Question 1

All the following will tend to discourage a takeover except:

Accepted Answer

Hoarding cash makes a company more attractive to potential acquirers because it increases the company's liquidity, making it a more appealing target. The other options are defensive measures that companies use to make themselves less attractive or harder to take over.

Question 2

Generous compensation packages paid to a firm's top managers in the event of a takeover are referred to as:

Accepted Answer

Golden parachutes are compensation packages that provide benefits to a company's top executives in the event of a takeover or change in ownership. These benefits may include large payouts, stock options, and other forms of compensation. The purpose of golden parachutes is to provide executives with financial security and incentives to stay with the company during a time of uncertainty and change. Therefore, choice A) is the best answer. Choices B), C), D), and E) are not relevant to the question of compensation packages paid to top managers during a takeover.

Question 3

The sale of stock in a wholly owned subsidiary via an initial public offering is referred to as a(n):

Accepted Answer

The sale of stock in a wholly owned subsidiary via an initial public offering is referred to as a carve-out. This is because the parent company is carving out a portion of the subsidiary and selling it to the public.

Question 4

A classified board is:

Accepted Answer

A classified board refers to a board where only a portion of the directors are elected in any one year. This is done to stagger the terms of the directors, ensuring that there is continuity on the board and preventing a complete turnover in any given year.

Question 5

Which one of the following statements is correct?

Accepted Answer

In a cash acquisition, shareholders of the acquired firm must recognize any capital gains or losses at the time of the acquisition because they are receiving cash in exchange for their shares. This is a taxable event where the shareholders must report the difference between the acquisition price and their basis in the stock.

Question 6

A contract wherein the bidding firm agrees to limit its holdings in the target firm is called a:

Accepted Answer

A standstill agreement is a contract between a bidder and a target firm that restricts the bidder's purchases of the target's securities. This agreement is often used in hostile takeovers to prevent the bidder from acquiring a controlling interest. The agreement typically includes a provision that requires the bidder to limit its holdings in the target firm, usually to a specific percentage of outstanding shares. This ensures that the bidder cannot gain too much control over the target firm, and gives the target firm time to explore alternative strategies.

Question 7

Assume Uptown Markets just made a tender offer to purchase shares of its own stock.This offer was made to all its shareholders except for the largest outside shareholder.This offer is referred to as a(n):

Accepted Answer

The offer made by Uptown Markets is exclusionary in nature since it is excluding the largest outside shareholder. It is also a self-tender offer since Uptown Markets is tendering for its own shares.

Question 8

A tactic designed to make unfriendly takeover attempts financially unappealing,if not impossible,is called:

Accepted Answer

A poison pill is a tactic used by a company to make an unfriendly takeover attempt financially unappealing or difficult. This can be achieved by implementing measures such as issuing new shares to existing shareholders, thus diluting the value of the acquiring company's shares, or granting existing shareholders the right to purchase additional shares at a discounted price, making the takeover more expensive.

Question 9

Assume an acquiring firm obtained control of a target firm through a tender offer.This group is now proposing a merger that is generally referred to as a:

Accepted Answer

The term "cleanup merger" refers to a type of merger where an acquiring company has already gained control of a target company through a tender offer and is now proceeding with a merger to complete the acquisition process. This type of merger is also sometimes called a "second-step merger" or "squeeze-out merger."

Question 10

The purchase accounting method for mergers requires that:

Accepted Answer

The purchase accounting method requires that the assets of the acquired firm be recorded at their fair market value on the balance sheet of the acquiring firm. This means that the excess of the purchase price over the fair market value of the target firm is allocated to specific assets such as inventory, property, plant and equipment, and intangible assets. Goodwill is also recognized as an asset on the balance sheet but it is not amortized on a yearly basis. The equity of the acquiring firm is not directly impacted by the purchase accounting method. Option A is incorrect because the excess amount paid is not recorded as a one-time expense on the income statement, but rather allocated to assets. Option B is incorrect because goodwill is not amortized annually. Option C is incorrect because the equity of the acquiring firm is not reduced by the excess amount paid for the target firm. Option E is incorrect because the excess amount paid is not recorded as a tangible asset, but rather allocated to specific assets.

Question 11

Which one of the following statements is correct?

Accepted Answer

A carve-out involves the parent company selling or spinning off a portion of its business into a separate entity, which can generate cash for the parent firm. A split-up may or may not follow a spin-off, and a divestiture involves selling or spinning off all or a significant portion of a business, but the original firm may still exist. A spin-off does not necessarily involve an initial public offering, and a carve-out is not a specific type of acquisition.

Question 12

The payments made by a firm to repurchase shares of its outstanding stock from an individual investor in an attempt to eliminate a potentially unfriendly takeover attempt are referred to as:

Accepted Answer

The payments made by a firm to repurchase shares of its outstanding stock from an individual investor in an attempt to eliminate a potentially unfriendly takeover attempt are referred to as greenmail. Greenmail is a strategy used by a target company to prevent a hostile takeover by repurchasing the acquiring company's stock at a premium price. This strategy effectively removes the acquiring company's incentive to continue with the takeover bid.

