Question 1

If an automobile manufacturer were to acquire one of the firms listed below,which acquisition would be called a horizontal merger?

Accepted Answer

A horizontal merger is when two companies in the same industry and at the same stage of production merge. Acquiring a rival automobile manufacturer would fit this definition, while acquiring a steel mill, a tire producer, or a bank would not.

Question 2

The cost of a merger may outweigh the potential gain if the:

Accepted Answer

If the cost of the merger outweighs the potential gain, it means that the acquiring firm is paying more than the value of the acquired firm. If the acquired firm's shareholders receive more than the value of their firm, it further adds to the cost of the merger and makes it less desirable. Therefore, option D is the best choice as it directly addresses the issue of the cost of the merger being higher than the potential gain.

Question 3

If Snapper Lawnmowers were to acquire Briggs and Stratton (gasoline-powered engines),the merger would be:

Accepted Answer

Vertical. This is because Snapper Lawnmowers relies on Briggs and Stratton's gasoline-powered engines as a crucial component to its product. By acquiring the supplier of its crucial component, it becomes a vertical merger.

Question 4

When an outside group acquires a firm,primarily through the use of borrowed funds,the acquisition is known as a:

Accepted Answer

A leveraged buyout is an acquisition of a company using a significant amount of borrowed money to meet the cost of acquisition. In a leveraged buyout, the assets of the company being acquired are often used as collateral for the borrowed funds. A management buyout is a type of leveraged buyout, but it involves the existing management team of the company being acquired. A tender offer is an offer made by one company to purchase the shares of another company's stock at a premium. A successful proxy fight is when a group of shareholders succeeds in replacing the current management team with one that they support.

Question 5

An increase in earnings per share after a merger may not indicate increased value if the:

Accepted Answer

The answer of An increase in earnings per share after...

Question 6

Large-scale efforts to make a firm less appealing in the midst of a potential merger are known as:

Accepted Answer

Poison pills are a tactic used by a target company to make itself less attractive to a potential acquirer in the event of a hostile takeover attempt. This is done by implementing provisions that make the company's stock less valuable or dilute the shares of the acquiring company.

Question 7

The shareholders of firm A have offered 1 million shares valued at $10 each to acquire firm B.After the merger is announced,stock A trades for $9 per share.Which of the following statements is not correct?

Accepted Answer

The answer of The shareholders of firm A have offered...

Question 8

One indication that investors expect no synergy from a merger would be that:

Accepted Answer

If the total market value (or market capitalization) of the merged firms does not change, it suggests that investors do not see any potential benefits or synergies that would result from the merger. This indicates that the merger may not create value for the shareholders of either company.

Question 9

A conglomerate merger occurs when:

Accepted Answer

A conglomerate merger is one where firms from different industries merge. There may or may not be differences in size, management teams, and synergies expected to develop.

Question 10

Which of the following might you recommend to a firm with excessive free cash flow?

Accepted Answer

A repurchase of shares is a good option for a firm with excessive free cash flow because it can increase earnings per share and potentially increase the stock price. Acquiring another firm might not be necessary or efficient, and a leveraged buyout could add too much debt to the company's balance sheet.

Question 11

A spinoff is an action in which:

Accepted Answer

A spinoff is when a company sells off a portion of its assets or business to form a new, separate company. This can happen for a variety of reasons, such as focusing on core competencies or reducing debt.

Question 12

When shareholders attempt to garner additional votes in an attempt to oust management,it is called a:

Accepted Answer

Shareholders attempting to oust management through garnering additional votes is known as a proxy contest. Management buyout refers to the management team buying out the company from existing shareholders. Tender offer is an offer made by one company to buy another company's shares at a premium price. Poison pill is a strategy used by a company to make its stock less attractive to potential acquirers.

Question 13

Diversification is often a poor motive for mergers because:

Accepted Answer

Investors can diversify their portfolios on their own without the need for companies to merge solely for the purpose of diversification. Mergers for diversification purposes do not necessarily lead to synergies or increased profitability, and may even result in decreased focus and efficiency. Therefore, diversification is often a poor motive for mergers.

Question 14

When one firm merges with another,the:

Accepted Answer

When one firm merges with another, the target firm will cease to exist as an independent entity and become a part of the acquiring firm. However, the specifics of the merger, including the approval by shareholders and the merger of boards of directors, can vary depending on the terms of the merger agreement.

Question 15

In which merger type would one be least likely to observe economies of scale?

Accepted Answer

The answer of In which merger type would one be...

Question 16

The cost of a merger equals the:

Accepted Answer

The cost of a merger is typically measured by the premium paid over the target's value as a separate entity, which represents the additional value expected to be generated by the combination of the two firms. The premium can be paid in cash, stock, or a combination of both, but what matters is the difference between the acquisition price and the fair value of the target's equity. Therefore, choices A and D are incorrect because they focus only on the amount of cash or stock paid, which may not reflect the true cost of the deal. Choice B is also incorrect because it assumes that the merger will generate positive synergies that offset the cost, which may or may not be the case. Therefore, the best choice is C.

Question 17

The market for corporate control suggests that:

Accepted Answer

The market for corporate control refers to the buying and selling of companies through mergers, acquisitions, and takeovers. This suggests that management and ownership are important factors in a firm's results, as evidenced by the willingness of investors to buy and sell companies to improve their portfolio.

Question 18

A tender offer is one in which the firm's:

Accepted Answer

A tender offer typically involves an entity or individual making an offer to purchase shares from existing shareholders of a company at a specified price, often at a premium to the market price. This is usually done in an attempt to gain control of the company.

Question 19

Mergers may provide reductions in average production cost as a result of:

Accepted Answer

Mergers can provide economies of scale, which means that as the size of the merged company increases, it can achieve lower average production costs due to the ability to spread fixed costs over a larger output. This can result in increased efficiency and competitiveness in the marketplace. Increased market share, a more efficient management, and diversification may also be potential benefits of a merger, but they do not necessarily lead to cost reductions.

Question 20

ABC Corp.has offered 1 million shares having a total market value of $8 million for XYZ Corp.After the merger is announced,shares in ABC trade for $7 each.If ABC is confident about XYZ's value,what has happened to the cost of the merger?

Accepted Answer

The market value of ABC's shares has decreased by $1 million, so the cost of the merger has decreased by $1 million.

Quiz 21: Mergers, Acquisitions, and Corporate Control