Exam 18: Mergers, Lbos, Divestitures, and Business Failure

Which of the following is a reason for mergers?

A vertical merger may result in expansion of operations in an existing product line and elimination of a competitor.

A merger transaction endorsed by a target firm's management, approved by its stockholders, and easily consummated is called a friendly merger.

Firms' motives to merge include growth or diversification, synergy, fund raising, tax considerations, and defense against takeover.

The value of a firm measured as the sum of the values of its operating units if each were sold separately is known as a firm's part and parcel value.

In a voluntary settlement, one group of creditors having claims of $1,000,000 will be immediately paid 95 cents on a dollar. The remainder of the creditors will postpone payment an additional 60 days. This is an example of ________.

Jia's Oven Manufacturing is evaluating the acquisition of Cuisinaire Kitchen Appliance Co. Cuisinaire has a loss carryforward of $1.5 million which resulted from earlier operations. Jia's Oven can purchase Cuisinaire for $1.8 million and liquidate the assets for $1.3 million. Jia's Oven expects earnings before taxes in the five years following the acquisition to be as follows: (These earnings are assumed to fall within the annual limit legally allowed for application of the tax loss carryforward resulting from the proposed acquisition.) Jia's Oven is in the 40 percent tax bracket and has a cost of capital of 17 percent. (a) What is the tax advantage of the acquisition each year for Jia's Oven? (b) What is the maximum cash price Jia's Oven would be willing to pay for Cuisinaire? (c) Do you recommend the acquisition? Why or why not?

The responsibilities of a debtor in possession include ________.

An important aspect of a firm's reorganization plan is the recapitalization of the firm's capital structure. The goal of restructuring a firm's debt includes ________.

Which of the following increases the chances of business failures?

When making a cash acquisition of a going concern, the acquiring corporation should ________.

A firm that wants to expand or extend its operations in existing or new product areas may avoid many of the risks associated with the design, manufacture, and sale of additional or new product and remove a potential competitor by acquiring a suitable going concern.

If the P/E paid for a target company is less than the P/E of the acquiring company, the effect on the earnings per share of the acquired company will be ________.

In defending against a hostile takeover, the strategy that involves the target firm creating securities that give their holders certain rights that become effective when a takeover is attempted is called the ________ strategy.

The sale of a unit of a firm to existing management is often achieved through ________.

In defending against hostile takeover attempts, a company will approve anti-takeover amendments to the corporate charter that constrain the firm's ability to transfer managerial control of the firm as a result of a merger. This is called the ________ strategy.

The earnings per share of a merged firm are generally above the premerger earnings per share of one firm and below the premerger earnings per share of the other, after making the necessary adjustment for the ratio of exchange.

The primary advantage of a holding company, that permits the firm to control a large amount of assets with a relatively small dollar investment is known as ________.

Which of the following is true of a tender offer?

A firm undertakes a merger in order to eliminate redundant functions or increase market share. This is an example of ________.