Question 1

When evaluating an acquisition, you should:

Accepted Answer

When evaluating an acquisition, it is important to focus on the incremental cash flows of the merged firm that are relevant to the acquisition. This requires applying the appropriate rate of return to these cash flows. Ignoring potential changes in management and one-time acquisition fees can also lead to inaccurate evaluations. Book values should not be the sole focus, as they may not reflect the true value of the assets being acquired. Market values should also be considered. Therefore, choice C is the best option as it takes into account the relevant cash flows and the appropriate rate of return.

Question 2

The purchase accounting method for mergers require that:

Accepted Answer

The purchase accounting method requires that the assets of the target firm be recorded at their fair market value on the balance sheet of the acquiring firm. This ensures that the financial statements reflect the true cost of the acquisition.

Question 3

Which one of the following statements is correct?

Accepted Answer

A spin-off frequently follows an equity carve-out. An equity carve-out is when a parent company sells a minority stake in a subsidiary to the public, while still retaining a majority stake. A spin-off is when a parent company separates a subsidiary into a separate, independent company. It is common for a spin-off to follow an equity carve-out, as it allows the parent company to fully divest from the subsidiary.

Question 4

Which one of the following combinations of ﬁrms would beneﬁt the most through the use of complementary resources?

Accepted Answer

A golf resort and a ski resort would benefit the most from complementary resources, as both resorts are seasonal and offer different activities. The golf resort can operate during the summer months, while the ski resort can operate during the winter months, allowing them to share resources such as staff and facilities. This would allow both resorts to generate revenue year-round and maximize their profits. The other options do not offer as clear of a complementary resource advantage.

Question 5

The value of a target ﬁrm to the acquiring ﬁrm is equal to:

Accepted Answer

The value of the target firm to the acquiring firm is not just the purchase cost, but also includes the value of the target firm as a separate entity (its assets, liabilities, revenue streams, etc.) and the incremental value that will be generated by the acquisition (such as synergies or access to new markets). Therefore, A is the best choice as it takes into account both the pre-acquisition value and the incremental value.

Question 6

In a merger or acquisition, a ﬁrm should be acquired if it:

Accepted Answer

The primary objective of a merger or acquisition is to create value for the shareholders of the acquiring firm. Therefore, a firm should only be acquired if it generates a positive net present value to the shareholders of the acquiring firm. Options B and C may also be considered in some cases, but the ultimate goal remains value creation. Option D is not a valid reason for acquisition as dividend payments do not necessarily reflect the true value of a firm.

Question 7

The shareholders of a target ﬁrm beneﬁt the most when:

Accepted Answer

Shareholders of a target firm benefit the most when the acquiring firm has a better management team and replaces the target firm's managers. This is because effective management can improve operations, increase efficiency, and enhance shareholder value.

Question 8

Which one of the following is most likely a good candidate for an acquisition that could beneﬁt from the use of complementary resources?

Accepted Answer

A sports arena that is currently home only to an indoor hockey team could benefit from an acquisition that could bring in complementary resources such as a basketball team, a concert promoter, or other sports teams that could fill the arena on non-hockey days. This would allow for better utilization of the arena's resources and increase revenue. The other options do not necessarily have the same potential for complementary resources to be added via an acquisition.

Question 9

A reason for acquisitions is synergy.Synergy includes:

Accepted Answer

Synergy in acquisitions can result in a combination of revenue enhancements (such as cross-selling products or expanding customer reach), cost reductions (such as combining back-office operations or eliminating redundancies), lower taxes (such as taking advantage of tax benefits of the acquired company), and lower capital requirements (such as sharing resources and reducing the need for additional investments). Therefore, option E of "All of the above" is the best choice.

Question 10

One company wishes to acquire another.Which of the following forms of acquisition does not require a formal vote by the shareholders of the acquired ﬁrm?

Accepted Answer

In an acquisition of equity, the acquiring company can purchase shares directly from the market or shareholders without needing a formal vote from the acquired firm's shareholders.

Question 11

Suppose that Verizon and Sprint were to merge.Ignoring potential antitrust problems, this merger would be classiﬁed as a:

Accepted Answer

Verizon and Sprint are competitors in the same industry (telecommunications) and their merger would result in a consolidation of their market power, creating a larger entity with greater market share. This falls under the definition of a horizontal merger, which occurs when companies at the same level of the supply chain merge.

Question 12

Which of the following represent potential gains from an acquisition? I. the replacement of ineffective managers
II) lower costs per unit produced
III) an increase in ﬁrm size so that diseconomies of scale are realized
IV) spreading of overhead costs

Accepted Answer

I and IV represent potential gains from an acquisition. The replacement of ineffective managers can lead to better management and decision-making, resulting in increased profitability. Spreading of overhead costs can occur as the acquiring company usually has resources and systems in place that the acquired company can benefit from. Additionally, if the acquisition results in lower costs per unit produced, the acquiring company can achieve economies of scale, resulting in increased profitability. However, an increase in firm size may lead to diseconomies of scale, which could lead to a decrease in profitability. Therefore, III is not a potential gain from an acquisition.

