Question 1

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 2

A rights offering that gives existing target shareholders the right to buy shares in either the target or an 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

Which of the following statements regarding vertical integration is FALSE?

Accepted Answer

A)  Vertically integrated companies may be large, but unlike other large corporations, since they remain focused in one industry they are easy to run. 
B)  A company might not be happy with how its products are being distributed, so it might decide to take control of its distribution channels. 
C)  A company might conclude that it can enhance its product if it has direct control of the inputs required to make the product. 
D)  The principal benefit of vertical integration is coordination. By putting two companies under central control, management can ensure that both companies work toward a common goal. 
A)  Vertically integrated companies may be large, but unlike other large corporations, since they remain focused in one industry they are easy to run. 
B)  A company might not be happy with how its products are being distributed, so it might decide to take control of its distribution channels. 
C)  A company might conclude that it can enhance its product if it has direct control of the inputs required to make the product. 
D)  The principal benefit of vertical integration is coordination. By putting two companies under central control, management can ensure that both companies work toward a common goal.

Question 4

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 gain from acquiring 50% of Mayo's shares by borrowing, attaching the debt to the company and replacing the management?

Accepted Answer

A)  $150 million 
B)  $225 million 
C)  $300 million 
D)  $10 million 
A)  $150 million 
B)  $225 million 
C)  $300 million 
D)  $10 million

Question 5

Which of the following statements regarding efficiency gains is FALSE?

Accepted Answer

A)  Takeovers relying on the improvement of target management are difficult to complete, and post-takeover resistance to change can be great. Thus not all inefficiently run organizations are necessarily more efficient following a takeover. 
B)  Although identifying poorly performing corporations is relatively easy, fixing them is another matter entirely. 
C)  A justification that acquirers cite for paying a premium for a target is efficiency gains, which are often achieved through an elimination of duplication. 
D)  A chief executive of an inefficiently run corporation can be ousted by current shareholders voting to replace the board of directors, and in fact a large number of ineffective managers are replaced in this way. 
A)  Takeovers relying on the improvement of target management are difficult to complete, and post-takeover resistance to change can be great. Thus not all inefficiently run organizations are necessarily more efficient following a takeover. 
B)  Although identifying poorly performing corporations is relatively easy, fixing them is another matter entirely. 
C)  A justification that acquirers cite for paying a premium for a target is efficiency gains, which are often achieved through an elimination of duplication. 
D)  A chief executive of an inefficiently run corporation can be ousted by current shareholders voting to replace the board of directors, and in fact a large number of ineffective managers are replaced in this way.

Question 6

The merger of two companies in the same industry that make products required at different stages of the production cycle is called ________.

Accepted Answer

A)  economies of scope 
B)  vertical integration 
C)  economies of scale 
D)  horizontal integration 
A)  economies of scope 
B)  vertical integration 
C)  economies of scale 
D)  horizontal integration

Question 7

The period of the ________ 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 8

Which of the following statements regarding mergers and diversification is FALSE?

Accepted Answer

A)  Because it may be easier to measure performance accurately in a conglomerate, agency costs may reduce and resources may be more efficiently allocated. 
B)  Because these employees 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 reduce and resources may be more efficiently allocated. 
B)  Because these employees 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 9

Use the information for the question(s) below.
Martin Manufacturing has earnings per share (EPS) of $3.00, 5 million shares outstanding, and a share price of $32. Martin is considering buying Luther Industries, which has earnings per share of $2.50, 2 million shares outstanding, and a share price of $20. Martin will pay for Luther by issuing new shares. There are no expected synergies from the transaction.
-Assume that Martin pays no premium to acquire Luther. Calculate Martin's price-earnings (P/E) ratio both pre and post merger.

Accepted Answer

Premerger P/E = price per share / earnin

Question 10

Consider two firms, Thither and Yon. Both companies will either make $30 million or lose $10 million every year with equal probability. The companies' profits are perfectly negatively correlated. What are the expected after-tax profits of Thither in any year, assuming a corporate tax rate of 35% and no tax loss carry back or carry forward?

