Question 1

Which of the following is defined as a transaction in which two firms combine to form a single firm?

Accepted Answer

A) Merger 
B) Synergy 
C) Acquisition 
D) Assignment 
A) Merger 
B) Synergy 
C) Acquisition 
D) Assignment

Question 2

Suppose that the financial ratios of a potential borrowing firm took the following values: X1 = Net working capital/Total assets = 0.15,X2 = Retained earnings/Total assets = 0.27,X3 = Earnings before interest and taxes/Total assets = 0.28,X4 = Market value of equity/Book value of long-term debt = 0.68,X5 = Sales/Total assets ratio = 0.9.Calculate and interpret the Altman's Z-score for this firm.

Accepted Answer

A) 1.92; Low risk 
B) 2.01; Indeterminate 
C) 2.79; Low risk 
D) 2.79; Indeterminate 
A) 1.92; Low risk 
B) 2.01; Indeterminate 
C) 2.79; Low risk 
D) 2.79; Indeterminate

Question 3

Calculation of Average Costs with Economies of Scope Flowers Galore is considering a merger with Balloons N More.Flowers Galore's total operating costs of producing services are $400,000 for a sales volume of $4 million.Balloons' total operating costs of producing services are $30,000 for a sales volume of $700,000.If the two firms merge,calculate the total average cost for the merged firm assuming no synergies.

Accepted Answer

A) 4.29 percent 
B) 9.15 percent 
C) 10.00 percent 
D) 7.14 percent 
A) 4.29 percent 
B) 9.15 percent 
C) 10.00 percent 
D) 7.14 percent

Question 4

LD Inc.declared bankruptcy through a Chapter 7 filing.Consider the following data in millions of dollars and determine the funds available for secured creditors.
• Proceeds from the liquidation of assets = $395
• First mortgage = $102
• Administration expenses associated with the bankruptcy = $5
• Notes payable to the banks = $205
• Subordinated debentures = $350
• Taxes due to federal,state,and other governmental agencies = $17
• Wages due employees (2,000 employees)= $6

Accepted Answer

A) $265 
B) $367 
C) $267 
D) $369 
A) $265 
B) $367 
C) $267 
D) $369

Question 5

LD Inc.declared bankruptcy through a Chapter 7 filing.Consider the following data in millions of dollars and determine the funds available for secured creditors.
• Proceeds from the liquidation of assets = $225
• First mortgage = $50
• Administration expenses associated with the bankruptcy = $5
• Notes payable to the banks = $205
• Subordinated debentures = $350
• Taxes due to federal,state,and other governmental agencies = $17
• Wages due employees (2,000 employees)= $6

Accepted Answer

A) $197 
B) $147 
C) $199 
D) $149 
A) $197 
B) $147 
C) $199 
D) $149

Question 6

Valuation of a Merger The managers of BSW Inc.have been approached by EAG Corp.for a possible merger.EAG Corp.is asking a price of $50 million to be purchased by BSW Inc.The two firms currently have cumulative total cash flows of $2.5 million that are growing at 2 percent annually.Managers of EAG estimate that because of synergies the merged firm's cash flows will increase by an additional 5 percent for the first three years following the merger.After the first three years,managers of EAG have estimated that cash flows will grow at a rate of 2 percent.The WACC for the merged firms is 12 percent.Managers of BSW Inc.agree that cash flows should grow at an additional 5 percent for the first three years,but are unsure of the long-term growth rate in cash flows estimated by EAG.Calculate the minimum growth rate needed after the first three years such that BSW Inc.would see this merger as a positive NPV project.

Accepted Answer

A) 5.00 percent 
B) 6.925 percent 
C) 1.728 percent 
D) 12.00 percent 
A) 5.00 percent 
B) 6.925 percent 
C) 1.728 percent 
D) 12.00 percent

Question 7

Calculation of Average Costs with Economies of Scope Crib World is considering a merger with Tots Supply Stores.Crib's total operating costs of producing services are $250,000 for sales volume of $1.25 million.Tots' total operating costs of producing services are $210,000 for a sales volume (JP)of $900,000.Calculate the average cost of production for the Crib and Tots firms,respectively.

Accepted Answer

A) 20 percent, 23.33 percent 
B) 23.33 percent, 20 percent 
C) 27.78 percent, 16.8 percent 
D) 21.4 percent, 21.4 percent 
A) 20 percent, 23.33 percent 
B) 23.33 percent, 20 percent 
C) 27.78 percent, 16.8 percent 
D) 21.4 percent, 21.4 percent

Question 8

Which of the following is a formal bankruptcy proceeding involving the reorganization of the corporation with some provision for repayment to the firm's creditors?

Accepted Answer

A) Chapter 7 
B) Chapter 11 
C) Chapter 13 
D) Chapter 17 
A) Chapter 7 
B) Chapter 11 
C) Chapter 13 
D) Chapter 17

Question 9

Calculation of Average Costs with Economies of Scope Baby Supplies is considering a merger with Tot Toy Stores.Baby's total operating costs of producing services are $450,000 for sales volume of $2.15 million.Tot's total operating costs of producing services are $250,000 for a sales volume (JP)of $975,000.Calculate the average cost of production for the Baby and Tot Toy firms,respectively.

