Question 1

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

Accepted Answer

Under the purchase method of accounting, the balance sheet of the acquirer and the acquired are not simply added together. Instead, the acquirer records the acquired assets and liabilities at fair value, which may result in differences between the sum of the two companies' balance sheets before the acquisition and the combined balance sheet after the acquisition.

Question 2

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

Accepted Answer

Tax-free status for an acquisition does not require applying to the Canada Revenue Agency (CRA) prior to launching the acquisition bid. Tax-free status typically depends on the structure of the transaction and compliance with specific tax laws, not on a pre-approval process by the CRA.

Question 3

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

Accepted Answer

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

Question 4

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

Accepted Answer

Asset write-ups refer to the increase in the value of an acquired asset above its fair value. This increase can be due to synergistic gains, which are benefits that arise from the combination of two or more businesses. Tax benefits are one type of synergistic gain that can result from an acquisition.

Question 5

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

Accepted Answer

Research generally shows that while mergers can create value, the benefits often accrue more to the shareholders of the target firm rather than the acquiring firm.

Question 6

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.

Accepted Answer

This statement is true. According to the purchase method of accounting, any 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 7

Revenue enhancement represents a synergistic beneﬁts from a merger.

Accepted Answer

Revenue enhancement is one of the potential benefits of a merger, as it combines resources and expertise to increase revenue generation. This can be achieved through various means such as cross-selling of products, expanding the customer base, and optimizing pricing strategies. Therefore, revenue enhancement represents a synergistic benefit of a merger.

Question 8

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

Accepted Answer

Marketing gains refer to synergistic benefits from increased sales or market share, not cost reductions, which are typically referred to as cost synergies or economies of scale.

Question 9

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

Accepted Answer

This statement is false. An acquisition can be tax-free even if the acquirer does not offer cash to the equity holders of the acquired firm. It can be structured as a stock-for-stock exchange, where the shareholders of the acquired firm receive stock in the acquiring company instead of cash. This type of exchange may qualify for tax-free treatment under certain conditions.

Question 10

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

Accepted Answer

The statement is incorrect. An increase in firm size that results in diseconomies of scale can actually represent a potential loss from an acquisition, as it may result in decreased efficiency and higher costs.

Question 11

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

Accepted Answer

The answer of The incremental cash ﬂows of a merger...

Question 12

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

Accepted Answer

This is because only transactions between Canadian corporations are eligible for a tax-free acquisition under the Income Tax Act of Canada. Transactions involving foreign corporations are subject to specific tax rules and regulations.

Question 13

Increased capital needs represents synergistic beneﬁts from a merger.

Accepted Answer

Increased capital needs typically indicate additional financial requirements, not synergistic benefits, which usually involve cost savings or increased revenue from a merger.

Question 14

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

Accepted Answer

Unused debt capacity refers to the ability of a company to take on additional debt without violating its debt covenants. This can be a valuable asset in an acquisition, as it can allow the acquiring company to finance the acquisition with debt, which can be tax-deductible.

Question 15

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.

Accepted Answer

This statement is not entirely accurate as there are various factors that can affect the success and benefits of an acquisition beyond the size of the target firm. The success of an acquisition depends on various factors such as synergy between the two firms, financial management, and market conditions, among others.

Question 16

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

Accepted Answer

This statement is true. When two companies merge, they can combine their tax losses and offset them against future profits, resulting in less tax paid and potentially increasing cash flow.

Question 17

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

Accepted Answer

Economy of scale benefits refer to the cost advantages that a company can achieve by increasing the scale of its operations, such as through a merger. This can result in cost savings and increased efficiencies, which can translate into cash flow benefits.

Question 18

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.

Accepted Answer

This is true for the purchase method of accounting. The fair market value of the assets of the target firm must be recorded on the books of the bidder.

Question 19

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

Accepted Answer

An improvement in marketing can lead to increased sales and revenue, which can result in cash flow benefits for the merged company.

Question 20

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.

Accepted Answer

Goodwill represents the intangible assets acquired in an acquisition, such as brand reputation, customer relationships, and intellectual property, which are considered valuable despite not being physical assets.

Quiz 23: Enterprise Risk Management

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

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

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

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

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

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.

Revenue enhancement represents a synergistic beneﬁts from a merger.

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

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

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

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

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

Increased capital needs represents synergistic beneﬁts from a merger.

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

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.

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

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

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.

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

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.