Question 1

In defending against hostile takeover attempts, a company will include provisions in theemployment contracts of key executives that provide them with sizable compensation if the firm istaken over. This is called the __________strategy.
A) shark repellent
B) greenmail
C) white knight
D) golden parachute

Accepted Answer

This is because this strategy is commonly referred to as a "golden parachute" where key executives are provided with substantial compensation in the event of a takeover. Option A, "shark repellent," refers to tactics used by a company to make itself less attractive to potential acquirers. Option B, "greenmail," involves a company buying back its own stock from a potential acquirer at a premium to discourage further takeover attempts. Option C, "white knight," refers to a third party that is invited by a company to come in and acquire it to fend off a hostile takeover attempt.

Question 2

A financial merger is undertaken to increase
A) cash flows; which is used to service the debt typically incurred to finance the merger transaction.
B) cash flows; which is used to increase dividends to shareholders.
C) operating efficiency; which is used to increase cash flows.
D) marketshare; which is used to maximize shareholder wealth.

Accepted Answer

The answer of A financial merger is undertaken to increase
A)...

Question 3

A combination of companies where the former corporations cease to exist is
A) a consolidation.
B) a congeneric formation.
C) a holding company.
D) a merger.

Accepted Answer

In a consolidation, two or more companies combine to form a new entity, and the original companies cease to exist.

Question 4

All of the following are advantages of holding companies EXCEPT
A) reduced federal corporate taxes due to the holding company status.
B) possible provincial tax benefits realized by each subsidiary in its state of incorporation.
C) lawsuits or legal actions against a subsidiary will not threaten the remaining companies.
D) since each subsidiary is a separate corporation, the failure of one company should cost the holding company no more than its investment in that subsidiary.

Accepted Answer

Holding companies do not necessarily result in reduced federal corporate taxes. The tax benefits realized by each subsidiary in its state of incorporation and the reduction in liability for the holding company are advantages of holding companies. The failure of one company should not cost the holding company more than its investment in that subsidiary is another advantage of holding companies.

Question 5

The primary advantage of a holding company, that permit(s) the firm to control a large amount ofassets with a relatively small dollar investment is known as
A) tax effects.
B) risk protection.
C) the leverage effect.
D) administrative costs.

Accepted Answer

The leverage effect is the primary advantage of a holding company, as it allows the firm to control a large amount of assets with a relatively small dollar investment. This is achieved by using debt financing to acquire subsidiaries and maintain control over them, which can increase the return on investment for the holding company.

Question 6

Which of the following is a common method used to pay for an acquisition?
A) Increase the market price of existing shares.
B) In a takeover, the winning company does not pay for the acquired firm.
C) Issue a new class of shares.
D) Pay shareholders of the acquired company a combination of shares and cash.

Accepted Answer

Paying shareholders of the acquired company a combination of shares and cash is a common method used to pay for an acquisition. This allows the acquiring company to use their own shares as currency while also providing cash for shareholders who may not want to hold onto the new company's shares.

Question 7

The creation of a high?debt, private corporation with improved cash flow and value is the goal in
A) leveraged buyout.
B) issuing junk bonds.
C) a financial merger.
D) conglomerate merger.

Accepted Answer

A leveraged buyout (LBO) involves a high level of debt being used to purchase a company, with the aim of improving the company's cash flow and value so that the debt can be paid off. Therefore, an LBO aligns with the described goal of creating a high-debt private corporation with improved cash flow and value. Issuing junk bonds, financial merger, and conglomerate merger do not necessarily involve the same level of debt or focus on improving cash flow and value in the same way as an LBO.

Question 8

A(n)__________ is undertaken with the goal of restructuring the acquired company in order to improve its cash flow and unlock its hidden value.
A) operating merger.
B) hostile takeover.
C) financial merger.
D) strategic merger.

Accepted Answer

A financial merger is aimed at restructuring the acquired company to enhance cash flow and reveal hidden value, often focusing on financial gains rather than operational synergies.