Question 13

If a ﬁrm wants to take over another ﬁrm but feels the attempt to do so will be viewed as unfriendly it could decide to take a _____ approach to the acquisition.

Accepted Answer

The term "bear hug" refers to a friendly or gentle approach taken by one company to acquire another company. This is done in order to avoid being seen as aggressive or hostile.

Question 14

Suppose that General Motors has made an offer to acquire General Mills.Ignoring potential antitrust problems, this merger would be classiﬁed as a:

Accepted Answer

This merger would be classified as a conglomerate merger because it involves two companies that operate in completely different industries—General Motors in automotive and General Mills in food processing. Conglomerate mergers combine firms with unrelated business activities.

Question 15

Suppose that Exxon-Mobil acquired Schlumberger, an exploration/drilling company.Ignoring potential antitrust problems, this merger would be classiﬁed as a:

Accepted Answer

This merger would be classified as a vertical merger because it involves companies at different stages of production in the same industry, with Exxon-Mobil being an oil and gas company and Schlumberger providing exploration and drilling services.

Question 16

Which one of the following statements is correct?

Accepted Answer

C) The management of an acquiring firm may indeed put itself at risk of losing control if they use shares of equity for acquisitions. This is because issuing new shares can dilute the ownership percentage of existing shareholders, including the management team, potentially altering control dynamics.

Question 17

Which of the following represent potential tax gains from an acquisition? I. a reduction in the level of debt
II) an increase in surplus funds
III) the use of net operating losses
IV) an increased use of leverage

Accepted Answer

III) the use of net operating losses and IV) an increased use of leverage represent potential tax gains from an acquisition. Net operating losses can offset future taxable income, reducing tax liability. Increased use of leverage can lead to higher interest deductions, also reducing taxable income.

Question 18

Firm A and Firm B join to create Firm AB.This is an example of:

Accepted Answer

A consolidation occurs when two or more firms combine to form a new entity, in this case, Firm AB. It differs from an acquisition of assets or equity because both firms cease to exist as separate entities and instead form a new organization. It also differs from a tender offer, which is a public offer to purchase shares of a company's stock, often with the intention of acquiring a controlling stake.

Question 19

If an acquisition does not create value, then the:

Accepted Answer

If an acquisition does not create value, the earnings per share can still change due to the additional shares issued for the acquisition. However, the equity price of the acquiring firm should remain constant as the market recognizes the inability of the acquisition to create additional value.

Question 20

Which of the following are reasons why a ﬁrm may want to divest itself of some of its assets? I. to raise cash
II) to get rid of unproﬁtable operations
III) to get rid of some assets received in an acquisition
IV) to cash in on some proﬁtable operations

Accepted Answer

A firm may divest assets for all the listed reasons: to raise cash, eliminate unprofitable operations, dispose of unwanted assets from an acquisition, or capitalize on profitable operations.

Quiz 28: Mergers and Acquisitions

When evaluating an acquisition, you should:

The purchase accounting method for mergers require that:

Which one of the following statements is correct?

Which one of the following combinations of ﬁrms would beneﬁt the most through the use of complementary resources?

The value of a target ﬁrm to the acquiring ﬁrm is equal to:

In a merger or acquisition, a ﬁrm should be acquired if it:

The shareholders of a target ﬁrm beneﬁt the most when:

Which one of the following is most likely a good candidate for an acquisition that could beneﬁt from the use of complementary resources?

A reason for acquisitions is synergy.Synergy includes:

One company wishes to acquire another.Which of the following forms of acquisition does not require a formal vote by the shareholders of the acquired ﬁrm?

Suppose that Verizon and Sprint were to merge.Ignoring potential antitrust problems, this merger would be classiﬁed as a:

Which of the following represent potential gains from an acquisition? I. the replacement of ineffective managers II) lower costs per unit produced III) an increase in ﬁrm size so that diseconomies of scale are realized IV) spreading of overhead costs

If a ﬁrm wants to take over another ﬁrm but feels the attempt to do so will be viewed as unfriendly it could decide to take a _____ approach to the acquisition.

Suppose that General Motors has made an offer to acquire General Mills.Ignoring potential antitrust problems, this merger would be classiﬁed as a:

Suppose that Exxon-Mobil acquired Schlumberger, an exploration/drilling company.Ignoring potential antitrust problems, this merger would be classiﬁed as a:

Which one of the following statements is correct?

Which of the following represent potential tax gains from an acquisition? I. a reduction in the level of debt II) an increase in surplus funds III) the use of net operating losses IV) an increased use of leverage

Firm A and Firm B join to create Firm AB.This is an example of:

If an acquisition does not create value, then the:

Which of the following are reasons why a ﬁrm may want to divest itself of some of its assets? I. to raise cash II) to get rid of unproﬁtable operations III) to get rid of some assets received in an acquisition IV) to cash in on some proﬁtable operations