Question 1

Only if a target firm's value is greater to the acquiring firm than its market value as a separate entity will a merger be financially justified.

Accepted Answer

A) True 
 B)False  True

Question 2

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  True

Question 3

Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV) approach is most CORRECTσ

Accepted Answer

A)  the horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the cost of debt. 
B)  the horizon value is calculated by discounting the expected earnings at the wacc. 
C)  the horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the wacc. 
D)  the horizon value must always be more than 20 years in the future. 
E)  the horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the levered cost of equity. 
A)  the horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the cost of debt. 
B)  the horizon value is calculated by discounting the expected earnings at the wacc. 
C)  the horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the wacc. 
D)  the horizon value must always be more than 20 years in the future. 
E)  the horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the levered cost of equity. C

Question 4

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 5

Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV) approach is most CORRECTσ

Accepted Answer

A)  the value of equity is calculated by discounting the horizon value, the tax shields, and the free cash flows at the cost of equity. 
B)  the value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows before the horizon date at the unlevered cost of equity. 
C)  the value of equity is calculated by discounting the horizon value and the free cash flows at the cost of equity. 
D)  the capv approach stands for the accounting pre-valuation approach. 
E)  the value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows at the cost of equity. 
A)  the value of equity is calculated by discounting the horizon value, the tax shields, and the free cash flows at the cost of equity. 
B)  the value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows before the horizon date at the unlevered cost of equity. 
C)  the value of equity is calculated by discounting the horizon value and the free cash flows at the cost of equity. 
D)  the capv approach stands for the accounting pre-valuation approach. 
E)  the value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows at the cost of equity.

Question 6

Which of the following statements is most CORRECTσ

Accepted Answer

A)  the smaller the synergistic benefits of a particular merger, the greater the scope for striking a bargain in negotiations, and the higher the probability that the merger will be completed. 
B)  since mergers are frequently financed by debt rather than equity, a lower cost of debt or a greater debt capacity are rarely relevant considerations when considering a merger. 
C)  managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification, including more stable earnings. however, since shareholders are free to diversify their own holdings, and at what's probably a lower cost, diversification benefits is generally not a valid motive for a publicly held firm. 
D)  operating economies are never a motive for mergers. 
E)  tax considerations often play a part in mergers. if one firm has excess cash, purchasing another firm exposes the purchasing firm to additional taxes. thus, firms with excess cash rarely undertake mergers. 
A)  the smaller the synergistic benefits of a particular merger, the greater the scope for striking a bargain in negotiations, and the higher the probability that the merger will be completed. 
B)  since mergers are frequently financed by debt rather than equity, a lower cost of debt or a greater debt capacity are rarely relevant considerations when considering a merger. 
C)  managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification, including more stable earnings. however, since shareholders are free to diversify their own holdings, and at what's probably a lower cost, diversification benefits is generally not a valid motive for a publicly held firm. 
D)  operating economies are never a motive for mergers. 
E)  tax considerations often play a part in mergers. if one firm has excess cash, purchasing another firm exposes the purchasing firm to additional taxes. thus, firms with excess cash rarely undertake mergers.

Question 7

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 8

Which of the following statements is most CORRECTσ

Accepted Answer

A)  a defensive merger is one where the firm's managers decide to merge with another firm to avoid or lessen the possibility of being acquired through a hostile takeover. 
B)  acquiring firms send a signal that their stock is undervalued if they choose to use stock to pay for the acquisition. 
C)  cash payments are used in takeovers but never in mergers. 
D)  managers often are fired in takeovers, but never in mergers. 
E)  if a company that produces military equipment merges with a company that manages a chain of motels, this is an example of a horizontal merger. 
A)  a defensive merger is one where the firm's managers decide to merge with another firm to avoid or lessen the possibility of being acquired through a hostile takeover. 
B)  acquiring firms send a signal that their stock is undervalued if they choose to use stock to pay for the acquisition. 
C)  cash payments are used in takeovers but never in mergers. 
D)  managers often are fired in takeovers, but never in mergers. 
E)  if a company that produces military equipment merges with a company that manages a chain of motels, this is an example of a horizontal merger.

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

Since managers' central goal is to maximize stock price, managerial control issues do not interfere with mergers that would benefit the target firm's stockholders.

Accepted Answer

A) True 
 B)False

Question 11

Borrowing funds on terms that would require immediate repayment of all funds if the firm is acquired, selling off valuable assets, and granting huge "golden parachutes" that open if the firm is acquired are three procedures used to defend against hostile takeovers. These strategies are known as "poison pills."

Accepted Answer

A) True 
 B)False

Question 12

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 13

Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the discount rate can only be determined after the merger is consummated.