Question 9

Most firms seeking merger partners will hire the services of
A) an investment broker.
B) a commercial banker.
C) a private contractor.
D) an investment banker.

Accepted Answer

When seeking merger partners, firms often hire the services of investment bankers. Investment bankers specialize in mergers and acquisitions and can provide valuable advice and assistance throughout the process. They can help identify potential merger partners, negotiate the terms of the merger, and secure financing for the deal.

Question 10

In defending against a hostile takeover, the strategy involving the payment of a large,debt?financed, cash dividend is the __________strategy.
A) leveraged recapitalization
B) white knight
C) shark repellent
D) golden parachute

Accepted Answer

The strategy involving the payment of a large, debt-financed, cash dividend is known as leveraged recapitalization. This involves taking on a significant amount of debt in order to pay a one-time cash dividend to shareholders, making the company less attractive to potential acquirers.

Question 11

A merger involving the purchase of a specific product line, rather than the whole company is
A) a selective lines merger.
B) a variation of the strategic merger.
C) a financial merger.
D) an operating merger.

Accepted Answer

A variation of the strategic merger involves acquiring specific assets or product lines that align with the acquiring company's strategic goals, rather than purchasing the entire company.

Question 12

When the ratio of exchange in a merger is equal to one and both the acquiring and the target companies have the same premerger earnings per share, the merged firm's earnings per share will initially
A) remain constant.
B) increase.
C) drop to zero.
D) decline.

Accepted Answer

When the ratio of exchange is equal to one and both companies have the same premerger earnings per share, the merged firm's earnings per share will remain constant because there is no dilution or accretion of earnings. The combined earnings per share will be equal to the premerger earnings per share.

Question 13

Generally, a combination of two firms of unequal size is called
A) a congeneric formation.
B) a holding company.
C) a consolidation.
D) a merger.

Accepted Answer

A combination of two firms of unequal size is called a merger. A merger involves the joining of two companies, with one usually maintaining its identity while the other is absorbed into it. The resulting company retains the legal identity of the larger of the two companies involved in the transaction.

Question 14

Greater control over the acquisition of raw materials or the distribution of finished goods is an economic benefit of
A) vertical merger
B) conglomerate merger
C) congeneric merger
D) horizontal merger

Accepted Answer

A vertical merger involves the combination of companies that operate at different stages of the production process, such as a supplier and a manufacturer or a manufacturer and a distributor. This type of merger allows for greater control over the acquisition of raw materials and the distribution of finished goods. By bringing these stages under one company, it can streamline operations, reduce costs, and improve efficiency, ultimately leading to economic benefits.

Question 15

All of the following are disadvantages of holding companies EXCEPT
A) high cost of administration.
B) increased risk.
C) legal responsibility for subsidiaries.
D) double taxation.

Accepted Answer

Holding companies typically do not have legal responsibility for the liabilities of their subsidiaries, which is a key advantage rather than a disadvantage.

Question 16

When a firm undertakes a merger to improve its sources and supply of raw materials, this is an example of a
A) hostile takeover.
B) friendly merger.
C) financial merger.
D) strategic merger.

Accepted Answer

A merger undertaken to improve sources and supply of raw materials is a strategic merger. This type of merger is usually done to gain access to essential resources, reduce production costs, and increase efficiency. It is not a hostile takeover because it is a mutual decision between the two firms, and it is not merely a financial transaction like a financial merger.

Question 17

__________is an arrangement initiated by the debtor firm to negotiate with the creditors about a plan for sustaining or liquidating the firm.
A) A filing under the Bankruptcy and Insolvency Act.
B) An involuntary reorganization.
C) An involuntary liquidation.
D) A voluntary settlement.

