Question 1

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 a true arbitrage opportunity if there is a risk that the deal will not go through. If the takeover does not ultimately succeed, the risk-arbitrageur will 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 a true arbitrage opportunity if there is a risk that the deal will not go through. If the takeover does not ultimately succeed, the risk-arbitrageur will eventually have to unwind his position at whatever market prices prevailed. A

Question 2

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. D

Question 3

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 4

The fact that a large company can enjoy savings from producing goods in high volumes 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 5

The 1990s were known for "strategic" deals that were more likely to be ________ in related businesses; these mergers often were designed to create strong firms on a scale that would allow them to compete ________.

Accepted Answer

A)  friendly and to involve companies; globally 
B)  hostile but to involve companies; globally 
C)  friendly but not to involve companies; globally 
D)  friendly and to involve companies; domestically 
A)  friendly and to involve companies; globally 
B)  hostile but to involve companies; globally 
C)  friendly but not to involve companies; globally 
D)  friendly and to involve companies; domestically

Question 6

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. Martin will pay for Luther by issuing new shares. There are no expected synergies from the transaction.
-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 Mar

Question 7

From the bidder's perspective,the takeover is a ________ only if the premium it pays ________ the synergies created.

Accepted Answer

A)  positive-NPV project; exceeds 
B)  positive-NPV project; does not exceed 
C)  zero-NPV project; does not exceed 
D)  zero-NPV project; exceeds 
A)  positive-NPV project; exceeds 
B)  positive-NPV project; does not exceed 
C)  zero-NPV project; does not exceed 
D)  zero-NPV project; exceeds

Question 8

Cost-reduction synergies are ________ to achieve because they generally translate into layoffs of overlapping employees and elimination of redundant resources.

Accepted Answer

A)  more common but more difficult 
B)  more common and easier 
C)  more uncommon but easier 
D)  more uncommon and more difficult 
A)  more common but more difficult 
B)  more common and easier 
C)  more uncommon but easier 
D)  more uncommon and more difficult

Question 9

The principal benefit of vertical integration is ________ and major challenge of vertical integration is ________.

Accepted Answer

A)  net income; effectiveness 
B)  earnings per share; efficiency 
C)  coordination; effectiveness 
D)  control; efficiency 
A)  net income; effectiveness 
B)  earnings per share; efficiency 
C)  coordination; effectiveness 
D)  control; efficiency

Question 10

In Canada,________ monitors potential monopoly combinations.

Accepted Answer

A)  the Ministry of Finance 
B)  the Bank of Canada 
C)  the Toronto Stock Exchange (TSX) 
D)  the Competition Bureau 
A)  the Ministry of Finance 
B)  the Bank of Canada 
C)  the Toronto Stock Exchange (TSX) 
D)  the Competition Bureau

Question 11

A key issue for takeovers is ________ and ________ the value added as a result of the merger.

Accepted Answer

A)  qualifying; discounting 
B)  quantifying; compounding 
C)  qualifying; compounding 
D)  quantifying; discounting 
A)  qualifying; discounting 
B)  quantifying; compounding 
C)  qualifying; compounding 
D)  quantifying; discounting

Question 12

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 a timely way to changes in the economic environment. 
C)  Synergies usually fall into two categories: cost reductions and revenue enhancements. 
D)  There may 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 a timely way to changes in the economic environment. 
C)  Synergies usually fall into two categories: cost reductions and revenue enhancements. 
D)  There may be costs associated with size.

Question 13

This period is known as the conglomerate wave because firms typically acquired firms in unrelated businesses:

Accepted Answer

A)  1960s 
B)  1970s 
C)  1980s 
D)  1990s 
A)  1960s 
B)  1970s 
C)  1980s 
D)  1990s

Question 14

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 15

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 16

Which of the following statements regarding monopoly mergers is false?

