Deck 24: Mergers and Acquisitions

Question 1

In Canada and most U.S.states,the law requires that when existing shareholders of a target firm are forced to sell their shares,they receive a ________ for their shares.

A) fair value
B) premium
C) cash offer
D) stock payment
E) cash and stock payment

Answer 1

fair value

Question 2

The synergies of a merger add so much value to the combined firm that,upon announcement of a merger,the stock prices of both the target and the acquirer increase substantially.

Answer 2

False

Question 3

What is a conglomerate merger?

Answer 3

A merger in which the target and acquirer operate in unrelated industries.

Question 4

The takeover market is characterized by peaks of heavy activity followed by quiet troughs of few transactions.

Question 5

A merger in which the target and acquirer operate in unrelated industries is called a(n)

A) horizontal merger.
B) vertical merger.
C) conglomerate merger.
D) industrial merger.
E) complementary merger.

Question 6

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

A) economies of scope.
B) vertical integration.
C) economies of scale.
D) horizontal integration.
E) efficiency gains.

Question 7

This period is known as the conglomerate wave because firms typically acquired firms in unrelated businesses:

A) 1960s
B) 1970s
C) 1980s
D) 1990s
E) 2000s

Question 8

Revenue enhancement synergies are more common and easier to achieve than cost-reduction synergies.

Question 9

Due to strict regulations in Canada and the U.S.,the bidder in a merger will typically be able to acquire a target company for a price less than its current market value.

Question 10

A merger in which the target and acquirer are in the same industry is called a(n)

A) horizontal merger.
B) vertical merger.
C) conglomerate merger.
D) industrial merger.
E) complementary merger.

Question 11

Which of the following statements best describes the average stock price reactions to mergers?

A) Both the target's and the acquirer's share prices increase slightly.
B) Both the target's and the acquirer's share prices increase substantially.
C) The target's share price increases substantially, while the acquirer's share price falls substantially.
D) The target's share price increases substantially, while the acquirer's share price increases only slightly.
E) The target's share price falls slightly, while the acquirer's share price increases substantially.

Question 12

This period 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:

A) 1960s
B) 1970s
C) 1980s
D) 1990s
E) 2000s

Question 13

Merger activity is greater during economic expansions than during contractions and correlates with bull markets.

Question 14

A merger in which the target's industry buys or sells to the acquirer's industry is called a(n)

A) horizontal merger.
B) vertical merger.
C) conglomerate merger.
D) industrial merger.
E) complementary merger.

Question 15

The fact that a large company can enjoy savings from producing goods in high volume that are not available to a small company is called

A) economies of scale.
B) horizontal integration.
C) vertical integration.
D) economies of scope.
E) monopoly gains.

Question 16

Why have conglomerate mergers fallen out of favour?

Question 17

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

A) horizontal integration.
B) vertical integration.
C) economies of scale.
D) economies of scope.
E) monopoly gains.

Question 18

This period is known for known for "strategic" or "global" deals that were more likely to be friendly and to involve companies in related businesses; these mergers often were designed to create strong firms on a scale that would allow them to compete globally:

A) 1960s
B) 1970s
C) 1980s
D) 1990s
E) 2000s

Question 19

Explain the difference between a horizontal merger and a vertical merger.

Question 20

Most acquirers pay an acquisition premium for a target.Upon announcement of the bid,the target's stock price increases,on average,so that the stock price is the same as the price bid by the acquirer.

Question 21

Which of the following is an example of a merger undertaken in order to achieve gains from acquiring expertise?

A) A car manufacturer acquires a car parts supplier.
B) A breakfast cereal producer acquires another breakfast cereal producer and the combined firm is able to negotiate a reduced cost for the grain used in its cereal.
C) A telecommunications firm acquires another telecommunications firm and the combined firm serves a large percentage of the market.
D) An accounting firm acquires another accounting firm and the combined firm is able to eliminate duplication among administrative positions.
E) A video game development firm acquires another video game development firm that specializes in designing games for a new gaming system.

