Question 1

A merger is a corporate restructuring that occurs when one firm, called the acquiring firm, buys another firm, called the target firm.

Accepted Answer

A merger typically involves two companies agreeing to combine their operations into a single entity, rather than one firm buying another. An acquisition is when one firm buys another firm.

Question 2

Each member in a cooperative has equal ownership of the co-op and has an equal voice in how the co-op is run.

Accepted Answer

This is a defining characteristic of a cooperative. Each member has an equal say in the operations and decisions made by the co-op, regardless of the size of their investment.

Question 3

Unlike a sole proprietorship or general partnership, a general corporation is unaffected by the death or withdrawal of an owner.

Accepted Answer

A general corporation is a separate legal entity from its owners (shareholders), therefore it can continue to exist and operate even if one or more shareholders die or withdraw from the business.

Question 4

A horizontal merger is a combination of two firms that are in the same industry.

Accepted Answer

A horizontal merger is a type of merger where two firms in the same industry combine to create a larger, more powerful entity. This can result in increased market share and decreased competition.

Question 5

In an acquisition, the firm who is doing the buying is called the target firm.

Accepted Answer

In an acquisition, the firm who is doing the buying is called the acquiring firm, whereas the firm being bought is called the target firm.

Question 6

Acquisition is a corporate restructuring in which one firm buys another. After the acquisition, the target firm ceases to exist as an independent entity, while the acquiring firm continues to operate.

Accepted Answer

This is the correct definition of an acquisition. The acquiring firm takes over the target firm and the target firm is no longer an independent entity.

Question 7

Mergers and acquisitions basically mean the same thing; the only difference is the size of the companies involved.

Accepted Answer

The size of the companies involved is not the only difference between mergers and acquisitions. In a merger, two companies come together to form a new entity, while in an acquisition, one company buys another company.

Question 8

When the acquiring firm buys the target firm despite the opposition of the target's board and top management, the result is called an unapproved takeover.

Accepted Answer

When the acquiring firm buys the target firm despite the opposition of the target's board and top management, the result is called a hostile takeover.

Question 9

If an oil company merged with a company that produced motion pictures, the result would be a vertical merger.

Accepted Answer

A vertical merger is when two companies that operate in different but complementary stages of the same industry come together. In this case, an oil company and a motion picture company operate in entirely different industries and do not complement each other. Therefore, it would not be a vertical merger but rather a conglomerate merger.

Question 10

Joe owns 500 shares of stock in the Megabux Corporation. He is pleased to learn that the company earned a very nice profit over the most recent operating period. The company has announced that they will pay each shareholder a dividend of $1 per share out of the after-tax profits. This payment will represent tax-free income to Joe.

Accepted Answer

Dividends paid to shareholders from a company's profits are typically considered taxable income for the recipient, not tax-free income.

Question 11

Unlike general corporations, not-for-profit corporations have no shareholders and pay no dividends.

Accepted Answer

Not-for-profit corporations are intended to serve a specific social purpose or cause, rather than generating profits for shareholders. As such, they do not have shareholders and are not obligated to pay dividends. Instead, any profits or excess funds are typically reinvested into the organization to further its mission.

Question 12

A key goal of horizontal mergers is to achieve tighter integration of production and increased control over supply of crucial inputs.

Accepted Answer

Horizontal mergers primarily aim to expand a company's reach within the same industry by combining with competitors, leading to increased market share and potentially reducing competition, rather than focusing on the integration of production and control over inputs, which is more characteristic of vertical mergers.

Question 13

Crown corporations provide services to Canadians in areas where private industry cannot.

Accepted Answer

Crown corporations are created by the government to provide certain goods and services that the private industry cannot or will not provide to Canadians. These corporations are designed to serve the public interest and operate at arm's length from the government. Some examples of Crown corporations in Canada include the Canadian Broadcasting Corporation (CBC), Canada Post, and Via Rail.

Question 14

One reason for a conglomerate merger when diversifying into new markets is to reduce the risk associated with adverse conditions in any single market.

Accepted Answer

Conglomerate mergers involve combining companies that are in different industries or markets, which can reduce the risk associated with adverse conditions in any single market. This diversification helps protect the overall business from fluctuations in one particular market, as losses in one market may be offset by gains in another.

Question 15

Fly By Knight and Air Pockets are two mid-sized regional airlines that serve much the same territory. If these two airlines merged, the result would be a horizontal merger.

Accepted Answer

A horizontal merger is a merger between companies that operate in the same industry and offer similar products/services. Since Fly By Knight and Air Pockets are both mid-sized regional airlines serving the same territory, a merger between them would be a horizontal merger.

Question 16

A conglomerate merger is a combination of two firms in unrelated industries.

Accepted Answer

A conglomerate merger involves two companies merging, where both companies operate in different industries and have no common business operations or customer base. This is different from a horizontal or vertical merger, where companies operate in the same industry or have a similar product line.

Question 17

A horizontal merger occurs when firms from different industries join.

Accepted Answer

A horizontal merger occurs when firms in the same industry merge or when firms merge to expand their range of products or services within the same industry.

Question 18

A vertical merger is a combination of firms at different stages in the production of a good or service.

Accepted Answer

A vertical merger involves firms at different stages of production, such as a manufacturer merging with a supplier of raw materials.

Question 19

The board of directors in a corporation is comprised of those who hold the most shares.

Accepted Answer

The board of directors is typically elected by the shareholders, but it is not necessarily true that they are comprised of the shareholders with the most shares. In some cases, shareholders with smaller stakes may also have representation on the board or may be elected to serve on the board. Additionally, there may be other factors beyond share ownership that are considered when selecting board members, such as expertise or experience in a particular field.

Question 20

The board of directors establishes the corporation's mission and sets its board objectives but seldom takes an active role in the day-to-day management of the company.

Accepted Answer

The board of directors is responsible for providing strategic direction and oversight to the company but does not typically play a hands-on role in day-to-day management. That responsibility is delegated to executives and other managers within the organization.

Quiz 5: Business Formation: Choosing the Form That Fits