Question 1

Mergers that attempt to bootstrap earnings may obtain increased current earnings per share at the expense of:

Accepted Answer

A)   a higher price-earnings ratio.
B)   higher total combined market value.
C)   reduced future growth prospects.
D)   increased free cash flow. C

Question 2

What does empirical evidence suggest about the distribution of gains from mergers?

Accepted Answer

A)   Shareholders of the acquired firm gain the most.
B)   Shareholders of the acquiring firm gain the most.
C)   Neither group of shareholders is likely to gain.
D)   Both groups of shareholders gain equally. A

Question 3

The cost of a merger equals the:

Accepted Answer

A)   cash paid for the target firm.
B)   increase in total earnings minus the price paid.
C)   premium paid over the target's value as a separate entity.
D)   sum of cash and stock paid for the target firm. C

Question 4

Target firms frequently deter potential bidders by devising poison pills,which make the company unappetizing.

Accepted Answer

A) True 
 B)False

Question 5

Amendments to the corporate charter that attempt to circumvent mergers are known as poison pills.

Accepted Answer

A) True 
 B)False

Question 6

Allergan's sale of its generic drug business to Teva Pharmaceutical was an example of a divestiture.

Accepted Answer

A) True 
 B)False

Question 7

In mergers financed by cash,the merger cost is not affected by the size of the merger gain.

Accepted Answer

A) True 
 B)False

Question 8

Splitting one firm into four separate firms is an example of a:

Accepted Answer

A)   leveraged buyout.
B)   spin-off.
C)   management buyout.
D)   tender offer.

Question 9

Instead of selling part of its operations,companies sometimes spin off a business by separating it from the parent firm and distributing to its shareholders the stock in the newly independent company.

Accepted Answer

A) True 
 B)False

Question 10

If investors believe a firm may be acquired,its market value is likely to be higher than its stand-alone value.

Accepted Answer

A) True 
 B)False

Question 11

Strictly speaking,the purchase of the stock or assets of another firm is an acquisition.

Accepted Answer

A) True 
 B)False

Question 12

ABC Corp.has offered 1 million shares having a total market value of $8 million for XYZ.After the merger is announced,shares in ABC trade for $7 each.If ABC is confident about XYZ's value,then the cost of the merger:

Accepted Answer

A)   increased by $1 million.
B)   decreased by $1 million.
C)   increased by $9 million.
D)   remained constant.

Question 13

XYZ Corp has made a cash tender offer for 2 million shares of ABC Corp.at a price of $20,which is $6 higher than ABC's current stand-alone value.What is the cost of the merger?

Accepted Answer

A)   $40 million
B)   $28 million
C)   $12 million
D)   Zero

Question 14

CBA Corp.is worth $15 million as a stand-alone firm.ABC Corp.has offered 350,000 shares valued at $50 each to acquire CBA.After the announcement,however,the price of ABC's shares falls to $45.What was the cost of the merger?

Accepted Answer

A)   −$1.75 million
B)   $0.75 million
C)   $1.75 million
D)   $3.25 million

Question 15

On average,stockholders in target firms earn higher returns from mergers than the acquiring firm's stockholders.

Accepted Answer

A) True 
 B)False

Question 16

Why might shareholders of an acquiring firm prefer to finance mergers with stock rather than with cash?

Accepted Answer

A)   Stock financing is always less costly due to tax consequences.
B)   The EPS decreases when mergers are financed with cash.
C)   Target-firm shareholders will bear part of the cost if merger benefits were overestimated.
D)   All merger gains go to the acquirer when financed with stock.

Question 17

The 1980s were a time of little merger activity.

Accepted Answer

A) True 
 B)False

Question 18

Mergers may provide reductions in average production cost as a result of:

Accepted Answer

A)   increased market price.
B)   increased financing.
C)   economies of scale.
D)   diversification.

Question 19

A merger is expected to produce cost savings of $50 million and the acquired firm's shareholders will receive a premium of 20% over the $150 million value of their firm.The gain of the merger to the acquirer is:

Accepted Answer

A)   $20 million.
B)   $30 million.
C)   $50 million.
D)   $130 million.

Question 20

The expected savings from merging two banks often come from consolidating operations and eliminating redundant costs.

Accepted Answer

A) True 
 B)False

Exam 21: Mergers,Acquisitions,and Corporate Control

Mergers that attempt to bootstrap earnings may obtain increased current earnings per share at the expense of:

What does empirical evidence suggest about the distribution of gains from mergers?

The cost of a merger equals the:

Target firms frequently deter potential bidders by devising poison pills,which make the company unappetizing.

Amendments to the corporate charter that attempt to circumvent mergers are known as poison pills.

Allergan's sale of its generic drug business to Teva Pharmaceutical was an example of a divestiture.

In mergers financed by cash,the merger cost is not affected by the size of the merger gain.

Splitting one firm into four separate firms is an example of a:

Instead of selling part of its operations,companies sometimes spin off a business by separating it from the parent firm and distributing to its shareholders the stock in the newly independent company.

If investors believe a firm may be acquired,its market value is likely to be higher than its stand-alone value.

Strictly speaking,the purchase of the stock or assets of another firm is an acquisition.

ABC Corp.has offered 1 million shares having a total market value of $8 million for XYZ.After the merger is announced,shares in ABC trade for $7 each.If ABC is confident about XYZ's value,then the cost of the merger:

XYZ Corp has made a cash tender offer for 2 million shares of ABC Corp.at a price of $20,which is $6 higher than ABC's current stand-alone value.What is the cost of the merger?

CBA Corp.is worth $15 million as a stand-alone firm.ABC Corp.has offered 350,000 shares valued at $50 each to acquire CBA.After the announcement,however,the price of ABC's shares falls to $45.What was the cost of the merger?

On average,stockholders in target firms earn higher returns from mergers than the acquiring firm's stockholders.

Why might shareholders of an acquiring firm prefer to finance mergers with stock rather than with cash?

The 1980s were a time of little merger activity.

Mergers may provide reductions in average production cost as a result of:

A merger is expected to produce cost savings of $50 million and the acquired firm's shareholders will receive a premium of 20% over the $150 million value of their firm.The gain of the merger to the acquirer is:

The expected savings from merging two banks often come from consolidating operations and eliminating redundant costs.