Question 22

Consider two firms,Big Company and Little Enterprises,both with earnings of $6 per share and 2 million shares outstanding.Big is a mature company with few growth opportunities and a stock price of $56 per share.Little is a new firm with much higher growth opportunities and a stock price of $72 per share.Assume Little acquires Big using its own stock and the takeover adds no value.What is the change in Little's price-earnings ratio as a result of the acquisition?

A) 0
B) 9.36
C) -4.70
D) -1.33
E) 1.25

Question 23

Consider two firms,Big Company and Little Enterprises,both with earnings of $6 per share and 2 million shares outstanding.Big is a mature company with few growth opportunities and a stock price of $56 per share.Little is a new firm with much higher growth opportunities and a stock price of $72 per share.Assume Little acquires Big using its own stock and the takeover adds no value.In a perfect capital market,how many shares must Little offer Big's shareholders in exchange for their shares?

A) 1.556 shares of Little for each share of Big Enterprises
B) 0.643 shares of Little for each share of Big Enterprises
C) 1 share of Little for each share of Big Enterprises
D) 1.286 shares of Little for each share of Big Enterprises
E) 0.778 shares of Little for each share of Big Enterprises

Question 24

Which of the following is an example of a merger undertaken in order to achieve monopoly gains?

A) A car manufacturer acquires a car parts supplier.
B) A breakfast cereal producer acquires another breakfast cereal producer and the combined firm is able to negotiate a reduced cost for the grain used in its cereal.
C) A telecommunications firm acquires another telecommunications firm and the combined firm serves a large percentage of the market.
D) An accounting firm acquires another accounting firm and the combined firm is able to eliminate duplication among administrative positions.
E) A video game development firm acquires another video game development firm that specializes in designing games for a new gaming system.

Question 25

Consider two firms,Blue and Berry.Both companies will either make $30 million or lose $5 million every year with equal probability.The companies' profits are perfectly negatively correlated,so that in any year,one company makes $20 million and the other loses $10 million.If the two firms merge but are run as two independent divisions,what is the change in expected after-tax profits of the combined company (BlueBerry)in any year versus the combined expected after-tax profits of the two separate companies in any year,assuming a corporate tax rate of 30% and no tax loss carryback or carryforward?

A) $0
B) $1.5 million
C) $3 million
D) $9 million
E) $9.5 million

Question 26

Pfizer,a pharmaceutical company,has proposed an acquisition of Allergan,another pharmaceutical company.The combined firm is expected to be able to streamline operations by eliminating overlap,and thus reducing costs substantially.What type of synergies are the most likely reason behind this merger?

A) economies of scale
B) vertical integration
C) economies of scope
D) monopoly gains
E) efficiency gains

Question 27

Which of the following is an example of a merger undertaken in order to achieve gains from vertical integration?

A) A car manufacturer acquires a car parts supplier.
B) A breakfast cereal producer acquires another breakfast cereal producer and the combined firm is able to negotiate a reduced cost for the grain used in its cereal.
C) A telecommunications firm acquires another telecommunications firm and the combined firm serves a large percentage of the market.
D) An accounting firm acquires another accounting firm and the combined firm is able to eliminate duplication among administrative positions.
E) A video game development firm acquires another video game development firm that specializes in designing games for a new gaming system.

Question 28

Shaw Communications Inc.proposes a merger with Rogers Communications Inc.The combined firm is expected to serve over 70% of the Canadian telecommunications market.What type of synergies are the most likely reason behind this merger?

A) economies of scale
B) vertical integration
C) expertise
D) monopoly gains
E) efficiency gains

Question 29

General Mills,a producer of breakfast cereal,has proposed an acquisition of Kellogg,another cereal producer.The combined firm is expected to be able to negotiate a reduced cost for the grain used in its cereal.What type of synergies are the most likely reason behind this merger?

A) economies of scale
B) vertical integration
C) economies of scope
D) monopoly gains
E) efficiency gains

Question 30

Consider two firms,Bob Company and Cat Enterprises,both with earnings of $10 per share and 5 million shares outstanding.Cat is a mature company with few growth opportunities and a stock price of $25 per share.Bob is a new firm with much higher growth opportunities and a stock price of $40 per share.Assume Bob acquires Cat using its own stock and the takeover adds no value.What is the change in Bob's price-earnings ratio as a result of the acquisition?