Accepted Answer

A) 11.63 percent, 20.93 percent 
B) 20.93 percent, 25.64 percent 
C) 46.15 percent, 11.63 percent 
D) 22.4 percent, 22.4 percent 
A) 11.63 percent, 20.93 percent 
B) 20.93 percent, 25.64 percent 
C) 46.15 percent, 11.63 percent 
D) 22.4 percent, 22.4 percent

Question 10

Which of these is the person who liquidates the firm's assets through a private sale or public auction and then distributes any proceeds from the sale to the firms' creditors and stockholders?

Accepted Answer

A) Assignor 
B) Grantor 
C) Trustor 
D) Trustee 
A) Assignor 
B) Grantor 
C) Trustor 
D) Trustee

Question 11

Which of the following is a poor justification for a merger?

Accepted Answer

A) Tax considerations 
B) Lowering cost of capital 
C) Reducing costs 
D) Increasing the size of the firm 
A) Tax considerations 
B) Lowering cost of capital 
C) Reducing costs 
D) Increasing the size of the firm

Question 12

Calculation of Bankruptcy Probability A linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the equity multiplier and the total asset turnover ratio.Based on past bankruptcy experience,the linear probability model is estimated as:
PDi = 0.05 (equity multiplier)+ 0.02 (total asset turnover)
A firm has an equity multiplier of 1.9 times and a probability of default of 10 percent.Calculate the firm's total asset turnover ratio.

Accepted Answer

A) 0.25 
B) 25 
C) 2.5 
D) 0.75 
A) 0.25 
B) 25 
C) 2.5 
D) 0.75

Question 13

Calculation of Altman's Z-Score: Suppose that the financial ratios of a potential borrowing firm took the following values: X1 = Net working capital/Total assets = 0.25,X2 = Retained earnings/Total assets = 0.30,X3 = Earnings before interest and taxes/Total assets = 0.35,X4 = Market value of equity/Book value of long-term debt = 0.50,X5 = Sales/Total assets ratio = 0.9.Calculate the Altman's Z-score for this firm.

Accepted Answer

A) 2.30 
B) 3.075 
C) 9.8 
D) 1.96 
A) 2.30 
B) 3.075 
C) 9.8 
D) 1.96

Question 14

Calculation of Change in HHI Associated with a Merger Consider a market that has three firms with the following market shares:
Firm A 15 percent
Firm B 25 percent
Firm C 60 percent
Suppose Firm B want to acquire Firm A so that the post-acquisition market would exhibit the following shares:
B + A = 40 percent
C = 60 percent
What is the change in the HHI resulting from the merger?

Accepted Answer

A) 750 
B) 4450 
C) 5200 
D) No change 
A) 750 
B) 4450 
C) 5200 
D) No change

Question 15

Which of the following statements is incorrect?

Accepted Answer

A) While linear probability models divide firms into high or low bankruptcy risk classes, logit models and linear discriminant models produce a value for the expected probability of bankruptcy. 
B) The logit model overcomes a weakness of the linear probability model by restricting the estimated range of bankruptcy probabilities to lie between 0 and 1. 
C) All three credit scoring models use past data, such as financial ratios, as inputs to explain repayment experiences on old debt. 
D) All of these statements are correct. 
A) While linear probability models divide firms into high or low bankruptcy risk classes, logit models and linear discriminant models produce a value for the expected probability of bankruptcy. 
B) The logit model overcomes a weakness of the linear probability model by restricting the estimated range of bankruptcy probabilities to lie between 0 and 1. 
C) All three credit scoring models use past data, such as financial ratios, as inputs to explain repayment experiences on old debt. 
D) All of these statements are correct.

Question 16

The Altman's Z-score model has several weaknesses.What are they?

Accepted Answer

The first problem is that this model usu

Which of the following is defined as a transaction in which two firms combine to form a single firm?

Which of the following is a formal bankruptcy proceeding involving the reorganization of the corporation with some provision for repayment to the firm's creditors?

Which of these is the person who liquidates the firm's assets through a private sale or public auction and then distributes any proceeds from the sale to the firms' creditors and stockholders?

Which of the following is a poor justification for a merger?

Which of the following statements is incorrect?

The Altman's Z-score model has several weaknesses.What are they?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money

Time Value of Money

Valuing Bonds

Valuing Stockspart

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, equity, and Capital Structure

Sharing Firm Wealth: Dividends, share Repurchases and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

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Exam 20: Mergers and Acquisitions and Financial Distress

Which of the following is defined as a transaction in which two firms combine to form a single firm?

Which of the following is a formal bankruptcy proceeding involving the reorganization of the corporation with some provision for repayment to the firm's creditors?

Which of these is the person who liquidates the firm's assets through a private sale or public auction and then distributes any proceeds from the sale to the firms' creditors and stockholders?

Which of the following is a poor justification for a merger?

Which of the following statements is incorrect?

The Altman's Z-score model has several weaknesses.What are they?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money

Time Value of Money

Valuing Bonds

Valuing Stockspart

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, equity, and Capital Structure

Sharing Firm Wealth: Dividends, share Repurchases and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Filters