Question 1

Which of the following statements regarding mergers and taxes is FALSE?

Accepted Answer

A) Carryback and carryforward provisions essentially deliver the benefits of conglomeration to a small firm with volatile earnings. 
B) It might appear that a conglomerate has a tax advantage over a single-product firm simply because losses in one division can offset profits in another division. 
C) Companies with current-year losses can also use them to offset earnings (carryback)for the twenty prior years. 
D) The IRS will disallow a tax break if it can show that the principal reason for a takeover is tax avoidance,so it is unlikely that the tax advantage could,by itself,be a valid reason to acquire another firm. 
A) Carryback and carryforward provisions essentially deliver the benefits of conglomeration to a small firm with volatile earnings. 
B) It might appear that a conglomerate has a tax advantage over a single-product firm simply because losses in one division can offset profits in another division. 
C) Companies with current-year losses can also use them to offset earnings (carryback)for the twenty prior years. 
D) The IRS will disallow a tax break if it can show that the principal reason for a takeover is tax avoidance,so it is unlikely that the tax advantage could,by itself,be a valid reason to acquire another firm.

Question 2

Which of the following statements is FALSE?

Accepted Answer

A) There are two primary mechanisms by which ownership and control of a public corporation can change: Either another corporation or group of individuals can acquire the target firm,or the target firm can merge with another firm. 
B) Merger activity is greater during economic contractions than during expansions. 
C) Mergers and acquisitions are part of what is often referred to as "the market for corporate control." 
D) The takeover market is also characterized by merger waves-peaks of heavy activity followed by quiet troughs of few transactions. 
A) There are two primary mechanisms by which ownership and control of a public corporation can change: Either another corporation or group of individuals can acquire the target firm,or the target firm can merge with another firm. 
B) Merger activity is greater during economic contractions than during expansions. 
C) Mergers and acquisitions are part of what is often referred to as "the market for corporate control." 
D) The takeover market is also characterized by merger waves-peaks of heavy activity followed by quiet troughs of few transactions.

Question 3

An extremely lucrative severance package that is guaranteed to a firm's senior managers in the event that the firm is taken over and the managers are let go is called a:

Accepted Answer

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

Question 4

Taggart Transcontinental and Phoenix-Durango have entered into a stock swap merger agreement whereby Taggart will pay a 30% premium over Phoenix-Durango's premerger price.If Taggart's premerger price per share was $15 and Phoenix-Durango's was $30,then the exchange ratio that Taggart will offer is closest to:

Accepted Answer

A) 0.4:1 
B) 1.8:1 
C) 2.0:1 
D) 2.6:1 
A) 0.4:1 
B) 1.8:1 
C) 2.0:1 
D) 2.6:1

Question 5

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 Rearden 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

Question 6

The justification for the benefits of diversification from mergers include all of the following EXCEPT:

Accepted Answer

A) tax loss benefits. 
B) lower cost of debt or increased debt capacity. 
C) direct risk reduction. 
D) liquidity enhancement. 
A) tax loss benefits. 
B) lower cost of debt or increased debt capacity. 
C) direct risk reduction. 
D) liquidity enhancement.

Question 7

Regarding your tender offer,shareholders will:

Accepted Answer

A) not tender their shares since the post LBO price is higher than the offer price. 
B) not tender their shares since the post LBO price is higher than the current price. 
C) tender their shares since the post LBO price is higher than the offer price. 
D) tender their shares since the post LBO price is lower than the current price. 
A) not tender their shares since the post LBO price is higher than the offer price. 
B) not tender their shares since the post LBO price is higher than the current price. 
C) tender their shares since the post LBO price is higher than the offer price. 
D) tender their shares since the post LBO price is lower than the current price.

Question 8

Assume that Martin pays no premium to acquire Luther.Calculate Martin's price-earnings (P/E)ratio both pre and post merger.

Accepted Answer

Premerger P/E = @#IMG-DLM& 
= 10.67
First,since Ma

Question 9

Assuming you get 50% control of Associated Steel,then your gain from this transaction will be closest to:

Accepted Answer

A) $50.0 million 
B) $65 million 
C) $75 million 
D) $125 million 
A) $50.0 million 
B) $65 million 
C) $75 million 
D) $125 million

Question 10

If Wal-Mart and Target were to merge,this would be an example of a ________ merger.

Accepted Answer

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

Question 11

If Ford Motor Company bought The Goodyear Tire & Rubber Company,this would be an example of a ________ merger.

Accepted Answer

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

Question 12

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 actual premium Rearden will pay will be closest to:

Accepted Answer

A) 14.7% 
B) 18.0% 
C) 20.0% 
D) 22.4% 
A) 14.7% 
B) 18.0% 
C) 20.0% 
D) 22.4%

Question 13

Which of the following statements is FALSE?

