that a large company can enjoy from producing goods in high volume,that are not available to a small company is called:

Accepted Answer

A) economies of scale. 
B) horizontal integration. 
C) vertical integration. 
D) economies of scope. 
A) economies of scale. 
B) horizontal integration. 
C) vertical integration. 
D) economies of scope.

Question 18

When a hostile takeover appears to be inevitable,a target company will sometimes look for another,friendlier company to acquire it called a:

Accepted Answer

A) poison pill. 
B) classified board. 
C) golden parachute. 
D) white knight. 
A) poison pill. 
B) classified board. 
C) golden parachute. 
D) white knight.

Question 19

A situation where every director serves a three-year term and the terms are staggered so that only one-third of the directors are up for election each year is called a:

Accepted Answer

A) white knight. 
B) classified board. 
C) poison pill. 
D) golden parachute. 
A) white knight. 
B) classified board. 
C) poison pill. 
D) golden parachute.

Question 20

Which of the following statements is FALSE?

Accepted Answer

A) Cost-reduction synergies are hard to predict and achieve. 
B) Because the CEOs of small firms receive information so quickly,small firms are often able to react in timely way to changes in the economic environment. 
C) Synergies usually fall into two categories: cost reductions and revenue enhancements. 
D) There may also be costs associated with size. 
A) Cost-reduction synergies are hard to predict and achieve. 
B) Because the CEOs of small firms receive information so quickly,small firms are often able to react in timely way to changes in the economic environment. 
C) Synergies usually fall into two categories: cost reductions and revenue enhancements. 
D) There may also be costs associated with size.

Exam 28: Mergers and Acquisitions

Consider the following equation: < The term S in this equation refers to:

The merger of two companies in the same industry that make products required at different stages of the production cycle is called:

If Rearden offers an exchange ratio such that,at current pre-announcement share prices for both firms,the offer represents a 20% premium to buy Associated Steel,then the price per share of Associated Steel immediately after the announcement will be closest to:

When target shareholders exchange their old stock for new stock in the acquiring firm,this is known as a(n):

In a ________ merger,the target and the acquirer operate in unrelated industries.

Which of the following statements is FALSE?

Which of the following statements is FALSE?

In a ________ merger,the target's industry buys or sells to the acquirer's industry.

Which of the following statements is FALSE?

Which of the following statements regarding risk arbitrage is FALSE?

In a ________ merger,the target and the acquirer operate in the same industry.

Which of the following statements regarding efficiency gains is FALSE?

The savings that a large company can enjoy from producing goods in high volume,that are not available to a small company is called:

When a hostile takeover appears to be inevitable,a target company will sometimes look for another,friendlier company to acquire it called a:

A situation where every director serves a three-year term and the terms are staggered so that only one-third of the directors are up for election each year is called a:

Which of the following statements is FALSE?

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Corporate Governance

Risk Management

International Corporate Finance

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