Question 1

Synergy is the extra value created by merging two firms.

Accepted Answer

Synergy occurs when the combined value of two companies is greater than the sum of their individual values. Therefore, it results in extra value being created.

Question 2

Vertical merger is a merger of two firms in the same line of business.

Accepted Answer

A vertical merger is a merger between two companies that operate at different stages of production within the same industry, not in the same line of business.

Question 3

Poison pill is a takeover defense in which the target firm finds an acquirer more to its liking thanthe initial hostile acquirer and prompts the two to compete to take over the firm.

Accepted Answer

This is not a correct definition of a poison pill defense. A poison pill defense is a strategy used by a company to make its stock less attractive to a potential acquirer in order to prevent a hostile takeover. It often involves creating and issuing new shares of stock to existing shareholders, diluting the value of the acquirer's offer.

Question 4

A major disadvantage of holding companies is the increased risk resulting from the leverage effect.

Accepted Answer

Holding companies often use leverage (borrowed funds) to acquire subsidiaries and assets, which increases the financial risk for the company. If the investments do not perform well, the holding company may struggle to meet its debt obligations and face a higher risk of financial distress or bankruptcy.

Question 5

A corporate takeover is valued as a capital budgeting exercise.

Accepted Answer

A corporate takeover involves a significant investment of funds, which must be evaluated to determine its financial viability. This evaluation is known as capital budgeting, which involves analyzing the financial implications of long-term investment decisions. Therefore, a corporate takeover is valued as a capital budgeting exercise.

Question 6

Consolidation is a corporation that has voting control of one or more other corporations.

Accepted Answer

The answer of Consolidation is a corporation that has voting...

Question 7

The sale of a unit of a firm to existing management is often achieved through
A) a leveraged buyout.
B) an employee stock option.
C) a cash exchange.
D) a limited partnership.

Accepted Answer

A leveraged buyout (LBO) involves the management team borrowing money to purchase the unit from the parent company. This allows the management team to have more control and ownership of the unit, while also potentially benefiting from increased profits and growth of the unit. Employee stock options and cash exchanges do not necessarily involve existing management purchasing the unit, and a limited partnership typically involves outside investors being brought in as part-owners rather than existing management solely owning the unit.

Question 8

Horizontal merger is a merger in which one firm acquires another firm in the same generalindustry but neither in the same line of business nor a supplier or customer.

Accepted Answer

The answer of Horizontal merger is a merger in which...

Question 9

The acquisition of a "cash?rich" company allows the acquiring company
A) to reduce leverage and to increase borrowing power.
B) to reap greater tax benefits.
C) to develop better managers.
D) to achieve economies of scale in some phase of the business.

Accepted Answer

Acquiring a cash-rich company can reduce the acquiring company's leverage by increasing its cash reserves, which can also enhance its borrowing capacity due to improved financial stability.

Question 10

The takeover target's management may not support a proposed takeover due to a very high tenderoffer.

Accepted Answer

A very high tender offer is generally favorable for the target's shareholders, and management is likely to support it as it maximizes shareholder value.

Question 11

A holding company is a corporation that is controlled by one or more other corporations.

Accepted Answer

A holding company is a corporation that owns enough voting stock in one or more other companies to control their policies and management, not the other way around.

Question 12

The overriding goal for merging is to
A) increase cash flows.
B) maximize operating efficiency.
C) maximize shareholder wealth as reflected in the acquirer's share price.
D) maximize shareholder wealth as reflected in the share price of the target firm.

Accepted Answer

The primary objective of any merger or acquisition is to enhance shareholder value, which is reflected through an increase in the acquirer's share price. The merger should result in positive synergies and efficiencies that help increase profitability and cash flows, which ultimately translates into higher share prices. Therefore, the correct option is C - maximize shareholder wealth as reflected in the acquirer's share price.

Question 13

White knight is a takeover defense in which a firm issues securities that give their holders certain rights that become effective when a takeover is attempted and that make the target firm less desirable to a hostile acquirer.

Accepted Answer

A white knight is a friendly investor or company that acquires a corporation at risk of being taken over by an unfriendly bidder, not a defense involving issuing securities.

Question 14

A __________occurs when the operations of the acquiring and target firms are combined in order toachieve economies and thereby cause the performance of the merged firm to exceed that of thepre?merged firm.
A) financial merger
B) strategic merger
C) operating merger
D) hostile takeover

Accepted Answer

A strategic merger occurs when two companies combine their operations to achieve synergies and economies of scale, leading to improved performance beyond what each could achieve independently.