A) 0
B) -2
C) 4
D) -0.75
E) 1.25

Question 31

Consider two firms,Bob Company and Cat Enterprises,both with earnings of $10 per share and 5 million shares outstanding.Cat is a mature company with few growth opportunities and a stock price of $25 per share.Bob is a new firm with much higher growth opportunities and a stock price of $40 per share.Assume Bob acquires Cat using its own stock and the takeover adds no value.In a perfect capital market,how many shares must Bob offer Cat's shareholders in exchange for their shares?

A) 1 share of BobCat for each share of Cat Enterprises
B) 0.625 shares of BobCat company for each share of Cat Enterprises
C) 1.6 shares of BobCat company for each share of Cat Enterprises
D) 0.3846 shares of BobCat company for each share of Cat Enterprises
E) 1.25 shares of BobCat company for each share of Cat Enterprises

Question 32

Which of the following is an example of a merger undertaken in order to achieve efficiency gains?

A) A car manufacturer acquires a car parts supplier.
B) A breakfast cereal producer acquires another breakfast cereal producer and the combined firm is able to negotiate a reduced cost for the grain used in its cereal.
C) A telecommunications firm acquires another telecommunications firm and the combined firm serves a large percentage of the market.
D) An accounting firm acquires another accounting firm and the combined firm is able to eliminate duplication among administrative positions.
E) A video game development firm acquires another video game development firm that specializes in designing games for a new gaming system.

Question 33

Which of the following is an example of a merger undertaken in order to achieve economies of scale?

A) A car manufacturer acquires a car parts supplier.
B) A breakfast cereal producer acquires another breakfast cereal producer and the combined firm is able to negotiate a reduced cost for the grain used in its cereal.
C) A telecommunications firm acquires another telecommunications firm and the combined firm serves a large percentage of the market.
D) An accounting firm acquires another accounting firm and the combined firm is able to eliminate duplication among administrative positions.
E) A video game development firm acquires another video game development firm that specializes in designing games for a new gaming system.

Question 34

Tata Motors,a car manufacturer,has decided to enter into a merger with Axon Industries,the company that supplies Tata with many of its car parts.What type of synergies are the most likely reason behind this merger?

A) economies of scale
B) vertical integration
C) expertise
D) monopoly gains
E) efficiency gains

Question 35

Consider two firms,Blue and Berry.Both companies will either make $25 million or lose $5 million every year with equal probability.The companies' profits are perfectly negatively correlated,so that in any year,one company makes $25 million and the other loses $5 million.If the two firms merge but are run as two independent divisions,what is the change in expected after-tax profits of the combined company (BlueBerry)in any year versus the combined expected after-tax profits of the two separate companies in any year,assuming a corporate tax rate of 30% and no tax loss carryback or carryforward?

A) $1.5 million
B) $7.75 million
C) $0.75 million
D) -$5.5 million
E) $0

Question 36

Consider two firms,Blue and Berry.Both companies will either make $20 million or lose $10 million every year with equal probability.The companies' profits are perfectly negatively correlated,so that in any year,one company makes $20 million and the other loses $10 million.If the two firms merge but are run as two independent divisions,what is the change in expected after-tax profits of the combined company (BlueBerry)in any year versus the combined expected after-tax profits of the two separate companies in any year,assuming a corporate tax rate of 40% and no tax loss carryback or carryforward?

A) $0
B) $2 million
C) $3 million
D) $5 million
E) $4 million

Question 37

Consider two firms,Left Company and Right Enterprises,both with earnings of $2.50 per share and 15 million shares outstanding.Left is a mature company with few growth opportunities and a stock price of $7 per share.Right is a new firm with much higher growth opportunities and a stock price of $16 per share.Assume Right acquires Left using its own stock and the takeover adds no value.In a perfect capital market,how many shares must Right offer Left's shareholders in exchange for their shares?

