Question 1

Revenue enhancement synergies are more common and easier to achieve than cost-reduction synergies.

Accepted Answer

A) True 
 B)False  False

Question 2

Pfizer,a pharmaceutical company,has proposed an acquisition of Allergan,another pharmaceutical company.The combined firm is expected to be able to streamline operations by eliminating overlap,and thus reducing costs substantially.What type of synergies are the most likely reason behind this merger?

Accepted Answer

A) economies of scale 
B) vertical integration 
C) economies of scope 
D) monopoly gains 
E) efficiency gains 
A) economies of scale 
B) vertical integration 
C) economies of scope 
D) monopoly gains 
E) efficiency gains E

Question 3

A merger in which the target and acquirer operate in unrelated industries is called a(n):

Accepted Answer

A) horizontal merger. 
B) vertical merger. 
C) conglomerate merger. 
D) industrial merger. 
E) complementary merger. 
A) horizontal merger. 
B) vertical merger. 
C) conglomerate merger. 
D) industrial merger. 
E) complementary merger. C

Question 4

A situation where every director serves a three-year term and the terms are staggered so that only one-third of the directors are up for election each year is called a:

Accepted Answer

A) white knight. 
B) classified board. 
C) poison pill. 
D) golden parachute. 
E) recapitalization. 
A) white knight. 
B) classified board. 
C) poison pill. 
D) golden parachute. 
E) recapitalization.

Question 5

Mayo Corporation is currently trading at $30 per share.There are 10 million shares outstanding and the company has no debt.You believe that the value of the company would increase by 50% if the management were replaced.How much would you need to offer in total to acquire 50% of Mayo's shares?

Accepted Answer

A) $300 million 
B) $150 million 
C) $100 million 
D) $10 million 
E) $50 million 
A) $300 million 
B) $150 million 
C) $100 million 
D) $10 million 
E) $50 million

Question 6

Consider two firms,Blue and Berry.Both companies will either make $20 million or lose $10 million every year with equal probability.The companies' profits are perfectly negatively correlated,so that in any year,one company makes $20 million and the other loses $10 million.If the two firms merge but are run as two independent divisions,what is the change in expected after-tax profits of the combined company (BlueBerry)in any year versus the combined expected after-tax profits of the two separate companies in any year,assuming a corporate tax rate of 40% and no tax loss carryback or carryforward?

Accepted Answer

A) $0 
B) $2 million 
C) $3 million 
D) $5 million 
E) $4 million 
A) $0 
B) $2 million 
C) $3 million 
D) $5 million 
E) $4 million

Question 7

This period is known for known for "strategic" or "global" deals that were more likely to be friendly and to involve companies in related businesses; these mergers often were designed to create strong firms on a scale that would allow them to compete globally:

Accepted Answer

A) 1960s 
B) 1970s 
C) 1980s 
D) 1990s 
E) 2000s 
A) 1960s 
B) 1970s 
C) 1980s 
D) 1990s 
E) 2000s

Question 8

Barlow Manufacturing has announced plans to acquire Hull Enterprises.Barlow is trading for $31.50 per share and has a premerger value of $12 billion,while Hull is trading for $21.75 per share and has a premerger value of $4 billion dollars.If the projected synergies from the merger are $675 million,what is the maximum exchange ratio that Barlow could offer in a stock swap and still generate a positive NPV?

Accepted Answer

A) 0.807 
B) 0.729 
C) 1.693 
D) 1.530 
E) 0.749 
A) 0.807 
B) 0.729 
C) 1.693 
D) 1.530 
E) 0.749

Question 9

For a hostile takeover to succeed,the acquirer must appeal to the target shareholders; this is usually done through:

Accepted Answer

A) a tender offer and a proxy fight. 
B) a tender offer and a poison pill. 
C) a white knight and a proxy fight. 
D) a staggered board and a white knight. 
E) a recapitalization and a poison pill. 
A) a tender offer and a proxy fight. 
B) a tender offer and a poison pill. 
C) a white knight and a proxy fight. 
D) a staggered board and a white knight. 
E) a recapitalization and a poison pill.

Question 10

What is a poison pill,and how does it prevent a hostile takeover?

Accepted Answer

A poison pill is a rights offering that

Question 11

Consider two firms,Left Company and Right Enterprises,both with earnings of $2.50 per share and 15 million shares outstanding.Left is a mature company with few growth opportunities and a stock price of $7 per share.Right is a new firm with much higher growth opportunities and a stock price of $16 per share.Assume Right acquires Left using its own stock and the takeover adds no value.In a perfect capital market,how many shares must Right offer Left's shareholders in exchange for their shares?

Accepted Answer

A) 2.2857 shares of Right for each share of Left Enterprises 
B) 0.4375 shares of Right for each share of Left Enterprises 
C) 1 share of Right for each share of Left Enterprises 
D) 0.6957 shares of Right for each share of Left Enterprises 
E) 0.7425 shares of Right for each share of Left Enterprises 
A) 2.2857 shares of Right for each share of Left Enterprises 
B) 0.4375 shares of Right for each share of Left Enterprises 
C) 1 share of Right for each share of Left Enterprises 
D) 0.6957 shares of Right for each share of Left Enterprises 
E) 0.7425 shares of Right for each share of Left Enterprises

Question 12

What is the difference between economies of scale and economies of scope?