Accepted Answer

A voluntary settlement is an arrangement initiated by the debtor firm to negotiate with the creditors about a plan for sustaining or liquidating the firm. It is a voluntary agreement between the debtor and the creditors, unlike an involuntary reorganization or liquidation where the decision is made by a court. A filing under the Bankruptcy and Insolvency Act may lead to a voluntary settlement or an involuntary reorganization/liquidation, but it does not specifically refer to a plan initiated by the debtor firm.

Question 18

In defending against a hostile takeover, the strategy that involves the target firm finding a more suitable acquirer and prompting it to compete with the initial hostile acquirer to take over the firm is called the__________ strategy.
A) greenmail
B) white knight
C) golden parachute
D) poison pill

Accepted Answer

The strategy described is known as the "white knight" strategy, where the target firm seeks out a more favorable acquirer to compete with the hostile acquirer. Greenmail involves buying back a significant amount of the company's own shares at a premium to discourage the hostile acquirer, golden parachute offers executives large compensation packages in the event of a takeover, and poison pill involves implementing measures to make the target firm less attractive to the hostile acquirer.

Question 19

Marketing Concepts, Inc. is considering the acquisition of Management Theories, Inc. at a cashprice of $1.5 million. Management Theories, Inc. has short?term liabilities of $500,000. As a resultof acquiring Management Theories, Inc., Marketing Concepts, Inc. would acquire the copyrights to a national best?seller which would provide an estimated cash flow of $300,000 for the next five years. The firm has a cost of capital of 20 percent. The approximate net present value of this acquisition is
A) -$1,102,700.
B) $480,800.
C) -$102,700.
D) $500,000.

Accepted Answer

The net present value of the acquisition is the present value of the cash flows minus the acquisition price. The present value of the cash flows is $300,000 x (1 - 1/(1 + 0.2)^5)/0.2 = $980,800. The net present value is $980,800 - $1,500,000 = -$519,200.

Question 20

A hostile merger is typically accomplished through
A) a tender offer.
B) an exchange of the acquirer's stocks and bonds.
C) a cash purchase.
D) an exchange of the acquirer's stock.

Accepted Answer

A hostile merger is typically accomplished through a tender offer, which involves the acquirer making a direct offer to the target company's shareholders to buy their shares at a premium price. This bypasses the target company's management, who may not be willing to sell the company.

Quiz 18: Mergers and Acquisitions, and Business Failure

In defending against hostile takeover attempts, a company will include provisions in theemployment contracts of key executives that provide them with sizable compensation if the firm istaken over. This is called the __________strategy.

A financial merger is undertaken to increase

A combination of companies where the former corporations cease to exist is

All of the following are advantages of holding companies EXCEPT

The primary advantage of a holding company, that permit(s) the firm to control a large amount ofassets with a relatively small dollar investment is known as

Which of the following is a common method used to pay for an acquisition?

The creation of a high?debt, private corporation with improved cash flow and value is the goal in

A(n) __________ is undertaken with the goal of restructuring the acquired company in order to improve its cash flow and unlock its hidden value.

Most firms seeking merger partners will hire the services of

In defending against a hostile takeover, the strategy involving the payment of a large,debt?financed, cash dividend is the __________strategy.

A merger involving the purchase of a specific product line, rather than the whole company is

When the ratio of exchange in a merger is equal to one and both the acquiring and the target companies have the same premerger earnings per share, the merged firm's earnings per share will initially

Generally, a combination of two firms of unequal size is called

Greater control over the acquisition of raw materials or the distribution of finished goods is an economic benefit of

All of the following are disadvantages of holding companies EXCEPT

When a firm undertakes a merger to improve its sources and supply of raw materials, this is an example of a

__________is an arrangement initiated by the debtor firm to negotiate with the creditors about a plan for sustaining or liquidating the firm.

In defending against a hostile takeover, the strategy that involves the target firm finding a more suitable acquirer and prompting it to compete with the initial hostile acquirer to take over the firm is called the__________ strategy.

A hostile merger is typically accomplished through