A) 2.2857 shares of Right for each share of Left Enterprises
B) 0.4375 shares of Right for each share of Left Enterprises
C) 1 share of Right for each share of Left Enterprises
D) 0.6957 shares of Right for each share of Left Enterprises
E) 0.7425 shares of Right for each share of Left Enterprises

Question 38

Consider two firms,Big Company and Little Enterprises,both with earnings of $6 per share and 2 million shares outstanding.Big is a mature company with few growth opportunities and a stock price of $56 per share.Little is a new firm with much higher growth opportunities and a stock price of $72 per share.Assume Little acquires Big using its own stock and the takeover adds no value.What is the change in Little's earnings per share as a result of the acquisition?

A) $3.86
B) -$2.63
C) $0.75
D) $0
E) $6.00

Question 39

Consider two firms,Bob Company and Cat Enterprises,both with earnings of $10 per share and 5 million shares outstanding.Cat is a mature company with few growth opportunities and a stock price of $25 per share.Bob is a new firm with much higher growth opportunities and a stock price of $40 per share.Assume Bob acquires Cat using its own stock and the takeover adds no value.What is the change in Bob's earnings per share as a result of the acquisition?

A) $2.31
B) -$3.85
C) $10.00
D) $0
E) $5.00

Question 40

Consider two firms,ABC and XYZ.Both companies will either make $5 million or lose $2 million every year with equal probability.The companies' profits are perfectly negatively correlated,so that in any year,one company makes $5 million and the other loses $2 million.The two firms decide to enter into a merger and combine operations.What are the expected after-tax profits of the combined company in any year,assuming a corporate tax rate of 35% and no tax loss carryback or carryforward,if they are run as two independent divisions?

A) $6 million
B) $3.25 million
C) $6.5 million
D) $3 million
E) $1.95 million

Question 41

Greentree Holdings has announced plans to acquire Mackinac Corporation.Greentree is trading for $15 per share and has a premerger value of $950 million,while Mackinac is trading for $25 per share and has a premerger value of $225 million dollars.If Greentree's maximum offer is 2.25 shares for each Mackinac share,what are the projected synergies from the merger?

A) $112.5 million
B) $45 million
C) $78.75 million
D) $225 million
E) $75 million

Question 42

Purchasing a corporation requires a more accurate estimate of value than can be achieved using the method of comparables.

Question 43

Greentree Holdings has announced plans to acquire Mackinac Corporation.Greentree is trading for $15.75 per share and has a premerger value of $950 million,while Mackinac is trading for $24 per share and has a premerger value of $225 million dollars.If the projected synergies from the merger are $95 million,what is the maximum exchange ratio that Greentree could offer in a stock swap and still generate a positive NPV?

A) 0.933
B) 1.676
C) 2.167
D) 0.722
E) 1.885

Question 44

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.
What is the difference between economies of scale and economies of scope?

Question 45

Greentree Holdings has announced plans to acquire Mackinac Corporation.Greentree is trading for $18 per share and has a premerger value of $950 million,while Mackinac is trading for $30 per share and has a premerger value of $225 million dollars.If Greentree's maximum offer is 2 shares for each Mackinac share,what are the projected synergies from the merger?

A) $112.5 million
B) $45 million
C) $190 million
D) $225 million
E) $75 million

Question 46

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.
If Martin pays no premium to acquire Luther,what will the earnings per share be after the merger?

Question 47

Greentree Holdings has announced plans to acquire Mackinac Corporation.Greentree is trading for $15.75 per share and has a premerger value of $950 million,while Mackinac is trading for $24 per share and has a premerger value of $225 million dollars.If the projected synergies from the merger are $95 million,what is the maximum cash offer per share that Greentree could make and still generate a positive NPV?

A) $26.40
B) $40.22
C) $29.69
D) $52.01
E) $34.13

Question 48

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.
What are synergies?

Question 49

Barlow Manufacturing has announced plans to acquire Hull Enterprises.Barlow is trading for $19.25 per share and has a premerger value of $3 billion,while Hull is trading for $41.35 per share and has a premerger value of $950 million dollars.If the projected synergies from the merger are $425 million,what is the maximum cash offer per share that Barlow could make and still generate a positive NPV?

