Question 1

The empirical evidence shows that unrelated diversification is an effective means of smoothing out the business cycle.

Accepted Answer

Empirical evidence generally suggests that unrelated diversification often fails to smooth out the business cycle for companies, as it can lead to inefficiencies and a lack of focus on core competencies, making businesses more vulnerable to economic fluctuations.

Question 2

Which of the following are not true about ESOPs?
A) An ESOP is a trust
B) Employer contributions to an ESOP are tax deductible
C) ESOPs can never borrow
D) Employees participating in ESOPs are immediately vested
E) C and D

Accepted Answer

ESOPs can indeed borrow money, which is often used to purchase the shares of the company, making statement C incorrect. Additionally, employees participating in ESOPs are not always immediately vested; there can be a vesting schedule, making statement D incorrect as well.

Question 3

A firm may be motivated to purchase another firm whenever
A) The cost to replace the target firm's assets is less than its market value
B) The replacement cost of the target firm's assets exceeds its market value
C) When the inflation rate is accelerating
D) The ratio of the target firm's market value is more than twice its book value
E) The market to book ratio is greater than one and increasing

Accepted Answer

A firm may be motivated to purchase another firm when the replacement cost of the target firm's assets exceeds its market value, as this indicates that the firm is undervalued and could be acquired for less than the cost of creating similar assets from scratch.

Question 4

ESOPs may be used for which of the following?
A) As an alternative to divestiture
B) To consummate management buyouts
C) As an anti-takeover defense
D) A, B, and C
E) A and B only

Accepted Answer

ESOPs (Employee Stock Ownership Plans) can be used as an alternative to divestiture, allowing owners to sell part or all of a company to employees and transfer ownership within the company. They can also be used to consummate management buyouts, providing a financing mechanism that allows employees to buy out the owners of a company. Finally, ESOPs can be used as an anti-takeover defense, as the ESOP trust will hold a significant number of shares and may be less likely to sell to an unsolicited bidder. Therefore, options A, B, and C are all valid uses for ESOPs.

Question 5

Growth is often cited as an important factor in acquisitions.The underlying assumption is that that bigger is
better to achieve scale,critical mass,globalization,and integration.

Accepted Answer

The statement is true. Growth is often considered an important factor in acquisitions as it helps in achieving economies of scale, critical mass, globalization, and integration.

Question 6

Which of the following are generally considered restructuring activities?
A) A merger
B) An acquisition
C) A divestiture
D) A consolidation
E) All of the above

Accepted Answer

Restructuring activities include a wide range of corporate actions aimed at significantly altering the structure or operations of a company. This can include mergers, acquisitions, divestitures, and consolidations, all of which are aimed at improving the company's financial health, efficiency, or market position.

Question 7

Which of the following is an example of economies of scope?
A) Declining average fixed costs due to increasing levels of capacity utilization
B) A single computer center supports multiple business units
C) Amortization of capitalized software
D) The divestiture of a product line
E) Shifting production from an underutilized facility to another to achieve a higher overall operating rate and shutting down the first facility

Accepted Answer

Economies of scope occur when a single resource is used to produce multiple products or services, resulting in cost savings. In this case, one computer center is able to support multiple business units, reducing the overall cost of IT infrastructure. The other choices either refer to economies of scale (A and E) or unrelated concepts (C and D).

Question 8

Buyers often prefer "friendly" takeovers to hostile ones because of all of the following except for:
A) Can often be consummated at a lower price
B) Avoid an auction environment
C) Facilitate post-merger integration
D) A shareholder vote is seldom required
E) The target firm's management recommends approval of the takeover to its shareholders

Accepted Answer

A shareholder vote is often required in both friendly and hostile takeovers, making it not a distinguishing factor that would make buyers prefer friendly takeovers. In friendly takeovers, the cooperation of the target firm's management can facilitate the process, but shareholder approval is typically still necessary.

Question 9

Which one of the following is not an example of a horizontal merger?
A) NationsBank and Bank of America combine
B) U.S. Steel and Marathon Oil combine
C) Exxon and Mobil Oil combine
D) SBC Communications and Ameritech Communications combine
E) Hewlett Packard and Compaq Computer combine

Accepted Answer

A horizontal merger is when two companies in the same industry merge. NationsBank and Bank of America, Exxon and Mobil, SBC Communications and Ameritech Communications, Hewlett Packard and Compaq Computer are all examples of horizontal mergers. However, U.S. Steel and Marathon Oil are not in the same industry, so their combination is not a horizontal merger.

