Deck 23: Mergers and Acquisitions

Question 1

In a typical merger, only the target firm retains its individual identity.

Answer 1

False

Question 2

Being acquired by another firm is an effective method of replacing senior management.

Answer 2

True

Question 3

An acquisition of a firm through the purchase of shares of the outstanding stock is frequently more expensive than if the two firms had just merged.

Answer 3

True

Question 4

An acquisition of a firm through the purchase of shares of the outstanding stock can be accomplished without the involvement of the target firm's board of directors.

Question 5

The value of a strategic fit is easy to estimate using discounted cash flow analysis.

Question 6

An advantage of a merger is that it guarantees efficiency and improvement

Question 7

Leveraged buyouts often create entrepreneurial incentives for managers.

Question 8

The required repayment of the debt used in leveraged buyouts induces reduced managerial efficiencies.

Question 9

In a typical consolidation, the target retains its individual identity.

Question 10

The net present value of an acquisition should have no bearing on whether or not the acquisition occurs.

Question 11

An acquisition of a firm through the purchase of shares of the outstanding may be made either by circular bid or by stock exchange bid.

Question 12

In a successful takeover, the shareholders of the acquiring firm usually realize substantial gains.

Question 13

An argument against using an acquisition by tender offer as opposed to a merger is that the target firm's management and board of directors can be bypassed.

Question 14

An advantage of a merger is that there is no need to transfer title to the individual assets of the acquired firm to the acquiring firm.

Question 15

A tender offer must be approved by a vote of the shareholders of the target firm, while a merger does not.

Question 16

Bureaucratic obstacles are often eliminated in leveraged buyouts.

Question 17

Conglomerate acquisitions are least likely to result in synergistic increases in value.

Question 18

Acquisitions are often relatively complex from an accounting and tax point of view.

Question 19

A disadvantage of a merger is that it requires shareholder approval of both firms.

Question 20

An acquisition of a firm through the purchase of shares of the outstanding stock can be accomplished without having the shareholders vote on the acquisition.

Question 21

Revenue enhancement represents a synergistic benefits from a merger.

Question 22

Asset write-ups refers to synergistic gains due to tax benefits in an acquisition.

Question 23

Unused debt capacity refers to synergistic gains due to tax benefits in an acquisition.

Question 24

For an acquisition to be tax-free the acquirer must apply to the CRA for tax-free status prior to launching the acquisition bid.

Question 25

For an acquisition to be tax-free the acquirer must offer cash to the equity holders of the acquired firm.

Question 26

In general, the evidence indicates that mergers create wealth for the stockholders of the acquiring firm.

Question 27

In an economic sense, goodwill created in an acquisition represents blue sky, that is, the acquiring firm is essentially paying a premium for the purchase and getting nothing of value for this part of the price.

Question 28

For an acquisition to be tax-free, the acquisition must involve two Canadian corporations subject to corporate income tax.

Question 29

Marketing gains refer to synergistic gains from merger due to revenue enhancement.

Question 30

A feature of the purchase method of accounting includes the balance sheets of the acquirer and the acquired are just added together.

Question 31

Better use of tax losses is a possible source of cash flow benefits derived from a merger.

Question 32

The incremental cash flows of a merger can relate to changes in the number of outstanding shares of stock.

Question 33

A feature of the purchase method of accounting includes the difference between the purchase price and the estimated fair market value of the net assets of the target firm must be classified as goodwill and recorded on the balance sheet.

Question 34

An improvement in the marketing of the firm's products is a possible source of cash flow benefits derived from a merger.

Question 35

It has been suggested that the reason why the stockholders in acquiring firms may not benefit to any significant degree from an acquisition is because the target firms tend to be much larger than the acquiring firms.

Question 36

Increased capital needs represents synergistic benefits from a merger.

Question 37

A feature of the purchase method of accounting includes the assets of the target firm must be shown at their fair market value on the books of the bidder.

Question 38

An increase in firm size so that diseconomies of scale are realized represents a potential gain from an acquisition.

Question 39

Economy of scale benefits is a possible source of cash flow benefits derived from a merger.

Question 40

Marketing gains refer to synergistic gains due to cost reductions in an acquisition.

