Deck 16: Tax Issues in Mergers Acquisitions

Question 1

In the United States, amortization of goodwill is deductible for tax purposes over a period of:

A) 5 years
B) 10 years
C) 15 years
D) 20 years

Answer 1

C

Question 2

In a Type A reorganization in the United States, at least what percent of the payment to the target must be stock in the acquiring company:

A) 20%
B) 50%
C) 80%
D) 100%
E) No specific percentage

Answer 2

B

Question 3

Research by Auerbach and Reishus found that:

A) Firms that merge more frequently do not borrow more than firms that have exhibited a less tendency to merge
B) Firms that merge more frequently increasingly use stock as a function on the number of deals they do
C) Private equity firms use less debt when they complete deals
D) All the above
E) Both a and b True or False Questions

Answer 3

A

Question 4

Research by Hayn on the role that the tax attributes of transactions played in determining abnormal returns for targets and acquirers found:

A) Tax-free status is a prerequisite of certain deals. Targets that do not receive such a status may decline to continue with the deal and may look to other bidders who can structure the transaction so that such a status is attained
B) Potential tax benefits stemming from net operating loss carryforwards and unused tax credits positively affect announcement period returns of firms involved in tax-free acquisitions
C) Capital gains and the step-up in the acquired assets basis affects returns of firms involved in taxable acquisitions
D) All the above

Question 5

In the United States and under the purchase method, the acquiring company is entitled to income of the acquired company only from the date of purchase.

Question 6

In a Type B reorganization in the United States, cash may constitute no more than 20% of the consideration paid for the target's shares.

Question 7

Research by Auerbach and Poterba and by Altshuler and Auerbach on tax loss carry forwards indicate that the following tax-related factor may offset the otherwise full value of the target's losses:

A) Failure to achieve synergistic gains
B) Improved research and development
C) Expiration
D) Post-acquisition litigation
E) All the above

Question 8

One advantage of a Type C reorganization is that the bidder does not need to be concerned about the target soliciting its shareholder's approval of the transaction.

Question 9

Answer: Research by Scholes and Wolfson on M&As before 1981, between 1981 and 1986, and after 1986 found:

A) No differences in M&A activity over the 1981-1986 period compared the pre-1981
B) Intensified level of merger activity to tax motives that were put in place with the 1981 Act and eliminated by the 1986 Act
C) No clear trends in the data
D) None of the above

Question 10

In a Type C reorganization, cash may be used only if 50% of the target shares were purchased with stock.

Question 11

Research by Hong, Mandelker, and Kaplan found that stock prices were significantly affected by the choice of acquisition accounting treatments.

Question 12

In a Type A reorganization in the United States, the following consideration may be used to acquire a target:

A) Stock
B) Cash
C) Non-equity securities
D) All the above

Question 13

Answer: There are different types of Type D reorganizations and one type covers acquisitions while another type covers breakups such as spinoffs.

Question 14

In a Type B reorganization in the United States, at least what percent of the payment to the target must be stock in the acquiring company:

A) 20%
B) 50%
C) 80%
D) 100%
E) No specific percentage

Question 15

Research seeking to find the existence of asset basis step-up as a motivating factor for mergers and acquisitions before the Tax Reform Act of 1986, such as research by Auerbach and Reishus, confirmed that asset basis step-up was a significant motivating factor.

Question 16

The United States just lowered its corporate tax rates and this should greatly reduce, if not eliminate, the demand for tax-based corporate inversion?

Question 17

In the United States, up until 2001, there was only one accepted accounting treatment for mergers and acquisitions-pooling.

Question 18

In the United States, goodwill is amortized over a period not exceeding:

A) 10 years
B) 20 years
C) 30 years
D) 40 years

Question 19

In a Type B Reorganization, the stock purchases must be completed over no longer than:

A) 6-month period
B) 9-month period
C) 12-month period
D) 3-month period
E) None of the above

Question 20

In the United States, a transaction may be partially taxable if the consideration is a combination of stock and cash.