A) $98.37
B) $60.60
C) $41.35
D) $47.20
E) $59.85

Question 50

Barlow Manufacturing has announced plans to acquire Hull Enterprises.Barlow is trading for $19.25 per share and has a premerger value of $3 billion,while Hull is trading for $41.35 per share and has a premerger value of $950 million dollars.If the projected synergies from the merger are $425 million,what is the maximum exchange ratio that Barlow could offer in a stock swap and still generate a positive NPV?

A) 2.379
B) 0.531
C) 3.109
D) 2.452
E) 0.674

Question 51

Consider two firms,Left Company and Right Enterprises,both with earnings of $2.50 per share and 15 million shares outstanding.Left is a mature company with few growth opportunities and a stock price of $7 per share.Right is a new firm with much higher growth opportunities and a stock price of $16 per share.Assume Right acquires Left using its own stock and the takeover adds no value.What is the change in Right's earnings per share as a result of the acquisition?

A) $0.98
B) $3.21
C) -$0.76
D) $0
E) $2.50

Question 52

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.
What are the possible managerial motives to merge?

Question 53

Barlow Manufacturing has announced plans to acquire Hull Enterprises.Barlow is trading for $31.50 per share and has a premerger value of $12 billion,while Hull is trading for $21.75 per share and has a premerger value of $4 billion dollars.If the projected synergies from the merger are $675 million,what is the maximum exchange ratio that Barlow could offer in a stock swap and still generate a positive NPV?

A) 0.807
B) 0.729
C) 1.693
D) 1.530
E) 0.749

Question 54

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.
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.

Question 55

Sol Company has announced plans to acquire Luna Corporation.Sol is trading for $23 per share,and has a premerger value of $7 billion,while Luna is trading for $56 per share and has a premerger value of $5 billion.The projected synergies from the merger are $500 million.If the offer is for $2 billion in cash and the remainder in stock,what is the maximum exchange ratio that Sol could offer in the stock swap portion and still generate a positive NPV?

A) 3.04
B) 2.68
C) 2.84
D) 0.48
E) 0.45

Question 56

Consider two firms,Left Company and Right Enterprises,both with earnings of $2.50 per share and 15 million shares outstanding.Left is a mature company with few growth opportunities and a stock price of $7 per share.Right is a new firm with much higher growth opportunities and a stock price of $16 per share.Assume Right acquires Left using its own stock and the takeover adds no value.What is the change in Right's price-earnings ratio as a result of the acquisition?

A) 0
B) 3.0
C) -3.2
D) -3.6
E) -1.8

Question 57

Barlow Manufacturing has announced plans to acquire Hull Enterprises.Barlow is trading for $31.50 per share and has a premerger value of $12 billion,while Hull is trading for $21.75 per share and has a premerger value of $4 billion dollars.If the projected synergies from the merger are $675 million,what is the maximum cash offer per share that Barlow could make and still generate a positive NPV?

A) $48.20
B) $21.75
C) $53.33
D) $25.42
E) $17.55

Question 58

Once a tender offer is announced,the target's share price immediately rises by the amount of the acquisition premium.

Question 59

Greentree Holdings has announced plans to acquire Mackinac Corporation.Greentree is trading for $42 per share and has a premerger value of $4 billion,while Mackinac is trading for $28 per share and has a premerger value of $1.5 billion dollars.If Greentree's maximum offer is 0.75 shares for each Mackinac share,what are the projected synergies from the merger?

A) $1.125 billion
B) $1.5 billion
C) $500 million
D) $187.5 million
E) $259.5 million

Question 60

Sol Company has announced plans to acquire Luna Corporation.Sol is trading for $210 per share,and has a premerger value of $22 billion,while Luna is trading for $145 per share and has a premerger value of $14 billion.The projected synergies from the merger are $1 billion.If the offer is for $8 billion in cash and the remainder in stock,what is the maximum exchange ratio that Sol could offer in the stock swap portion and still generate a positive NPV?

A) 0.81
B) 0.74
C) 0.72
D) 1.69
E) 1.55

Question 61

The freezeout tender offer has a significant disadvantage compared to a leveraged buyout because an acquiring corporation must make an all-cash offer.

Question 62

What is a poison pill,and how does it prevent a hostile takeover?

Question 63

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?