Accepted Answer

A)  It is often argued that merging with or acquiring a major rival enables a firm to substantially reduce competition within the industry and thereby increase profits. 
B)  Financial researchers have found that the share prices of other firms in the same industry did not significantly increase following the announcement of a merger within the industry. 
C)  While only the merging company benefits when competition is reduced, all companies in an industry pay the associated costs. 
D)  Society as a whole bears the cost of monopoly strategies, so most countries have antitrust laws that limit such activity. 
A)  It is often argued that merging with or acquiring a major rival enables a firm to substantially reduce competition within the industry and thereby increase profits. 
B)  Financial researchers have found that the share prices of other firms in the same industry did not significantly increase following the announcement of a merger within the industry. 
C)  While only the merging company benefits when competition is reduced, all companies in an industry pay the associated costs. 
D)  Society as a whole bears the cost of monopoly strategies, so most countries have antitrust laws that limit such activity.

Question 17

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

Accepted Answer

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

Question 18

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. Martin 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 19

Which of the following statements is false?

Accepted Answer

A)  Merger activity is greater during economic expansions than during contractions and correlates with bull markets. 
B)  Merger activity is greater during economic contractions than during expansions and correlates with bear markets. 
C)  According to Thomson Reuters, 2007 saw the value of merger and acquisition activity hit an all-time high, with over $4.5 trillion worth of deals announced globally. 
D)  The latest merger wave came to a crashing end as the credit crisis of late 2007 and 2008 curtailed the ability to finance mergers. 
A)  Merger activity is greater during economic expansions than during contractions and correlates with bull markets. 
B)  Merger activity is greater during economic contractions than during expansions and correlates with bear markets. 
C)  According to Thomson Reuters, 2007 saw the value of merger and acquisition activity hit an all-time high, with over $4.5 trillion worth of deals announced globally. 
D)  The latest merger wave came to a crashing end as the credit crisis of late 2007 and 2008 curtailed the ability to finance mergers.

Question 20

Canada's Competition Bureau was rated in the "good" category by ________.

Accepted Answer

A)  the World Bank 
B)  the Global Competition Review 
C)  the International Monetary Fund 
D)  the Organization for Economic Co-operation and Development 
A)  the World Bank 
B)  the Global Competition Review 
C)  the International Monetary Fund 
D)  the Organization for Economic Co-operation and Development

Exam 28: Mergers and Acquisitions

Which of the following statements regarding risk arbitrage is false?

Which of the following statements regarding efficiency gains is false?

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

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

The 1990s were known for "strategic" deals that were more likely to be ________ in related businesses; these mergers often were designed to create strong firms on a scale that would allow them to compete ________.

From the bidder's perspective,the takeover is a ________ only if the premium it pays ________ the synergies created.

Cost-reduction synergies are ________ to achieve because they generally translate into layoffs of overlapping employees and elimination of redundant resources.

The principal benefit of vertical integration is ________ and major challenge of vertical integration is ________.

In Canada,________ monitors potential monopoly combinations.

A key issue for takeovers is ________ and ________ the value added as a result of the merger.

Which of the following statements is false?

This period is known as the conglomerate wave because firms typically acquired firms in unrelated businesses:

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

Which of the following statements is false?

Which of the following statements regarding monopoly mergers is false?

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

Which of the following statements is false?

Canada's Competition Bureau was rated in the "good" category by ________.

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

The Time Value of Money

Interest Rates

Valuing Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behaviour and Capital Market Efficiency

Financial Options

Option Valuation

Real Options

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 Modelling: a Case Study

The Mechanics of Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Corporate Governance

Risk Management

International Corporate Finance

Filters

The 1990s were known for "strategic" deals that were more likely to be in related businesses; these mergers often were designed to create strong firms on a scale that would allow them to compete .

From the bidder's perspective,the takeover is a only if the premium it pays the synergies created.

The principal benefit of vertical integration is and major challenge of vertical integration is .

A key issue for takeovers is and the value added as a result of the merger.