Accepted Answer

Economies of scale refer to the savings

Question 13

Sol Company has announced plans to acquire Luna Corporation by swapping 1.2 shares of Sol stock for each share of Luna stock.After the announcement,Sol traded for $41 per share,and Luna traded for $48 per share.Assuming the takeover is successful,which of the following is the most appropriate merger-arbitrage strategy?

Accepted Answer

A) Buy 100 shares of Luna,short sell 120 shares of Sol. 
B) Buy 120 shares of Luna,short sell 100 shares of Sol. 
C) Buy 100 shares of Sol,short sell 100 shares of Luna. 
D) Buy 100 shares of Sol,short sell 120 shares of Luna. 
E) Buy 120 shares of Sol,short sell 100 shares of Luna. 
A) Buy 100 shares of Luna,short sell 120 shares of Sol. 
B) Buy 120 shares of Luna,short sell 100 shares of Sol. 
C) Buy 100 shares of Sol,short sell 100 shares of Luna. 
D) Buy 100 shares of Sol,short sell 120 shares of Luna. 
E) Buy 120 shares of Sol,short sell 100 shares of Luna.

Question 14

Which of the following statements best describes the average stock price reactions to mergers?

Accepted Answer

A) Both the target's and the acquirer's share prices increase slightly. 
B) Both the target's and the acquirer's share prices increase substantially. 
C) The target's share price increases substantially,while the acquirer's share price falls substantially. 
D) The target's share price increases substantially,while the acquirer's share price increases only slightly. 
E) The target's share price falls slightly,while the acquirer's share price increases substantially. 
A) Both the target's and the acquirer's share prices increase slightly. 
B) Both the target's and the acquirer's share prices increase substantially. 
C) The target's share price increases substantially,while the acquirer's share price falls substantially. 
D) The target's share price increases substantially,while the acquirer's share price increases only slightly. 
E) The target's share price falls slightly,while the acquirer's share price increases substantially.

Question 15

The freezeout tender offer has a significant disadvantage compared to a leveraged buyout because an acquiring corporation must make an all-cash offer.

Accepted Answer

A) True 
 B)False

Question 16

A merger in which the target and acquirer are in the same industry is called a(n):

Accepted Answer

A) horizontal merger. 
B) vertical merger. 
C) conglomerate merger. 
D) industrial merger. 
E) complementary merger. 
A) horizontal merger. 
B) vertical merger. 
C) conglomerate merger. 
D) industrial merger. 
E) complementary merger.

Question 17

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. 
E) recapitalization. 
A) golden parachute. 
B) poison pill. 
C) classified board. 
D) white knight. 
E) recapitalization.

Question 18

In Canada and most U.S.states,the law requires that when existing shareholders of a target firm are forced to sell their shares,they receive a ________ for their shares.

Accepted Answer

A) fair value 
B) premium 
C) cash offer 
D) stock payment 
E) cash and stock payment 
A) fair value 
B) premium 
C) cash offer 
D) stock payment 
E) cash and stock payment

Question 19

Why does a recapitalization make a firm a less attractive target for a takeover?

Accepted Answer

A company that undertakes a recapitaliza

Question 20

Shaw Communications Inc.proposes a merger with Rogers Communications Inc.The combined firm is expected to serve over 70% of the Canadian telecommunications market.What type of synergies are the most likely reason behind this merger?

Accepted Answer

A) economies of scale 
B) vertical integration 
C) expertise 
D) monopoly gains 
E) efficiency gains 
A) economies of scale 
B) vertical integration 
C) expertise 
D) monopoly gains 
E) efficiency gains

Exam 24: Mergers and Acquisitions

Revenue enhancement synergies are more common and easier to achieve than cost-reduction synergies.

Pfizer,a pharmaceutical company,has proposed an acquisition of Allergan,another pharmaceutical company.The combined firm is expected to be able to streamline operations by eliminating overlap,and thus reducing costs substantially.What type of synergies are the most likely reason behind this merger?

A merger in which the target and acquirer operate in unrelated industries is called a(n):

A situation where every director serves a three-year term and the terms are staggered so that only one-third of the directors are up for election each year is called a:

Mayo Corporation is currently trading at $30 per share.There are 10 million shares outstanding and the company has no debt.You believe that the value of the company would increase by 50% if the management were replaced.How much would you need to offer in total to acquire 50% of Mayo's shares?

This period is known for known for "strategic" or "global" deals that were more likely to be friendly and to involve companies in related businesses; these mergers often were designed to create strong firms on a scale that would allow them to compete globally:

For a hostile takeover to succeed,the acquirer must appeal to the target shareholders; this is usually done through:

What is a poison pill,and how does it prevent a hostile takeover?

What is the difference between economies of scale and economies of scope?

Which of the following statements best describes the average stock price reactions to mergers?

The freezeout tender offer has a significant disadvantage compared to a leveraged buyout because an acquiring corporation must make an all-cash offer.

A merger in which the target and acquirer are in the same industry is called a(n):

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:

In Canada and most U.S.states,the law requires that when existing shareholders of a target firm are forced to sell their shares,they receive a ________ for their shares.

Why does a recapitalization make a firm a less attractive target for a takeover?

Shaw Communications Inc.proposes a merger with Rogers Communications Inc.The combined firm is expected to serve over 70% of the Canadian telecommunications market.What type of synergies are the most likely reason behind this merger?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Corporate Governance

Filters