Question 1

All of the following are examples of cost reductions that can result from an acquisition except:

Accepted Answer

A)   reducing the number of management personnel required.
B)   lowering office costs by combining job functions.
C)   allocating fixed overhead across a wider range of products.
D)   benefiting from economies of scale when purchasing raw materials.
E)   increasing the firm's market share. E

Question 2

Studies conducted on mergers and acquisitions have generally concluded that:

Accepted Answer

A)   both acquiring and target firm's shareholders benefit approximately equally in most situations.
B)   all involved shareholders tend to neither gain nor lose much as a result of these transactions.
C)   only highly leveraged acquisitions produce any shareholder gains.
D)   these transactions are financially beneficial to target shareholders.
E)   acquiring firm's shareholders gain at the expense of the target firm's shareholders. D

Question 3

Which one of the following defensive tactics is designed to prevent a "two-tier" takeover offer?

Accepted Answer

A)   Bear hug
B)   Poison put
C)   Shark repellent
D)   Dual class capitalization
E)   Fair price provision E

Question 4

Dixie and ten of her wealthy friends formed a group and borrowed the funds necessary to acquire all of the outstanding shares of Southern Fried Chicken. This transaction is known as a:

Accepted Answer

A)   proxy contest.
B)   management buyout.
C)   vertical acquisition.
D)   leveraged buyout.
E)   unfriendly takeover.

Question 5

An acquisition completed simply to diversify a firm will:

Accepted Answer

A)   create excessive synergy in almost all situations.
B)   lower systematic risk and increase the value of the firm.
C)   benefit the firm by eliminating unsystematic risk.
D)   benefit the shareholders by providing otherwise unobtainable diversification.
E)   generally not add any value to the firm.

Question 6

George's Equipment is planning on merging with Nelson Machinery. George's will pay Nelson's shareholders the current value of their stock in shares of George's Equipment. George's currently has 4,600 shares of stock outstanding at a market price of $31 a share. Nelson's has 1,600 shares outstanding at a price of $38 a share. What is the value per share of the merged firm assuming there is no synergy?

Accepted Answer

A)   $30.77
B)   $31.00
C)   $31.29
D)   $31.74
E)   $32.06

Question 7

Which one of the following statements correctly applies to a legally defined merger?

Accepted Answer

A)   The acquiring firm retains its identity and absorbs only the assets of the acquired firm.
B)   The acquired firm is completely absorbed and ceases to exist as a separate legal entity.
C)   A new firm is created that includes all the assets and liabilities of the acquiring firm plus the assets only of the acquired firm.
D)   A new firm is created from the assets and liabilities of both the acquiring and acquired firms.
E)   A merger reclassifies the acquired firm into a new entity that becomes a subsidiary of the acquiring firm.

Question 8

A group of individual investors is in the process of acquiring all of the publicly traded shares of OM Outfitters. Once the shares are acquired, they will no longer be publicly traded. Which of the following terms applies to this process?

Accepted Answer

A)   Tender offer
B)   Proxy contest
C)   Going-private transaction
D)   Merger
E)   Consolidation

Question 9

Firms A and B formally agree to each put up $25 million to create firm C. Firm C will perform environmental testing on the products produced by both Firm A and Firm B. Which one of the following terms describes Firm C?

Accepted Answer

A)   Joint venture
B)   Going-private transaction
C)   Conglomerate
D)   Subsidiary
E)   Leveraged buyout

Question 10

The current officers of MTC have decided to form a private investment group for the sole purpose of purchasing MTC. These individuals will borrow 90 percent of their offer price. The purchase of this firm is referred to as a:

Accepted Answer

A)   conglomeration.
B)   proxy contest.
C)   merger.
D)   management buyout.
E)   consolidation.

Question 11

Which one of the following is not required for an acquisition to be considered tax-free?

