Question 1

The long?run effect on the earnings per share of the merged firm depends largely on

Accepted Answer

The synergy of the merged firm, which refers to the potential financial benefits that result from the combination of two companies, can have a significant impact on the long-run earnings per share of the merged firm. A successful merger that generates significant synergy can lead to increased earnings per share, while a poorly executed one can result in lower earnings per share. The ratio of exchange, pre-merger P/E ratio, and tax considerations may also play a role, but they are not as significant as the synergy effect.

Question 2

The reduction of risk resulting from combining firms with differing seasonal or cyclical patterns ofsales or earnings is a key benefit of

Accepted Answer

Conglomerate mergers involve the combination of firms in unrelated industries. This reduces the risk of the combined entity as the earnings of one company may offset the seasonal or cyclical fluctuations of the other.

Question 3

A formal proposal to purchase a given number of shares of a firm's stock at a specified price is a

Accepted Answer

A formal proposal to purchase a given number of shares of a firm's stock at a specified price is called a tender offer. A warrant is a security granting the holder the right to buy underlying stock at a fixed price for a specified time period. A stock purchase option is an agreement between a company and a buyer that grants the buyer the option to buy shares of the company's stock at a certain price for a certain period. A right is a privilege granted to stockholders to subscribe for new issues of stock in proportion to their existing holdings.

Question 4

A leveraged buyout needs to be carried out through

Accepted Answer

The answer of A leveraged buyout needs to be carried...

Question 5

In defending against a hostile takeover, the strategy that involves the firm repurchasing through negotiation a large block of stock at a premium from one or more shareholders in order to end those shareholders' hostile takeover attempt is known as the __________strategy.

Accepted Answer

The strategy described is known as greenmail. This involves a company buying back a large block of stock from a shareholder who is attempting a hostile takeover at a premium price, in order to prevent the takeover from being successful. The shareholder may agree to sell their shares back to the company to make a profit and avoid a potential loss if the takeover attempt fails. This strategy is considered controversial and may be viewed unfavorably by other shareholders.

Question 6

The combination of two or more companies which results in one of the corporations having a voting control of one or more of the other companies is a

Accepted Answer

A holding company is a corporation that owns enough voting stock in another company to control its policies and management.

Question 7

A__________ is a method of structuring a financial merger, whereas a__________ involves the sale ofthe firm's assets.

Accepted Answer

A leveraged buyout (LBO) is a method of structuring a financial merger, where the buyer uses a combination of equity and debt to acquire a company. Divestiture involves the sale of a company's assets. Therefore, a leveraged divestiture is not a commonly used term, whereas a leveraged buyout with a subsequent divestiture of certain assets may be possible.

Question 8

If the P/E paid is greater than the P/E of the acquiring company, the effect on the earnings per share of the acquired company will be

Accepted Answer

The higher P/E paid by the acquiring company indicates that the market values the acquired company's earnings more highly, leading to a positive effect on the acquired company's earnings per share.

Question 9

If the P/E paid is less than the P/E of the acquiring company, the effect on the earnings per share of the acquired company will be

Accepted Answer

The P/E paid is the price paid for each share of the acquired company divided by the earnings per share of the acquired company. If the P/E paid is less than the P/E of the acquiring company, then the acquiring company is paying less for each dollar of earnings of the acquired company. This will result in a higher earnings per share for the acquired company.

Question 10

When a firm undertakes a merger in order to eliminate redundant functions or increase market share, this is an example of

Accepted Answer

This type of merger is intentionally planned in order to achieve certain strategic goals, such as eliminating redundancy or increasing market share. A friendly merger involves two companies agreeing to merge for mutual benefit, while a financial merger focuses on financial benefits such as tax savings. Hostile takeovers occur when one company acquires another company without the agreement of the target company's management.

Question 11

Most firms seeking merger partners will hire the services of

Accepted Answer

When firms are seeking merger partners, they typically hire investment bankers. Investment bankers specialize in providing financial advice to companies and can assist in finding potential merger partners, negotiating deals, and facilitating the transaction process. Private contractors and commercial bankers do not typically have the same level of expertise and services necessary for mergers and acquisitions, while investment brokers may provide related services but are not as specialized in the M&A process.

Question 12

Normally, the acquiring firm pays a price that is a premium above the market price of the acquired firm. This means that the ratio of exchange in market price is

Accepted Answer

When the acquiring firm pays a premium above the market price of the acquired firm, it means that the ratio of exchange in market price is greater than 1. This is because the acquiring firm is willing to pay more than what the market values the acquired firm at, in order to gain control of it.

Question 13

In defending against a hostile takeover, the strategy that involves the target firm creating securitiesthat give their holders certain rights that become effective when a takeover is attempted is called the __________strategy.

Accepted Answer

The strategy described in the question is the poison pill. This involves the target firm creating securities (usually in the form of stock options) that are triggered if a hostile takeover attempt is made. These securities can make the takeover much more expensive or difficult for the acquiring company, thereby deterring them from pursuing it further. Shark repellent, golden parachute, and greenmail are all different strategies for defending against a hostile takeover.

Question 14

An attractive candidate for acquisition through leveraged buyout should possess which of the following characteristics:

Accepted Answer

All of the listed characteristics are important for an attractive candidate for acquisition through leveraged buyout. A low level of debt and stable cash flows ensure that the company can meet its financial obligations and invest in growth. A good position in the industry with solid profit history and growth potential is important for long-term success. Bankable assets can also be useful for securing financing. Thus, all of these characteristics are desirable for an attractive candidate for acquisition through leveraged buyout.

Question 15

When making a cash acquisition of a going concern, the acquiring corporation must be certain

Accepted Answer

The answer of When making a cash acquisition of a...

Question 16

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, both the acquiring and the target companies have the same

Accepted Answer

When the ratio of exchange is equal to one and the premerger earnings per share are the same for the acquiring and target companies, the post-merger earnings per share will also be the same. Therefore, both companies will have the same P/E ratio.

Question 17

Typically, reasons for undertaking mergers are

Accepted Answer

Mergers can be driven by both strategic and financial reasons. Strategic reasons may include gaining access to new markets, accessing new technology or skills, or acquiring key talent. Financial reasons may include achieving economies of scale, reducing costs, or increasing market share. Ultimately, the goal of a merger should be to create value for shareholders, which aligns with wealth maximization.

Question 18

The "stakeholders" in targeted takeover companies include the

Accepted Answer

The stakeholders in targeted takeover companies include employees, customers, creditors, and shareholders. Each of these groups has a vested interest in the outcome of the takeover, as it can have significant implications for their roles and financial status within the company. Therefore, all of the options listed above are correct.

Question 19

Business failure may be caused by all of the following EXCEPT

Accepted Answer

Book value of assets that exceed liabilities would not cause business failure.

Question 20

A friendly merger transaction is typically consummated through all of the following EXCEPT

Accepted Answer

A tender offer is typically associated with hostile takeovers, not friendly mergers.

Quiz 18: Mergers and Acquisitions, and Business Failure