Question 1

Because of the uncertainty about whether a takeover will succeed,the market price ________ by an amount ________ when the takeover is announced.

Accepted Answer

A)  rises; equal to the premium 
B)  rises; greater than the premium 
C)  does not rise; equal to the premium 
D)  does not rise; greater than the premium 
A)  rises; equal to the premium 
B)  rises; greater than the premium 
C)  does not rise; equal to the premium 
D)  does not rise; greater than the premium

Question 2

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 3

KT corporation has announced plans to acquire MJ corporation.KT is trading for $45 per share and MJ is trading for $25 per share,with a premerger value for MJ of $3 billion dollars.If the projected synergies from the merger are $750 million,what is the maximum exchange ratio that KT could offer in a stock swap and still generate a positive NPV?

Accepted Answer

Exchange r

Question 4

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

Accepted Answer

A)  Because it may be easier to measure performance accurately in a conglomerate, agency costs may be reduced and resources may be more efficiently allocated. 
B)  Because employees holding a large fraction of their wealth in shares of the corporation for which they work are obligated to hold idiosyncratic risk, they benefit when the firm reduces that risk by conglomerating. 
C)  Like a large portfolio, large firms bear less idiosyncratic risk, so often mergers are justified on the basis that the combined firm is less risky. 
D)  Because most stockholders will already be holding a well-diversified portfolio, they get no further benefit from the firm diversifying through acquisition. 
A)  Because it may be easier to measure performance accurately in a conglomerate, agency costs may be reduced and resources may be more efficiently allocated. 
B)  Because employees holding a large fraction of their wealth in shares of the corporation for which they work are obligated to hold idiosyncratic risk, they benefit when the firm reduces that risk by conglomerating. 
C)  Like a large portfolio, large firms bear less idiosyncratic risk, so often mergers are justified on the basis that the combined firm is less risky. 
D)  Because most stockholders will already be holding a well-diversified portfolio, they get no further benefit from the firm diversifying through acquisition.

Question 5

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 16% on average in their stock price. 
C)  In Canadian provinces, 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 16% on average in their stock price. 
C)  In Canadian provinces, 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 6

Which of the following statements is false?

Accepted Answer

A)  The method of payment (cash or stock) affects how the value of the target's assets is recorded for tax purposes and it affects the combined firm's financial statements for financial reporting. 
B)  The combined firm must mark up the value assigned to the target's assets on the financial statements by allocating the purchase price to target assets according to their fair market value. 
C)  Any goodwill created in a merger deal can be amortized for tax purposes over 15 years. 
D)  Many transactions are carried out as acquisitive reorganizations under the tax code. These structures allow the target shareholders to defer their tax liability on the part of the payment made in acquirer stock but they do not allow the acquirer to step up the book value of the target assets. 
A)  The method of payment (cash or stock) affects how the value of the target's assets is recorded for tax purposes and it affects the combined firm's financial statements for financial reporting. 
B)  The combined firm must mark up the value assigned to the target's assets on the financial statements by allocating the purchase price to target assets according to their fair market value. 
C)  Any goodwill created in a merger deal can be amortized for tax purposes over 15 years. 
D)  Many transactions are carried out as acquisitive reorganizations under the tax code. These structures allow the target shareholders to defer their tax liability on the part of the payment made in acquirer stock but they do not allow the acquirer to step up the book value of the target assets.

Question 7

In stock-swap transaction,the "price" offered is determined by the ________-the number of bidder shares received in exchange for each target share-multiplied by ________ of the acquirer's stock.

Accepted Answer

A)  P/E ratio; the market price 
B)  exchange ratio; the discounted price 
C)  P/E ratio; the discounted price 
D)  exchange ratio; the market price 
A)  P/E ratio; the market price 
B)  exchange ratio; the discounted price 
C)  P/E ratio; the discounted price 
D)  exchange ratio; the market price

Question 8

For most investors an investment in the stock market is a ________ investment.

Accepted Answer

A)  risk-free 
B)  positive-NPV 
C)  zero-NPV 
D)  negative-NPV 
A)  risk-free 
B)  positive-NPV 
C)  zero-NPV 
D)  negative-NPV

Question 9

Which of the following statements is false?

Accepted Answer

A)  Canadian provincial 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 this 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)  Canadian provincial 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 this 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 10

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 11

What is a white knight?

Accepted Answer

When a hostile takeover appears to be in

Question 12

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 13

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 14

This period is known for hostile,"bust-up" takeovers,in which the acquirer purchased a poorly performing conglomerate and sold off its individual business units for more than the purchase price:

Accepted Answer

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

Question 15

Canadian securities laws make it difficult for investors to buy much more than ________.

Accepted Answer

A)  about 10% of a firm in secret 
B)  about 10% of a firm publicly 
C)  about 1% of a firm in secret 
D)  about 1% of a firm publicly 
A)  about 10% of a firm in secret 
B)  about 10% of a firm publicly 
C)  about 1% of a firm in secret 
D)  about 1% of a firm publicly

Question 16

Which of the following statements is false?

Accepted Answer

A)  Chief among the costs associated with size is that larger firms are more difficult to manage. 
B)  For most investors an investment in the stock market is a zero-NPV investment. 
C)  Diversification benefits are by far the most common justification that bidders give for the premium they pay for a target. 
D)  An acquirer might be able to add economic value, as a result of an acquisition, that an individual investor cannot add. 
A)  Chief among the costs associated with size is that larger firms are more difficult to manage. 
B)  For most investors an investment in the stock market is a zero-NPV investment. 
C)  Diversification benefits are by far the most common justification that bidders give for the premium they pay for a target. 
D)  An acquirer might be able to add economic value, as a result of an acquisition, that an individual investor cannot add.

Question 17

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

Accepted Answer

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

Question 18

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

Question 19

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 20

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.

Exam 28: Mergers and Acquisitions

Because of the uncertainty about whether a takeover will succeed,the market price ________ by an amount ________ when the takeover is announced.

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

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

Which of the following statements is false?

Which of the following statements is false?

In stock-swap transaction,the "price" offered is determined by the ________-the number of bidder shares received in exchange for each target share-multiplied by ________ of the acquirer's stock.

For most investors an investment in the stock market is a ________ investment.

Which of the following statements is false?

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

What is a white knight?

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

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

This period is known for hostile,"bust-up" takeovers,in which the acquirer purchased a poorly performing conglomerate and sold off its individual business units for more than the purchase price:

Canadian securities laws make it difficult for investors to buy much more than ________.

Which of the following statements is false?

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

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

Which of the following statements regarding poison pills is false?

Which of the following statements is false?

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

Because of the uncertainty about whether a takeover will succeed,the market price by an amount when the takeover is announced.

In stock-swap transaction,the "price" offered is determined by the -the number of bidder shares received in exchange for each target share-multiplied by of the acquirer's stock.