Question 15

The combination of two or more companies which results in the firm maintaining the identity of one of the firms is
A) consolidation.
B) merger.
C) holding company.
D) congeneric formation.

Accepted Answer

The definition provided fits the concept of a merger, where two or more companies come together to form a new entity while maintaining the identity of one of the firms. Consolidation refers to the combination of firms resulting in the creation of an entirely new entity. A holding company is a type of firm that owns shares in other companies but does not operate them directly. Congeneric formation is not a term commonly used in business contexts.

Question 16

__________is achieved by acquiring a company in the same general industry, but neither in the same line of business nor a supplier or a customer.
A) Horizontal merger
B) Vertical merger
C) Conglomerate merger
D) Congeneric merger

Accepted Answer

A congeneric merger is achieved by acquiring a company in the same general industry, but not in the same line of business, nor as a supplier or customer.

Question 17

An attempt to gain control of the firm by buying sufficient shares of the target firm in themarketplace is known as a__________ and is typically accomplished through a
A) hostile takeover; tender offer.
B) friendly takeover; tender offer.
C) friendly takeover; merger.
D) hostile takeover; merger.

Accepted Answer

A hostile takeover is an attempt to gain control of the target firm without the approval of its management. This is usually done by purchasing a sufficient number of shares in the open market to gain a controlling interest. A tender offer is a type of hostile takeover bid in which the acquiring company offers to buy shares directly from the shareholders of the target company at a premium to the market price.

Question 18

A firm that wants to expand or extend its operations in existing or new product areas may avoid many of the risks associated with the design, manufacture, and sale of additional or new product and remove a potential competitor by acquiring a suitable going concern.

Accepted Answer

Acquiring a suitable going concern can allow a firm to expand without some of the risks associated with developing and launching new products. Additionally, it can remove a competitor from the market.

Question 19

The combination of a dress manufacturer and a credit bureau is an example of
A) vertical merger.
B) conglomerate merger.
C) congeneric merger.
D) horizontal merger.

Accepted Answer

A conglomerate merger occurs when two companies that operate in completely different industries or sectors combine, such as a dress manufacturer and a credit bureau.

Question 20

Cash acquisitions of going concerns are best analyzed using
A) ratio analysis.
B) capital budgeting techniques.
C) the weighted marginal cost of capital theory.
D) an investment opportunity schedule.

Accepted Answer

Cash acquisitions of going concerns typically involve significant capital expenditures and require a long-term strategic analysis of potential cash flows and return on investment. Therefore, capital budgeting techniques, including net present value analysis and internal rate of return, are the most appropriate analysis tools in this context. Ratio analysis and the weighted marginal cost of capital theory may also provide useful information but are not as focused on the specific cash flows and investment considerations of a cash acquisition. An investment opportunity schedule is not a commonly used tool for analyzing cash acquisitions.

Quiz 18: Mergers and Acquisitions, and Business Failure

Synergy is the extra value created by merging two firms.

Vertical merger is a merger of two firms in the same line of business.

Poison pill is a takeover defense in which the target firm finds an acquirer more to its liking thanthe initial hostile acquirer and prompts the two to compete to take over the firm.

A major disadvantage of holding companies is the increased risk resulting from the leverage effect.

A corporate takeover is valued as a capital budgeting exercise.

Consolidation is a corporation that has voting control of one or more other corporations.

The sale of a unit of a firm to existing management is often achieved through

Horizontal merger is a merger in which one firm acquires another firm in the same generalindustry but neither in the same line of business nor a supplier or customer.

The acquisition of a "cash?rich" company allows the acquiring company

The takeover target's management may not support a proposed takeover due to a very high tenderoffer.

A holding company is a corporation that is controlled by one or more other corporations.

The overriding goal for merging is to

White knight is a takeover defense in which a firm issues securities that give their holders certain rights that become effective when a takeover is attempted and that make the target firm less desirable to a hostile acquirer.

A __________occurs when the operations of the acquiring and target firms are combined in order toachieve economies and thereby cause the performance of the merged firm to exceed that of thepre?merged firm.

The combination of two or more companies which results in the firm maintaining the identity of one of the firms is

__________is achieved by acquiring a company in the same general industry, but neither in the same line of business nor a supplier or a customer.

An attempt to gain control of the firm by buying sufficient shares of the target firm in themarketplace is known as a__________ and is typically accomplished through a

A firm that wants to expand or extend its operations in existing or new product areas may avoid many of the risks associated with the design, manufacture, and sale of additional or new product and remove a potential competitor by acquiring a suitable going concern.

The combination of a dress manufacturer and a credit bureau is an example of

Cash acquisitions of going concerns are best analyzed using