Accepted Answer

A)  $19.5 million 
B)  $6.5 million 
C)  $4.75 million 
D)  -$6.5 million 
A)  $19.5 million 
B)  $6.5 million 
C)  $4.75 million 
D)  -$6.5 million

Question 11

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 12

Which of the following questions is FALSE?

Accepted Answer

A)  Any acquirer shares received in full or partial exchange for target shares triggers an immediate tax liability for target shareholders. 
B)  In a friendly takeover, the target board of directors supports the merger, negotiates with potential acquirers, and agrees on a price that is ultimately put to a shareholder vote. 
C)  How the acquirer pays for the target affects the taxes of both the target shareholders and the combined firm. 
D)  If the acquirer purchases the target assets directly (rather than the target stock), then it can step up the book value of the target's assets to the purchase price. 
A)  Any acquirer shares received in full or partial exchange for target shares triggers an immediate tax liability for target shareholders. 
B)  In a friendly takeover, the target board of directors supports the merger, negotiates with potential acquirers, and agrees on a price that is ultimately put to a shareholder vote. 
C)  How the acquirer pays for the target affects the taxes of both the target shareholders and the combined firm. 
D)  If the acquirer purchases the target assets directly (rather than the target stock), then it can step up the book value of the target's assets to the purchase price.

Question 13

You work for a levered buyout firm and are evaluating a potential buyout of Boogle Inc. Boogle's stock price is $18, and it has 3 million shares outstanding. You believe that if you buy the company and replace its dismal management team, its value will increase by 50%. You are planning on doing a levered buyout of Boogle and will offer $25 per share for control of the company. Assuming you get 50% control, what will your gain from the transaction be?

Accepted Answer

The initial value of Boogle is $18 × 3 m

Question 14

An extremely lucrative severance package that is guaranteed to a firm's senior managers in the event that the firm is taken over and the managers are let go is called a ________.

Accepted Answer

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

Question 15

KT corporation has announced plans to acquire MJ corporation. KT is trading for $25 per share and MJ is trading for $45 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 ratio < @#IMG-DLM&_TB

Question 16

Which of the following statements regarding recapitalization as a takeover defense is FALSE?

Accepted Answer

A)  Another defense against a takeover is a recapitalization, in which a company changes its capital structure to make itself less attractive as a target. 
B)  Restructuring itself can produce efficiency gains, often removing the principal motivation for the takeover in the first place. 
C)  By increasing leverage on its own, the target firm can reap the benefit of the interest tax shields. 
D)  In many cases, a substantial portion of the synergy gains that an acquirer anticipates from a takeover are savings from a decrease in leverage as well as other cost reductions. 
A)  Another defense against a takeover is a recapitalization, in which a company changes its capital structure to make itself less attractive as a target. 
B)  Restructuring itself can produce efficiency gains, often removing the principal motivation for the takeover in the first place. 
C)  By increasing leverage on its own, the target firm can reap the benefit of the interest tax shields. 
D)  In many cases, a substantial portion of the synergy gains that an acquirer anticipates from a takeover are savings from a decrease in leverage as well as other cost reductions.

Question 17

On average, when a bid is announced, the stock price of the target drops.

Accepted Answer

A) True 
 B)False

Question 18

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.

Question 19

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

Question 20

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

Exam 22: Mergers and Acquisitions

Which of the following statements regarding poison pills is FALSE?

A rights offering that gives existing target shareholders the right to buy shares in either the target or an acquirer at a deeply discounted price once certain conditions are met is called a ________.

Which of the following statements regarding vertical integration is FALSE?

Which of the following statements regarding efficiency gains is FALSE?

The merger of two companies in the same industry that make products required at different stages of the production cycle is called ________.

The period of the ________ 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.

Which of the following statements regarding mergers and diversification is FALSE?

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

Which of the following questions is FALSE?

An extremely lucrative severance package that is guaranteed to a firm's senior managers in the event that the firm is taken over and the managers are let go is called a ________.

Which of the following statements regarding recapitalization as a takeover defense is FALSE?

On average, when a bid is announced, the stock price of the target drops.

Which of the following statements is FALSE?

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

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?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

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