Accepted Answer

A)   The continuity of equity interest
B)   A business purpose, other than avoiding taxes, for the acquisition
C)   The obtainment of equity shares in the acquirer by the target firm's shareholders
D)   A cash payment to the target firm's shareholders
E)   An exchange that is considered to be of equal value

Question 12

Taylor's Hardware is acquiring The Corner Store for $27,400 in cash. Taylor's has 1,500 shares of stock outstanding at a market value of $44 a share. The Corner Store has 2,100 shares of stock outstanding at a market price of $12 a share. Neither firm has any debt. The incremental value of the acquisition is $1,700. What is the value of Taylor's Hardware after the acquisition?

Accepted Answer

A)   $49,000
B)   $50,300
C)   $57,300
D)   $65,500
E)   $72,400

Question 13

Rosie's has 2,200 shares outstanding at a market price per share of $28.15. Sandy's has 4,500 shares outstanding at a market price of $38 a share. Neither firm has any debt. Sandy's is acquiring Rosie's. The incremental value of the acquisition is $1,800. What is the value of Rosie's to Sandy's?

Accepted Answer

A)   $107,270
B)   $48,770
C)   $54,300
D)   $68,700
E)   $63,730

Question 14

All of the following represent potential tax benefits that can directly result from an acquisition except:

Accepted Answer

A)   increasing the depreciation expense.
B)   using tax losses.
C)   increasing surplus funds.
D)   increasing the use of leverage.
E)   increasing interest expense.

Question 15

The purchase accounting method requires that:

Accepted Answer

A)   the excess of the purchase price over the fair market value of the target firm be recorded as a one-time expense on the income statement of the acquiring firm.
B)   goodwill be amortized on a yearly basis for financial statement purposes.
C)   the equity of the acquiring firm be reduced by the excess of the purchase price over the fair market value of the target firm.
D)   the assets of the target firm be recorded at their fair market value on the balance sheet of the acquiring firm.
E)   the excess amount paid for the target firm be recorded as a tangible asset on the books of the acquiring firm.

Question 16

Sleep Tight is acquiring Restful Inns for $52,500 in cash. Sleep Tight has 3,000 shares of stock outstanding at a market price of $38 a share. Restful Inns has 2,100 shares of stock outstanding at a market price of $24 a share. Neither firm has any debt. The incremental value of the acquisition is $1,700. What is the price per share of Sleep Tight after the acquisition?

Accepted Answer

A)   $36.92
B)   $37.30
C)   $37.87
D)   $39.19
E)   $39.29

Question 17

Which one of the following pairs of businesses could probably benefit the most by sharing complementary resources?

Accepted Answer

A)   Roofer and architect
B)   Tennis court and pharmacy
C)   Ski resort and golf course
D)   Dry cleaner and insurance office
E)   Trucking company and lawn service

Question 18

Which one of the following statements is correct?

Accepted Answer

A)   An increase in the earnings per share as a result of an acquisition will increase the price per share of the acquiring firm.
B)   The price-earnings ratio must remain constant as a result of an acquisition that fails to create value.
C)   If firm A acquires firm B then the number of shares in AB will equal the number of shares of A plus the number of shares of B.
D)   The price-earnings ratio can decrease even when the net present value of a merger is equal to zero.
E)   Diversification is one of the greatest benefits derived from an acquisition.

Question 19

Mercantile Exchange is being acquired by National Sales. The incremental value of the acquisition is $2,500. Mercantile Exchange has 1,200 shares of stock outstanding at a price of $26 a share. National Sales has 6,500 shares of stock outstanding at a price of $54 a share. What is the net present value of the acquisition given that the actual cost of the acquisition using company stock is $32,780?

Accepted Answer

A)   $887
B)   $1,011
C)   $920
D)   $367
E)   $1,046

Question 20

The Cookie Shoppe and Sweet Treats are all-equity firms. The Cookie Shoppe has 3,400 shares outstanding at a market price of $31 a share. Sweet Treats has 6,100 shares outstanding at a price of $42 a share. Sweet Treats is acquiring the Cookie Shoppe for $107,500 in cash. The incremental value of the acquisition is $2,900. What is the net present value of the acquisition?

Accepted Answer

A)   $1,600
B)   $800
C)   $700
D)   −$2,100
E)   −$300

Exam 26: Mergers and Acquisitions