Question 1

The primary reason managers give for most mergers is to acquire more assets so as to increase sales and market share.

Accepted Answer

A) True 
 B)False

Question 2

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 3

Which of the following are legal and acceptable reasons for the high level of merger activity in the U.S.during the 1980s?

Accepted Answer

A)  A profitable firm acquires a firm with large accumulated tax losses that may be carried forward. 
B)  Attempts to stabilize earnings by diversifying. 
C)  Purchase of assets below their replacement costs. 
D)  Reduction in competition resulting from mergers. 
E)  Synergistic benefits arising from mergers. 
A)  A profitable firm acquires a firm with large accumulated tax losses that may be carried forward. 
B)  Attempts to stabilize earnings by diversifying. 
C)  Purchase of assets below their replacement costs. 
D)  Reduction in competition resulting from mergers. 
E)  Synergistic benefits arising from mergers.

Question 4

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 action.

Accepted Answer

A) True 
 B)False

Question 5

The rate used to discount projected merger cash flows should be the cost of capital of the new consolidated firm because it incorporates the actual capital structure of the new firm.

Accepted Answer

A) True 
 B)False

Question 6

The owners of Arthouse Inc. ,a national artist supplies chain,are contemplating purchasing Craftworks Inc,a smaller chain.Arthouse's analysts project that the merger will result in incremental free flows and interest tax savings with a combined present value of $72.52 million,and they have determined that the appropriate discount rate for valuing Craftworks is 16%.Craftworks has 4 million shares outstanding and no debt.Craftworks' current price is $16.25.What is the maximum price per share that Arthouse should offer?

Accepted Answer

A)  $16.25 
B)  $16.97 
C)  $17.42 
D)  $18.13 
E)  $19.00 
A)  $16.25 
B)  $16.97 
C)  $17.42 
D)  $18.13 
E)  $19.00

Question 7

The distribution of synergistic gains between the stockholders of two merged firms is almost always based strictly on their respective market values before the announcement of the merger.

Accepted Answer

A) True 
 B)False

Question 8

The present value of the free cash flows discounted at the unlevered cost of equity is the value of the firm's operations if it had no debt.

Accepted Answer

A) True 
 B)False

Question 9

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 10

Although goodwill created in a merger may not be amortized for shareholder reporting purposes,it may be amortized for Federal tax purposes.

Accepted Answer

A) True 
 B)False

Question 11

The two principal advantages of holding companies are (1)the holding company can control a great deal of assets with limited equity and (2)the dividends received by the parent from the subsidiary are not taxed if the parent holds at least 50% of the subsidiary's stock.

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

A congeneric merger is one where the merging firms operate in related businesses but do not necessarily produce the same products or have a producer-supplier relationship.

Accepted Answer

A) True 
 B)False

Question 14

Merger activity is likely to heat up when interest rates are high because target firms can expect to receive an especially high premium over the pre-announcement stock price.

Accepted Answer

A) True 
 B)False

Question 15

Currently (2012),mergers can be accounted for using either the purchase method or the pooling method.

Accepted Answer

A) True 
 B)False

Question 16

Any goodwill created in a merger must be amortized over its expected life,usually 40 years,for shareholder reporting purposes.

Accepted Answer

A) True 
 B)False

Question 17

If a petrochemical firm that used oil as feedstock merged with an oil producer that had large oil reserves and a drilling subsidiary,this would be a vertical merger.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements is most CORRECT?

Accepted Answer

A)  Financial theory says that the choice of how to pay for a merger is really irrelevant because,although it may affect the firm's capital structure,it will not affect its overall required rate of return. 
B)  The basic rationale for any financial merger is synergy and,thus,the estimation of pro forma cash flows is the single most important part of the analysis. 
C)  In most mergers,the benefits of synergy and the premium the acquirer pays over the market price are summed and then divided equally between the shareholders of the acquiring and target firms. 
D)  The primary rationale for most operating mergers is synergy. 
E)  The acquiring firm's required rate of return in most horizontal mergers will not be affected,because the 2 firms will have similar betas. 
A)  Financial theory says that the choice of how to pay for a merger is really irrelevant because,although it may affect the firm's capital structure,it will not affect its overall required rate of return. 
B)  The basic rationale for any financial merger is synergy and,thus,the estimation of pro forma cash flows is the single most important part of the analysis. 
C)  In most mergers,the benefits of synergy and the premium the acquirer pays over the market price are summed and then divided equally between the shareholders of the acquiring and target firms. 
D)  The primary rationale for most operating mergers is synergy. 
E)  The acquiring firm's required rate of return in most horizontal mergers will not be affected,because the 2 firms will have similar betas.

Question 19

A joint venture is one in which two,or sometimes more,independent companies agree to combine resources in order to achieve a specific objective,usually limited in scope.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 22: Mergers and Corporate Control

The primary reason managers give for most mergers is to acquire more assets so as to increase sales and market share.

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 are legal and acceptable reasons for the high level of merger activity in the U.S.during the 1980s?

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 action.

The rate used to discount projected merger cash flows should be the cost of capital of the new consolidated firm because it incorporates the actual capital structure of the new firm.

The distribution of synergistic gains between the stockholders of two merged firms is almost always based strictly on their respective market values before the announcement of the merger.

The present value of the free cash flows discounted at the unlevered cost of equity is the value of the firm's operations if it had no debt.

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

Although goodwill created in a merger may not be amortized for shareholder reporting purposes,it may be amortized for Federal tax purposes.

The two principal advantages of holding companies are (1)the holding company can control a great deal of assets with limited equity and (2)the dividends received by the parent from the subsidiary are not taxed if the parent holds at least 50% of the subsidiary's stock.

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

A congeneric merger is one where the merging firms operate in related businesses but do not necessarily produce the same products or have a producer-supplier relationship.

Merger activity is likely to heat up when interest rates are high because target firms can expect to receive an especially high premium over the pre-announcement stock price.

Currently (2012),mergers can be accounted for using either the purchase method or the pooling method.

Any goodwill created in a merger must be amortized over its expected life,usually 40 years,for shareholder reporting purposes.

If a petrochemical firm that used oil as feedstock merged with an oil producer that had large oil reserves and a drilling subsidiary,this would be a vertical merger.

Which of the following statements is most CORRECT?

A joint venture is one in which two,or sometimes more,independent companies agree to combine resources in order to achieve a specific objective,usually limited in scope.

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

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds, Bond Valuation, and Interest Rates

Risk and Return

Corporate Valuation and Stock Valuation

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Financial Planning and Applications to Corporate Valuation

Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, Seasoned Offerings, and Investment Banks

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Dynamic Capital Structures and Corporate Valuation

Enterprise Risk Management

Bankruptcy, Reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not-For-Profit Businesses

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