Question 13

A change in the corporate charter making it more difficult for the firm to be acquired by increasing the percentage of shareholders that must approve a merger offer is called a:

Accepted Answer

A change in the corporate charter that increases the percentage of shareholders needed to approve a merger offer is called a supermajority amendment. This makes it more difficult for a potential acquirer to gain control of the company, as they would need to obtain approval from a higher percentage of shareholders.

Question 14

The two sources of value created by an LBO are:

Accepted Answer

The two sources of value created by an LBO are increased efficiency and the interest tax shield. In an LBO, the new owner uses debt to buy out the existing owner(s) and becomes the majority shareholder. The interest on the debt is tax-deductible, creating an interest tax shield, which increases cash flow available to the firm. Additionally, the new owner will implement changes to streamline operations and increase efficiency, which can lead to increased profitability and cash flow.

Question 15

In a taxable transaction:

Accepted Answer

The answer of In a taxable transaction:
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Question 16

A friendly suitor that a target firm turns to as an alternative to a hostile bidder is called a:

Accepted Answer

A friendly suitor that a target firm turns to as an alternative to a hostile bidder is called a white knight. Option A is incorrect as there is no concept of a golden suitor. Option B is incorrect as poison put is a type of defense mechanism used by the target firm to make its stock less attractive to the acquirer. Option D is incorrect as shark repellent is also a type of defense mechanism. Option E is incorrect as crown jewel refers to the most valuable and strategic asset of a firm that it may sell to raise cash.

Question 17

Which one of these is least associated with takeovers?

Accepted Answer

Spin-offs typically involve a company separating a part of its business and creating a separate entity that will operate independently. While this can lead to changes in ownership and management, it is not typically associated with takeovers as the parent company usually retains control over the newly created entity. The other options are all commonly associated with takeovers, as they involve one company acquiring or gaining control over another.

Question 18

In a tax-free acquisition,the shareholders of the target firm:

Accepted Answer

In a tax-free acquisition, the shareholders of the target firm are viewed as having exchanged their shares, which means that they are not taxed on the transaction. This is because the consideration received in the acquisition is in the form of stock or other securities, and the shareholders' basis in the new securities generally equals the basis in the old securities. Therefore, no taxable gain or loss is realized until the shareholders sell the new securities at a later date. Option A is incorrect because the income received by the shareholders is not necessarily tax-exempt. Option B is incorrect because gifting shares to a tax-exempt organization does not necessarily result in no taxable gain. Option D is also incorrect because selling shares to a qualifying entity may result in no capital gains tax, but there may still be income tax consequences. Option E is incorrect because selling shares at cost would not necessarily avoid the capital gains tax.

Question 19

A going-private transaction in which a large percentage of the money used to buy the outstanding stock is borrowed is called a:

Accepted Answer

A leveraged buyout (LBO) is a going-private transaction in which a large percentage of the money used to buy the outstanding stock is borrowed. In this type of transaction, the acquiring company borrows a significant amount of money to purchase the target company's shares, and the target company's assets are used as collateral for the loan. Tender offers involve making an offer to purchase a certain number of shares of a company's stock at a premium price, while a proxy contest is a battle for control of a company's board of directors. A merger involves the combination of two or more companies into a single entity, while a consolidation involves the merger of two or more companies into a new entity.

Question 20

A firm may want to divest itself of some of its assets for all the following reasons except to:

Accepted Answer

Firms typically divest to eliminate unprofitable operations, raise cash, or cash in on profitable operations, but not to eliminate synergy, as synergy is generally beneficial.

Quiz 29: Mergers,acquisitions,and Divestitures

All the following will tend to discourage a takeover except:

Generous compensation packages paid to a firm's top managers in the event of a takeover are referred to as:

The sale of stock in a wholly owned subsidiary via an initial public offering is referred to as a(n) :

A classified board is:

Which one of the following statements is correct?

A contract wherein the bidding firm agrees to limit its holdings in the target firm is called a:

Assume Uptown Markets just made a tender offer to purchase shares of its own stock.This offer was made to all its shareholders except for the largest outside shareholder.This offer is referred to as a(n) :

A tactic designed to make unfriendly takeover attempts financially unappealing,if not impossible,is called:

Assume an acquiring firm obtained control of a target firm through a tender offer.This group is now proposing a merger that is generally referred to as a:

The purchase accounting method for mergers requires that:

Which one of the following statements is correct?

The payments made by a firm to repurchase shares of its outstanding stock from an individual investor in an attempt to eliminate a potentially unfriendly takeover attempt are referred to as:

A change in the corporate charter making it more difficult for the firm to be acquired by increasing the percentage of shareholders that must approve a merger offer is called a:

The two sources of value created by an LBO are:

In a taxable transaction:

A friendly suitor that a target firm turns to as an alternative to a hostile bidder is called a:

Which one of these is least associated with takeovers?

In a tax-free acquisition,the shareholders of the target firm:

A going-private transaction in which a large percentage of the money used to buy the outstanding stock is borrowed is called a:

A firm may want to divest itself of some of its assets for all the following reasons except to: