Deck 23: Options

Question 1

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

A)Total market value of the merged firms does not change
B)The P/E ratio of the merged firms changes
C)The acquiring firm financed the merger with cash
D)The merged firms are from different industries

Answer 1

Total market value of the merged firms does not change

Question 2

A conglomerate merger occurs when:

A)Both partners are large in size
B)Large synergies are expected to develop
C)Firms from different industries merge
D)Both management teams remain intact after the merger

Answer 2

Firms from different industries merge

Question 3

The cost of a merger equals the:

A)Cash paid for the target firm
B)Increase in total earnings less the price paid
C)Premium paid over the target's value as a separate entity
D)Sum of cash and stock paid for the target firm

Answer 3

Premium paid over the target's value as a separate entity

Question 4

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

A)Acquire a firm to diversify
B)Acquire a firm to bootstrap earnings
C)A leveraged buyout
D)A repurchase of shares

Question 5

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

A)Management buyout
B)Tender offer
C)Leveraged buyout
D)Successful proxy fight

Question 6

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

A)Number of shares has increased
B)Price of the acquirer's stock increases
C)Price/earnings ratios were different in the pre-merger firms
D)Firm's additional earnings are spent on legal expenses of the merger

Question 7

The track record for proxy fights suggests they are:

A)Usually successful in forcing management out
B)Only successful when accompanied by a tender offer
C)Rarely effective in taking over management
D)The first step in a hostile takeover

Question 8

Firm B's one million shares of stock currently sell for $12 each, but Firm A is preparing an $18 per share tender offer.Firm A estimates the gain of the merger to be $6 million.What% of the merger gains will be captured by B's stockholders?

A)33.33%
B)50.00%
C)66.67%
D)75.00% NPV = overall gain - gain captured by B's shareholders.
$6 million = overall gain - $6 million
$12 million = overall gain

Question 9

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

A)Increased market share
B)A more efficient management
C)Economies of scale
D)Diversification

Question 10

When a firm's management takes the firm private with the aid of substantial debt it is known as a(n):

A)Tender offer
B)Greenmail offer
C)MBO
D)Hostile takeover

Question 11

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

A)A steel mill
B)A rival manufacturer
C)A tire producer
D)A bank

Question 12

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

A)Horizontal
B)Vertical
C)Conglomerate
D)It is equally likely to observe economies of scale in all merger types

Question 13

Diversification is often a poor motive for mergers because:

A)Vertical integration is rarely successful
B)Investors can diversify on their own account
C)It does not produce economies of scale
D)The increase in taxes overcomes gains in earnings

Question 14

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

A)Present value of the acquired firm exceeds the price paid for it
B)Present value of the merged firms is greater than the sum of their individual values
C)Merger allows cost savings to occur
D)Acquired firm's shareholders receive more than the value of their firm

Question 15

When one firm merges with another, the:

A)Boards of directors will merge also
B)Merger must be approved by 75% of the shareholders of the target firm
C)Merger must be approved by at least 50% of the shareholders of the target firm
D)Target firm will cease to exist

Question 16

A spin-off is an action in which:

A)The management bids for and acquires the firm
B)One firm issues stock to acquire another firm
C)Successful product lines are sold to competitors
D)A portion of the firm's assets are sold off to form a new company

Question 17

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

A)Management offers to sell the company to an acquirer
B)Board of directors offers to sell the company to the public
C)Shareholders are propositioned to sell their shares to outsiders
D)Management offers to buy all outstanding shares of the corporation

Question 18

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

A)Management buyout
B)Tender offer
C)Proxy contest
D)Poison pill

Question 19

The market for corporate control suggests that:

A)Management and ownership make a large difference in a firm's results
B)It is rare for mergers to show economic benefits over a sustained period
C)Hostile takeovers generate the most in additional value
D)LBOs cost more than they are worth

Question 20

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

A)A conglomerate
B)A divestiture
C)Horizontal
D)Vertical

Question 21

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

A)Proxy fights
B)Leveraged buyouts
C)Shark repellents
D)Poison pills

Question 22

When a management team buys the firm from current shareholders while continuing to manage and often incurring large segments of debt, it is known as a:

A)Management buyout
B)Spin-off
C)Successful greenmail attempt
D)Corporate break-up

Question 23

Other things equal, which of the following groups of stakeholders should expect to lose value as a result of an LBO?

A)Selling shareholders
B)Buying shareholders
C)Bondholders
D)Investment bankers

Question 24

Which of the following methods is the least likely to provide a change of corporate management?

A)Successful proxy fight
B)Voluntary resignation of all managers
C)Leveraged buyout of the firm
D)Merger or acquisition

Question 25

In the case of a merger that is stock financed, the assumed merger cost may be incorrect if the:

A)Value of the acquired firm's shares changes after the merger announcement
B)Value of the acquiring firm's shares changes after the merger announcement
C)Long-term interest rates increase
D)Merger is either horizontal or vertical

Question 26

In which of the following ways can the management teams of many corporations influence the board of directors?

A)By merging with another firm
B)Through appointment of shareholders to replace current board members
C)Through management's nomination of board candidates
D)By declaring a liquidating cash dividend

Question 27

If Canfor (lumber products) were to acquire a national homebuilding firm, the combination would be termed a:

A)Horizontal merger
B)Vertical merger
C)Conglomerate merger
D)A spin-off by the national homebuilding firm

Question 28

ABC Corp.has offered one 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?

A)It increases by $1 million
B)It decreases by $1 million
C)It increases by $9 million
D)It remains constant Pre-Announcement:
Cost of merger = Value of acquired firm
= ($8 x 1 million) - value of acquired firm
= $8 million - value of acquired firm
Post-Announcement:
Cost of merger = $7 million - value of acquired firm

Question 29

The "Bootstrap Game" is played somewhat in defiance of traditional merger logic in that it:

A)Provides immediate benefit through improved management
B)Does not offer a positive NPV from the merger
C)Stays in effect only until EPS are increased
D)Does not require the approval of a majority of shareholders

Question 30

Proxy fights are conducted in order to achieve a goal of:

A)Changing the corporate charter
B)Bringing about economies of scale
C)Replacing the current board and management team
D)Having a public tender offer

Question 31

The free-cash-flow theory of takeovers predicts that:

A)Firms without free cash flow will become the most common LBOs
B)Firms with free cash flow will continue to be the acquirers
C)Firms with excess cash do not have a tendency to use it wisely
D)The riskiest takeover candidates are those with large amounts of free cash flow

Question 32

Which of the following is least likely to provide a motivation for vertical integration?

A)A continuous source of raw materials
B)A desire to spread fixed costs across more output
C)Access to an efficient distribution channel
D)Acquisition of an established customer base

Question 33

The observation that cash-rich firms often use the funds to diversify rather than increase dividends indicates that:

A)Diversification is too costly for individuals
B)Growth is often valued for the sake of growth alone
C)Diversification is synergistic
D)Dividend-pricing models are of questionable value

Question 34

One of the reasons why proxy fights are rarely successful is that:

A)Management is always viewed as performing their jobs well
B)Management can use corporate resources to defend against the fight
C)Mergers are a cheaper form of changing management
D)Shareholders are unconcerned with corporate management

Question 35

Which of the following is not correct concerning a proposed merger of firms?

A)The acquired firm will cease to exist
B)Shareholders of the acquired firm may receive securities in the acquiring firm
C)Mergers are sometimes combinations of equals
D)Shareholder approval to merge is not required

Question 36

The shareholders of firm A have offered one 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?

A)Firm A appears to have overbid for firm B

B)The NPV of the merger may differ from expectations
C)Shareholders of A absorb all additional "cost"
D)A's stockholders are better off than if the merger were cash financed for $10 million

Question 37

Mergers that attempt to bootstrap earnings may obtain increased current earnings per share at the expense of:

A)A higher price-earnings ratio
B)Higher total combined market value
C)Reduced future growth prospects
D)Increased free-cash-flow

Question 38

A firm seeking a friendly acquirer to avoid a hostile takeover is in need of a:

A)Bootstrap
B)White knight
C)Poison pill
D)Greenmail attempt

Question 39

A public offer to purchase the shares of existing shareholders in order to take the firm over is called a:

A)Tender offer
B)Greenmail attempt
C)Spin-off
D)Divestiture

Question 40

Firms with substantial amounts of free-cash-flow often discover that:

A)Conglomerate mergers are the best use for the funds
B)Accounting profits are what truly matter
C)They have become takeover targets
D)Their capital budgets have been too low

Question 41

A merger is expected to produce cost savings of $50 million and the acquired firm's shareholders will receive a premium of 20% over the $150 million value of their firm.The gain of the merger to the acquirer is:

A)$20 million
B)$30 million
C)$50 million
D)$130 million Gain_A = gain from merger less premium given to shareholders of B
= $50 million - $30 million

Question 42

When two firms merge, the value of the acquiring firm will change by the:

A)Ggain from the merger
B)NPV minus the cost of the merger
C)NPV of the merger
D)Cost of the merger

Question 43

Which of the following statements is correct concerning the cost of two firms merging? The cost:

A)Is fixed when the merger is financed with cash
B)Can be affected by post-merger gains if cash is used
C)Decreases as the post-merger share price increases when stock is used to finance the merger
D)Is not determined until after the merger, regardless of the type of financing

Question 44

The most likely interpretation of headlines that read, "ABC Corp.adopts shark repellent" is that:

A)ABC wants to increase the difficulty of a takeover
B)ABC has made a tender offer for the shares of another firm
C)ABC will only merge with small-sized partners
D)ABC Corp.desires to reduce the costs of being acquired

Question 45

What type of financing is typically instrumental in bringing about leveraged buyouts?

A)Common-stock financing
B)Preferred-stock financing
C)Investment-grade bonds
D)Speculative-grade bonds

Question 46

Why is it not sufficient to state that a merger should occur simply because the economic gains are positive?

A)Gains are typically of an accounting nature
B)Shareholders of the target may capture all gains
C)Merger cost should be negative after discounting
D)The merger's gain must also exceed its NPV

Question 47

If the shareholders of an acquired firm capture all of the merger's gain, then the:

A)Cost of the merger is zero
B)NPV of the merger is zero
C)EPS will increase
D)Acquiring firm retains all merger benefits

Question 48

If two merged firms are shown to have a higher combined market value than the sum of the individual market values, then:

A)Economic gains are said to have taken place
B)The firms were previously underpriced
C)The merger provides diversification to investors
D)There is no cost involved in the merger

Question 49

Which of the following is not a method of changing the management of a firm?

A)Proxy contest
B)Merger and acquisition
C)LBO
D)MBO

Question 50

Firms A and B are each worth $50 million, but generate a $20 million gain when merged.If the cost of the merger was $5 million, how much did Firm A pay for Firm B?

A)$50 million
B)$55 million
C)$60 million
D)$65 million cost = cash - PV_B
$5 million = cash - $50 million

Question 51

In merger terminology, a white knight is:

A)Any suitor willing to bid more than the current share price for a firm
B)The successful bidder in a merger process
C)A suitor who acquires with cash rather than with stock
D)A friendly acquirer that will out-bid a hostile acquirer

Question 52

According to the free-cash-flow theory of takeovers, post-merger gains in market value represent:

A)An illogical assessment of earnings prospects
B)The remaining costs of the merger
C)The present value of free-cash-flow that will no longer be misused
D)Losses experienced by arbitrageurs and other speculators

Question 53

Firm B's one million shares of stock currently sell for $20 each.Firm A estimates the economic gain from the merger to be $10 million and is prepared to offer $22 cash for each share of B What% of the merger gain will be captured by firm B's shareholders?

A)20.00%
B)33.33%
C)50.00%
D)60.00% Economic gain = $10 million

Question 54

Which of the following is correct concerning a spin-off?

A)A division of a firm is reconstituted as a new firm
B)An unprofitable division is divested
C)A division of a firm is bought by its managers
D)The spin-off generates no free cash flow

Question 55

CBA Corp.is worth $15 million as a stand-alone firm.ABC Corp.has offered 350,000 shares valued at $50 each to merge with CBA.After the merger, however, ABC's shares are worth only $45 per share.What was the cost of the merger?

A)($1.75 million)
B)$0.75 million
C)$1.75 million
D)$3.25 million cost = $350,000 x $45 - $15 million
= $15.75 - $15 million

Question 56

What does empirical evidence suggest about the distribution of gains from mergers?

A)Shareholders of the acquired firm gain the most
B)Shareholders of the acquiring firm gain the most
C)Neither group of shareholders is likely to gain
D)Both groups of shareholders gain equally

Question 57

Firms that are acquired to take advantage of bootstrapping often have:

A)A lower price-earnings ratio than the acquirer
B)A higher price-earnings ratio than the acquirer
C)More outstanding shares than the acquirer
D)A higher market valuation than the acquirer

Question 58

Why might shareholders of an acquiring firm prefer to finance mergers with stock rather than with cash?