Question 10

Which of the following represent disadvantages of a holding company structure?
A) Potential for triple taxation
B) Significant number of minority shareholders may create contentious environment
C) Managers may have difficulty in making the best investment decisions
D) A, B, and C
E) A and C only

Accepted Answer

A holding company structure can potentially result in triple taxation, as both the subsidiary and holding company may be taxed at their respective levels, and then shareholders may be taxed on their dividends or capital gains. Having a significant number of minority shareholders can create a contentious environment, as they may have differing ideas about the direction of the company. Additionally, managers may have difficulty in making the best investment decisions for the overall company, as they may be focused more on the individual success of each subsidiary rather than the company as a whole.

Question 11

A leveraged buyout is the purchase of a company financed primarily by debt.This is a term more frequently applied to a firm going private financed primarily by debt.

Accepted Answer

A leveraged buyout (LBO) is the acquisition of a company using a significant amount of borrowed money, often with the assets of the company being used as collateral. LBOs are typically used by private equity firms to acquire a controlling interest in a company or to take a public company private. In both cases, the transaction is financed primarily by debt.

Question 12

All of the following are considered business alliances except for
A) Joint ventures
B) Mergers
C) Minority investments
D) Franchises
E) Licensing agreements

Accepted Answer

Mergers are not considered business alliances because they involve the complete integration of two companies into one, rather than a strategic partnership or collaborative effort between two separate entities. Joint ventures, minority investments, franchises, and licensing agreements are all examples of business alliances.

Question 13

Financial considerations,such as an acquirer believing the target is undervalued,a booming stock market or falling interest rates,frequently drive surges in the number of acquisitions.

Accepted Answer

Financial considerations are major factors that drive surges in the number of acquisitions. The perception that the target is undervalued, a booming stock market or falling interest rates are some of the reasons that could prompt an acquirer to pursue an acquisition.

Question 14

Consolidation occurs when two or more companies join to form a new company.

Accepted Answer

Consolidation means merging of two or more companies to form a new company.

Question 15

An acquisition is the purchase of an entire company or a controlling interest in a company.

Accepted Answer

An acquisition involves buying either the whole company or a controlling interest in the company.

Question 16

Which of the following is true only of a consolidation?
A) More than two firms are involved in the combination
B) One party to the combination disappears
C) All parties to the combination disappear
D) The entity resulting from the combination assumes ownership of the assets and liabilities of the acquiring firm only.
E) One company becomes a wholly owned subsidiary of the other.

Accepted Answer

In a consolidation, all original parties involved in the combination disappear, and a completely new entity is formed to take over the businesses of the combining parties. This distinguishes it from other forms of mergers or acquisitions where one of the original companies may remain in existence.

Question 17

The empirical evidence supports the presumption that bigger is always better when it comes to acquisitions.

Accepted Answer

The statement is false. Empirical evidence shows that the success of an acquisition is not solely reliant on the size of the acquired company, but rather on various factors such as strategic fit, cultural compatibility, and effective integration. There are cases where smaller acquisitions have led to higher returns and better outcomes than larger ones.

Question 18

A subsidiary merger is a merger of two companies where the target company becomes a subsidiary of the parent.

Accepted Answer

A subsidiary merger is when one company acquires all the shares of another company, which becomes a subsidiary of the acquiring company. The target company continues to exist as a separate legal entity, but it is ultimately controlled by the parent company.

Question 19

Individual investors can generally diversify their own stock portfolios more efficiently than corporate managers who diversify the companies they manage.

Accepted Answer

Individual investors have the freedom and flexibility to choose from a wider range of stocks and can allocate their resources more efficiently than corporate managers who are bound by company policies and financial constraints.

Question 20

Which of the following represent alternative ways for businesses to reap some or all of the advantages of M&As?
A) Joint ventures and strategic alliances
B) Strategic alliances, minority investments, and licensing
C) Minority investments, alliances, and licensing
D) Franchises, alliances, joint ventures, and licensing
E) All of the above

Accepted Answer

All the options listed represent alternative ways for businesses to achieve some or all of the benefits of mergers and acquisitions (M&As) without fully merging or acquiring another company. Joint ventures, strategic alliances, minority investments, licensing, and franchises allow companies to access new markets, technologies, and resources, share risks, and collaborate on projects while maintaining their independence.

Quiz 1: Introduction to Mergers, acquisitions, and Other Restructuring Activities

The empirical evidence shows that unrelated diversification is an effective means of smoothing out the business cycle.

Which of the following are not true about ESOPs?

A firm may be motivated to purchase another firm whenever

ESOPs may be used for which of the following?

Growth is often cited as an important factor in acquisitions.The underlying assumption is that that bigger is better to achieve scale,critical mass,globalization,and integration.

Which of the following are generally considered restructuring activities?

Which of the following is an example of economies of scope?

Buyers often prefer "friendly" takeovers to hostile ones because of all of the following except for:

Which one of the following is not an example of a horizontal merger?

Which of the following represent disadvantages of a holding company structure?