Question 41

A common reason why the management of a newly merged firm will opt to divest some of its operations is to raise cash.

Question 42

Synergistic benefits can often be realized by merging with a firm that has unused debt capacity.

Question 43

A reduction in the level of debt represents potential tax gains from an acquisition.

Question 44

Synergistic benefits can often be realized by merging with a firm that has net operating losses.

Question 45

A common reason why the management of a newly merged firm will opt to divest some of its operations is to avoid the taxes normally imposed on a stock acquisition.

Question 46

Synergistic benefits can often be realized by merging with a firm that has an ineffective marketing program.

Question 47

Strategic benefits refer to synergistic gains from merger due to revenue enhancement.

Question 48

It appears that the gains reaped by target firms from tender offer takeovers are higher than the gains realized from mergers.

Question 49

Synergistic benefits can often be realized by merging with a firm that uses complementary resources.

Question 50

A proposed acquisition may create synergy by reducing the utilization of the acquiring firm's assets.

Question 51

On average, friendly mergers may be arranged at lower premiums than unfriendly tender offers.

Question 52

When one firm acquires another solely for the purpose of diversification, the merger is called a horizontal merger.

Question 53

Complementary resources refers to synergistic gains due to tax benefits in an acquisition.

Question 54

A common reason why the management of a newly merged firm will opt to divest some of its operations is to comply with antitrust regulations.

Question 55

Economies of scale refer to synergistic gains due to cost reductions in an acquisition.

Question 56

Tax reductions represents a synergistic benefits from a merger.

Question 57

Utilizing any unused debt capacity is a possible source of cash flow benefits derived from a merger.

Question 58

Stockholders like mutual funds; therefore, they will pay a premium for the shares of a firm that is a conglomerate because the firm is essentially a mutual fund.

Question 59

Horizontal acquisitions are least likely to result in synergistic increases in value.

Question 60

An increase in surplus funds represents potential tax gains from an acquisition.

Question 61

Tuesday's and Thursday's are all-equity firms. Tuesday's has 5,600 shares outstanding at a market price of $28 a share. Thursday's has 4,500 shares outstanding at a price of $42 a share. Thursday's is acquiring Tuesday's. The incremental value of the acquisition is $4,200. What is the value of Tuesday's to Thursday's?

A) $130,200
B) $152,600
C) $156,800
D) $161,000
E) $165,400

Question 62

Firm A is acquiring Firm B for $59,000 in cash. Firm A has 4,600 shares of stock outstanding at a market value of $19 a share. Firm B has 2,500 shares of stock outstanding at a market price of $21 a share. Neither firm has any debt. The net present value of the acquisition is $1,800. What is the value of Firm A after the acquisition?

A) $74,500
B) $89,200
C) $136,700
D) $141,700
E) $146,400

Question 63

Alto and Solo are all-equity firms. Alto has 2,400 shares outstanding at a market price of $24 a share. Solo has 4,000 shares outstanding at a price of $17 a share. Solo is acquiring Alto for $63,000 in cash. The incremental value of the acquisition is $5,500. What is the net present value of acquiring Alto to Solo?

A) $100
B) $400
C) $1,200
D) $2,400
E) $5,500

Question 64

By lowering the percentage of shareholders which must approve the merger, a firm makes an acquisition of that firm more difficult.

Question 65

It has been suggested that the reason why the stockholders in acquiring firms may not benefit to any significant degree from an acquisition is because management may have priorities other than the interest of the stockholders.

Question 66

Firm A can acquire firm B for $120,000 in cash or in shares of firm A stock. The synergy value is $36,000.
What is the value of the post-merger firm if the merger is an all cash deal?

A) $126,000
B) $142,000
C) $178,000
D) $214,000
E) $334,000

Question 67

By Staggering the election of board members, a firm makes an acquisition of that firm more difficult.

Question 68

An argument against using an acquisition by tender offer as opposed to a merger is that a significant number of minority shareholders may hold out.

Question 69

Neither acquiring firm A nor target firm B has any debt. The incremental value of the proposed acquisition is estimated to be $250,000. Firm B is willing to be acquired for $30 per share in cash. What is the NPV for acquiring firm B?

A) The NPV is negative
B) $115,000
C) $160,000
D) $235,000
E) $260,000

Question 70

Suppose you have the following information concerning an acquiring firm (A) and a target firm (B). Neither firm has any debt. The incremental value of the acquisition is estimated to be $250,000. Firm B is willing to be acquired for $540,000 worth of Firm A's stock. What is the NPV of acquiring Firm B?

A) The NPV is negative
B) $94,588
C) $102,120
D) $118,156
E) $162,015

Question 71

Firm S is planning on merging with Firm T. Firm S will pay Firm T's stockholders the current value of their stock in shares of Firm S. Firm S currently has 5,100 shares of stock outstanding at a market price of $15 a share. Firm T has 2,600 shares outstanding at a price of $19 a share. What is the value of the merged firm?

A) $76,500
B) $87,200
C) $125,900
D) $128,400
E) $131,600

Question 72

Calipers, Inc. is acquiring Johnson Warehouse for $47,000 in cash. Calipers has 2,700 shares of stock outstanding at a market value of $32 a share. Johnson Warehouse has 3,200 shares of stock outstanding at a market price of $14 a share. Neither firm has any debt. The net present value of the acquisition is $1,800. What is the value of Caliper's after the acquisition?

A) $84,600
B) $86,000
C) $110,000
D) $124,800
E) $133,000

Question 73

All else equal, the cost of an acquisition will likely be higher if the acquirer uses its own common stock rather than cash to complete the purchase.

Question 74

Downing's Boats has agreed to be acquired by Schooners, Inc. for $325,000 worth of Schooners stock. Downing's currently has 12,500 shares of stock outstanding at a price of $23.80 a share. Schooners has 32,000 shares outstanding at a price of $46. The incremental value of the acquisition is $11,700. What is the merger premium per share?

A) $1.00
B) $1.20
C) $1.80
D) $2.20
E) $2.80

Question 75

The Sandwich Shoppe has 1,600 shares outstanding at a market price per share of $11. Joe's Slop Hut has 1,800 shares outstanding at a market price of $14 a share. Neither firm has any debt. Joe's Slop Hut is acquiring The Sandwich Shoppe. The incremental value of the acquisition is $1,600. What is the value of The Sandwich Shoppe to Joe's Slop Hut?

A) $1,600
B) $2,200
C) $17,600
D) $19,200
E) $22,500

Question 76

It has been suggested that the reason why the stockholders in acquiring firms may not benefit to any significant degree from an acquisition is because the price paid for the target firm might equal that firm's total value.

Question 77

The Lily Pad has 1,500 shares outstanding at a market price per share of $12. The Specialty Shop has 2,600 shares outstanding at a market price of $18 a share. Neither firm has any debt. The Specialty Shop is acquiring The Lily Pad for $20,000 in cash. The incremental value of the acquisition is $3,100. What is the value of The Lily Pad to The Specialty Shop?

A) $2,000
B) $9,000
C) $11,600
D) $16,900
E) $21,100

Question 78

Capitol Stores and The Back Corner are all-equity firms. Capitol Stores has 1,750 shares outstanding at a market price of $18.40 a share. The Back Corner has 2,100 shares outstanding at a price of $34 a share. The Back Corner is acquiring Capitol Stores for $34,900 in cash. What is the merger premium per share?

A) $0.46
B) $0.89
C) $1.54
D) $1.65
E) $2.00

Question 79

Firm X is planning on merging with Firm Y. Firm X will pay Firm Y's stockholders the current value of their stock in shares of Firm X. Firm X currently has 3,900 shares of stock outstanding at a market price of $40 a share. Firm Y has 2,200 shares outstanding at a price of $17 a share. The after-merger earnings will be $7,800. What will the earnings per share be after the merger?

A) $1.61
B) $1.67
C) $1.75
D) $1.81
E) $1.86

Question 80

Jennifer's Boutique has 2,100 shares outstanding at a market price per share of $26. Sally's has 3,000 shares outstanding at a market price of $41 a share. Neither firm has any debt. Sally's is acquiring Jennifer's for $58,000 in cash. What is the merger premium per share?

A) $1.43
B) $1.62
C) $1.81
D) $2.04
E) $2.07