A)Stock financing is always less costly due to tax consequences
B)EPS fall when mergers are financed with cash
C)Target-firm shareholders will bear part of the cost if merger benefits were overestimated
D)All merger gains go to the acquirer when financed with stock

Question 59

Shares of a corporation can, under certain circumstances, be priced at different amounts to different investors under the terms of a:

A)Proxy agreement
B)Public tender offer
C)Poison pill
D)Shark repellent

Question 60

Which of the following statements seems most correct about a firm that has made a cash tender offer for two million shares of ABC Corp.at a price of $20, which is $6 higher than ABC's current value?

A)The economic gain of the merger exceeds $40 million
B)The economic gain of the merger exceeds $28 million
C)The economic gain of the merger exceeds $12 million
D)The economic gain of the merger would be zero after accounting for merger cost

Question 61

Which of the following statements is correct for a firm that has undergone a leveraged buyout?

A)Its shares are traded publicly
B)Its capital is mostly equity financed
C)Its shares are not traded publicly
D)It has a larger shareholder base

Question 62

The merger between Chase Manhattan and Chemical bank is an example of:

A)Vertical merger
B)Horizontal merger
C)Conglomerate merger
D)Direct merger

Question 63

A merger adds value by creating synergies.Which of the following is not a possible source of synergy?

A)Economies of scale
B)Economies of vertical integration
C)Combining complementary resources
D)Diversification

Question 64

Which of the following is the most appropriate reason for an acquiring firm's shareholders to prefer using stock financing for acquisitions?

A)There is no cash outflow
B)It mitigates the effects of overvaluation of the target firm
C)It mitigates the effects of undervaluation of the target firm
D)It avoids dilution of shares

Question 65

Attempt to gain control of a firm by winning votes of its shareholders is best defined as:

A)Leveraged Buyout
B)Poison Pill
C)Shark Repellent
D)Proxy Contest

Question 66

When shareholders are issued rights to buy shares if a bidder acquires a large stake in the firm is best defined as:

A)Leveraged Buyout
B)Poison Pill
C)Shark Repellent
D)Proxy Contest

Question 67

The benefits of merger is easier when the merging companies:

A)Have different computer systems
B)Have different pay structures
C)Have different resources
D)Have different company cultures

Question 68

Empirical studies show that the operating efficiency of firms having undergone a leverage buyout, ______ over the following 3 years.

A)Increases
B)Decreases
C)Does not change
D)Shows no clear trend

Question 69

The major cost of a merger is:

A)The legal fees
B)The cost of restructuring the acquired firm
C)The premium the acquirer pays to the target firm
D)The reduction in free cash flow

Question 70

Which of the following is not a takeover defence?

A)Shark repellant
B)Poison pill
C)White knight
D)Proxy contest

Question 71

A proxy is a method by which a shareholder can allow another shareholder to vote his/her shares.

Question 72

Which of the following motives for mergers make economic sense?

A)To achieve economies of scale
B)To reduce risk by diversification
C)Merging to redeploy cash
D)To increase earnings per share

Question 73

Changes in corporate charter designed to deter an unwelcome takeover is best defined as:

A)Leveraged Buyout
B)Poison Pill
C)Shark Repellent
D)Proxy Contest

Question 74

An acquiring company is considering a takeover of a target company.The acquiring company has 10 million shares outstanding with $40 per share.The target company has 5 million shares outstanding which sell for $20 per share.If the acquiring company estimates that merger gains will be $20 million, determine what the highest price will be paid per share for the target.

A)$24
B)$26
C)$28
D)$30

Question 75

An acquiring company is considering a takeover of a target company.The acquiring company has 15 million shares outstanding with $30 per share.The target company has 8 million shares outstanding which sell for $24 per share.If the acquiring company estimates that merger gains will be $16 million, determine what the highest price will be paid per share for the target.

A)$24
B)$26
C)$28
D)$30

Question 76

If Microsoft acquires Apple Computer, it will be an example of a:

A)Vertical merger
B)Horizontal merger
C)Conglomerate merger
D)Distribution-channel merger

Question 77

Which of the following is not a category of mergers?

A)Horizontal
B)Vertical
C)Conglomerate
D)Diagonal

Question 78

Economies of vertical integration are one possible source of synergy in mergers.

Question 79

Splitting AT&T in 1996 into four separate firms is an example of:

A)Leveraged buyout
B)Spin-off
C)Management buyout
D)Tender offer

Question 80

Conglomerate mergers involve companies in:

A)Similar lines of business
B)Different stages of the corporate lifecycle
C)Unrelated lines of business
D)Different countries