A) $300 million
B) $150 million
C) $100 million
D) $10 million
E) $50 million

Question 64

Sol Company has announced plans to acquire Luna Corporation by swapping 0.55 shares of Sol stock for each share of Luna stock.After the announcement,Sol traded for $23 per share,and Luna traded for $11 per share.Assuming the takeover is successful,which of the following is the most appropriate merger-arbitrage strategy?

A) Buy 100 shares of Sol, short sell 100 shares of Luna.
B) Buy 55 shares of Luna, short sell 100 shares of Sol.
C) Buy 100 shares of Luna, short sell 55 shares of Sol.
D) Buy 100 shares of Sol, short sell 55 shares of Luna.
E) Buy 55 shares of Sol, short sell 100 shares of Luna.

Question 65

Consider a case in which existing shareholders do not have to invest time and effort,but still participate in the gains from a takeover,while the bidder who puts in the time and effort is forced to give up substantial profits.This situation is called

A) the free rider problem.
B) a toehold.
C) a leveraged buyout.
D) a freezeout merger.
E) a management buyout.

Question 66

A situation where every director serves a three-year term and the terms are staggered so that only one-third of the directors are up for election each year is called a

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

Question 67

Timbuktu Technologies is an all-equity firm that is currently trading at $22 per share,with 50 million shares outstanding.You believe that by replacing management,you can increase the value of the firm by 50%.What is the maximum amount of value you can extract in a leveraged buyout for 50% of the outstanding shares?

A) $550 million
B) $1.1 billion
C) $1.65 billion
D) $650 million
E) $225 million

Question 68

What is the difference between a friendly takeover and a hostile takeover?

Question 69

Sol Company has announced plans to acquire Luna Corporation at a premium of 30% over the pre-announcement share price.Sol is trading for $19 per share,and has a premerger value of $37 billion.Prior to the announcement,Luna was trading for $12 per share,and currently has 192 million shares outstanding.The projected synergies from the merger are $2 billion.What is the maximum exchange ratio that Sol could offer in a stock swap transaction and still generate a positive NPV?

A) 2.03
B) 1.37
C) 1.54
D) 1.05
E) 1.18

Question 70

Sol Company has announced plans to acquire Luna Corporation by swapping 1.2 shares of Sol stock for each share of Luna stock.After the announcement,Sol traded for $41 per share,and Luna traded for $48 per share.Assuming the takeover is successful,which of the following is the most appropriate merger-arbitrage strategy?

A) Buy 100 shares of Luna, short sell 120 shares of Sol.
B) Buy 120 shares of Luna, short sell 100 shares of Sol.
C) Buy 100 shares of Sol, short sell 100 shares of Luna.
D) Buy 100 shares of Sol, short sell 120 shares of Luna.
E) Buy 120 shares of Sol, short sell 100 shares of Luna.

Question 71

What is the major drawback of adopting a poison pill?

Question 72

Sol Company has announced plans to acquire Luna Corporation at a premium of 20% over the pre-announcement share price.Sol is trading for $42 per share,and has a premerger value of $14 billion.Prior to the announcement,Luna was trading for $71 per share,and currently has 106 million shares outstanding.The projected synergies from the merger are $1.5 billion.What is the maximum exchange ratio that Sol could offer in a stock swap transaction and still generate a positive NPV?

A) 1.97
B) 2.03
C) 2.43
D) 2.37
E) 0.58

Question 73

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

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

Question 74

When a hostile takeover appears to be inevitable,a target company will sometimes look for another,friendlier company to acquire it called a

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

Question 75

The acquiring corporation in a merger typically captures the value created by the merger.

Question 76

You work for a leveraged 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 leveraged 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?

Question 77

Why does a recapitalization make a firm a less attractive target for a takeover?

Question 78

For a hostile takeover to succeed,the acquirer must appeal to the target shareholders; this is usually done through

A) a tender offer and a proxy fight.
B) a tender offer and a poison pill.
C) a white knight and a proxy fight.
D) a staggered board and a white knight.
E) a recapitalization and a poison pill.

Question 79

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

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

Question 80

What are risk arbitrageurs? Do their actions represent true arbitrage?