Accepted Answer

A) True 
 B)False

Question 14

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 15

Which of the following statements is most CORRECTσ

Accepted Answer

A)  regulations in the united states prohibit acquiring firms from using common stock to purchase another firm. 
B)  defensive mergers are designed to make a company less vulnerable to a takeover. 
C)  hostile mergers always create value for the acquiring firm. 
D)  in a tender offer, the target firm's management always remain after the merger is completed. 
E)  a conglomerate merger is one where a firm combines with another firm in the same industry. 
A)  regulations in the united states prohibit acquiring firms from using common stock to purchase another firm. 
B)  defensive mergers are designed to make a company less vulnerable to a takeover. 
C)  hostile mergers always create value for the acquiring firm. 
D)  in a tender offer, the target firm's management always remain after the merger is completed. 
E)  a conglomerate merger is one where a firm combines with another firm in the same industry.

Question 16

Firms use defensive tactics to fight off undesired mergers. These tactics do not include

Accepted Answer

A)  getting a white squire to purchase stock in the firm. 
B)  getting white knights to bid for the firm. 
C)  repurchasing their own stock. 
D)  changing the bylaws to eliminate supermajority voting requirements. 
E)  raising antitrust issues. 
A)  getting a white squire to purchase stock in the firm. 
B)  getting white knights to bid for the firm. 
C)  repurchasing their own stock. 
D)  changing the bylaws to eliminate supermajority voting requirements. 
E)  raising antitrust issues.

Question 17

Juicers Inc. is thinking of acquiring Fast Fruit Company. Juicers expects Fast Fruit's NOPAT to be $9 million the first year, with no net new investment in operating capital and no interest expense. For the second year, Fast Fruit is expected to have NOPAT of $25 million and interest expense of $5 million. Also, in the second year only, Fast Fruit will need $10 million of net new investment in operating capital. Fast Fruit's marginal tax rate is 40%. After the second year, the free cash flows and the tax shields from Fast Fruit to Juicers will both grow at a constant rate of 4%. Juicers has determined that Fast Fruit's cost of equity is 17.5%, and Fast Fruit currently has no debt outstanding. Assume that all cash flows occur at the end of the year, Juicers must pay $45 million to acquire Fast Fruit. What it the NPV of the proposed acquisitionσ Note that you must first calculate the value to Juicers of Fast Fruit's equity.

Accepted Answer

A)  $45.0 million 
B)  $68.2 million 
C)  $86.5 million 
D)  $113.2 million 
E)  $133.0 million 
A)  $45.0 million 
B)  $68.2 million 
C)  $86.5 million 
D)  $113.2 million 
E)  $133.0 million

Question 18

In a financial merger, the relevant post-merger cash flows are simply the sum of the expected cash flows of the two companies, measured as if they were operated independently.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following statements is most CORRECTσ

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 20

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 offerσ

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

Exam 26: Mergers and Corporate Control

Only if a target firm's value is greater to the acquiring firm than its market value as a separate entity will a merger be financially justified.

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.

Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV) approach is most CORRECTσ

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 statements about valuing a firm using the compressed adjusted present value (CAPV) approach is most CORRECTσ

Which of the following statements is most CORRECTσ

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.

Which of the following statements is most CORRECTσ

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

Since managers' central goal is to maximize stock price, managerial control issues do not interfere with mergers that would benefit the target firm's stockholders.

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

Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the discount rate can only be determined after the merger is consummated.

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.

Which of the following statements is most CORRECTσ

Firms use defensive tactics to fight off undesired mergers. These tactics do not include

In a financial merger, the relevant post-merger cash flows are simply the sum of the expected cash flows of the two companies, measured as if they were operated independently.

Which of the following statements is most CORRECTσ

An Overview of Financial Management and the Financial Environment

Risk and Return-Part I

Risk and Return-Part II

Bond Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Basic Stock Valuation

Corporate Valuation and Financial Planning

Corporate Governance

Determining the Cost of Capital

Capital Budgeting: Decision Criteria

Capital Budgeting-Estimating Cash Flows and Analyzing Risk

Real Options

Distributions to Shareholders-Dividends and Repurchases

Capital Structure Decisions

Dynamic Capital Structures and Corporate Valuation

Initial Public Offerings-Investment Banking: and Financial Restructuring

Lease Financing

Hybrid Financing Preferred Stock-Warrants and Convertibles

Supply Chains and Working Capital Management

Providing and Obtaining Credit

Other Topics in Working Capital Management

Enterprise Risk Management

Bankruptcy-Reorganization and Liquidation

Multinational Financial Management

Time Value of Money

Basic Financial Tools: A review

Pension Plan Management

Financial Management in Not for Profit Businesses

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