Accepted Answer

A) SEC rules make it difficult for investors to buy much more than about 10% of a firm in secret.After an acquirer acquires such an initial stake in the target,called a toehold,they would have to make their intentions public by informing investors of his large stake. 
B) With the availability of both the freezeout merger and the leveraged buyout as acquisition strategies,most of the value added accrues to the acquiring shareholders. 
C) The laws on tender offers allow the acquiring company to freeze existing shareholders out of the gains from merging by forcing non-tendering shareholders to sell their shares for the tender offer price. 
D) Premiums in LBO transactions are often quite substantial-while they can avoid the free-rider problem acquirers must still get board approval to overcome other defenses such as poison pills,as well as outbid other potential acquirers. 
A) SEC rules make it difficult for investors to buy much more than about 10% of a firm in secret.After an acquirer acquires such an initial stake in the target,called a toehold,they would have to make their intentions public by informing investors of his large stake. 
B) With the availability of both the freezeout merger and the leveraged buyout as acquisition strategies,most of the value added accrues to the acquiring shareholders. 
C) The laws on tender offers allow the acquiring company to freeze existing shareholders out of the gains from merging by forcing non-tendering shareholders to sell their shares for the tender offer price. 
D) Premiums in LBO transactions are often quite substantial-while they can avoid the free-rider problem acquirers must still get board approval to overcome other defenses such as poison pills,as well as outbid other potential acquirers.

Question 14

A rights offering that gives existing target shareholders the right to buy shares in either the target or the acquirer at a deeply discounted price once certain conditions are met is called a:

Accepted Answer

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

Question 15

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

Accepted Answer

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

Question 16

Which of the following statements regarding poison pills is FALSE?

Accepted Answer

A) Companies with poison pills are harder to take over,and when they are taken over,the premium that existing shareholders receive for their stock is higher. 
B) Because a poison pill increases the cost of a takeover,all else equal,a target company must be in better shape to justify the expense of waging a takeover battle. 
C) Poison pills also increase the bargaining power of the target firm when negotiating with the acquirer because poison pills make it difficult to complete the takeover without the cooperation of the target board. 
D) By adopting a poison pill,a company effectively entrenches its management by making it much more difficult for shareholders to replace bad managers,thereby potentially destroying value. 
A) Companies with poison pills are harder to take over,and when they are taken over,the premium that existing shareholders receive for their stock is higher. 
B) Because a poison pill increases the cost of a takeover,all else equal,a target company must be in better shape to justify the expense of waging a takeover battle. 
C) Poison pills also increase the bargaining power of the target firm when negotiating with the acquirer because poison pills make it difficult to complete the takeover without the cooperation of the target board. 
D) By adopting a poison pill,a company effectively entrenches its management by making it much more difficult for shareholders to replace bad managers,thereby potentially destroying value.

Question 17

What is Reardon's price-earnings ratio after the takeover?

Accepted Answer

A) $1.85 
B) $1.90 
C) $2.00 
D) $2.25 
A) $1.85 
B) $1.90 
C) $2.00 
D) $2.25

Question 18

Which of the following statements regarding vertical integration is FALSE?

Accepted Answer

A) Vertically integrated companies may be large,but unlike other large corporations,since they remain focused in one industry they are easy to run. 
B) A company might not be happy with how its products are being distributed,so it might decide to take control of its distribution channels. 
C) A company might conclude that it can enhance its product if it has direct control of the inputs required to make the product. 
D) The principal benefit of vertical integration is coordination.By putting two companies under central control,management can ensure that both companies work toward a common goal. 
A) Vertically integrated companies may be large,but unlike other large corporations,since they remain focused in one industry they are easy to run. 
B) A company might not be happy with how its products are being distributed,so it might decide to take control of its distribution channels. 
C) A company might conclude that it can enhance its product if it has direct control of the inputs required to make the product. 
D) The principal benefit of vertical integration is coordination.By putting two companies under central control,management can ensure that both companies work toward a common goal.

Question 19

Savings that come from combining the marketing and distribution of different types of related products.are called:

Accepted Answer

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

Question 20

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 if the two firms are combined into one corporation,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

Exam 28: Mergers and Acquisitions

Which of the following statements regarding mergers and taxes is FALSE?

Which of the following statements is FALSE?

An extremely lucrative severance package that is guaranteed to a firm's senior managers in the event that the firm is taken over and the managers are let go is called a:

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 Rearden immediately after the announcement will be closest to:

The justification for the benefits of diversification from mergers include all of the following EXCEPT:

Regarding your tender offer,shareholders will:

Assume that Martin pays no premium to acquire Luther.Calculate Martin's price-earnings (P/E)ratio both pre and post merger.

Assuming you get 50% control of Associated Steel,then your gain from this transaction will be closest to:

If Wal-Mart and Target were to merge,this would be an example of a ________ merger.

If Ford Motor Company bought The Goodyear Tire & Rubber Company,this would be an example of a ________ merger.

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 actual premium Rearden will pay will be closest to:

Which of the following statements is FALSE?

A rights offering that gives existing target shareholders the right to buy shares in either the target or the acquirer at a deeply discounted price once certain conditions are met is called a:

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

Which of the following statements regarding poison pills is FALSE?

What is Reardon's price-earnings ratio after the takeover?

Which of the following statements regarding vertical integration is FALSE?

Savings that come from combining the marketing and distribution of different types of related products.are called:

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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