Question 1

Greenmail is a takeover defense under which the target firm repurchases a large block of shares at a premium from one or more shareholders in order to end a hostile takeover attempt by those shareholders.

Accepted Answer

Greenmail involves repurchasing shares at a premium to deter hostile takeover attempts.

Question 2

Pyramiding is an arrangement among holding companies wherein one company controls others,thereby causing an even greater magnification of earnings and losses.

Accepted Answer

Pyramiding involves one company controlling others in a way that magnifies earnings and losses.

Question 3

The companies controlled by a holding company are normally referred to as its subsidiaries.

Accepted Answer

This statement is true. Subsidiaries are companies that are owned and controlled by a parent holding company.

Question 4

Consolidation involves the combination of two or more firms, and the resulting firm maintains the identity of one of the firms.

Accepted Answer

Consolidation involves the combination of two or more firms, and the resulting firm creates a new identity, different from the identities of the firms that were merged. This is unlike amalgamation, where one of the firms maintains its identity.

Question 5

A conglomerate merger is the merger of firms in unrelated businesses.

Accepted Answer

A conglomerate merger is indeed the merger of firms that are in unrelated businesses. This type of merger is different from a horizontal merger (involving firms in the same industry) and a vertical merger (involving firms in different stages of the same industry).

Question 6

Technical insolvency occurs when a firm's liabilities exceed the fair market value of its assets.

Accepted Answer

The answer of Technical insolvency occurs when a firm's liabilities...

Question 7

If the P/E paid is greater than the P/E of the acquiring company, on a postmerger basis the target firm's EPS increases and the acquiring firm's EPS decreases.

Accepted Answer

This is because the P/E ratio is calculated by dividing the market price per share by the earnings per share. If the acquiring company pays a higher P/E ratio for the target company, it means they are paying more for each dollar of earnings. As a result, after the merger, the target company's earnings per share will have a greater impact on the overall earnings per share of the combined entity, leading to an increase in the target company's EPS and a decrease in the acquiring company's EPS.

Question 8

The actual ratio of exchange in a share-exchange acquisition is the ratio of the amount paid per share of the target company to the per-share market price of the acquiring firm.

Accepted Answer

The actual ratio of exchange is the ratio of the amount paid per share of the target company to the per-share market price of the acquiring firm.

Question 9

Conglomerate merger is a merger combining firms in unrelated businesses.

Accepted Answer

A conglomerate merger involves the combination of companies from different industries or sectors that are not related in terms of their products, services, or operations. This type of merger is often used to diversify a company's portfolio and spread risk across multiple industries.

Question 10

Strategic merger is a merger transaction undertaken with the goal of restructuring the acquiredcompany in order to improve its cash flow and unlock its hidden value.

Accepted Answer

A strategic merger is designed to improve the financial performance of the acquired company through restructuring and unlocking its hidden value, which can include synergies, cost savings, and increased market share. This is different from a merger which is primarily motivated by expanding market presence, diversification, or acquiring complementary products or services.

Question 11

An attractive candidate for acquisition through leveraged buyout usually has a relatively high level of debt and low level of "bankable" assets.

Accepted Answer

An attractive candidate for a leveraged buyout typically has a low level of existing debt and a high level of "bankable" assets, which can be used as collateral for the additional debt incurred during the buyout.

Question 12

The overriding goal for merging is the maximization of the owners' wealth as reflected in theacquirer's share price.

Accepted Answer

The main reason for merging is usually the economic benefit it brings to the acquiring company and its shareholders, which can be seen in the increase of the acquirer's stock price. Therefore, the statement is true.

Question 13

The owners of a holding company can control significantly larger amounts of assets than theycould acquire through mergers.

Accepted Answer

A holding company is able to control a larger amount of assets than through mergers because it typically holds controlling interest in other businesses, allowing it to consolidate their assets under its umbrella. This can lead to a larger overall asset base under the control of the holding company's owners.

Question 14

The main objective of a Plan of Arrangement is to wind-down the operations of a bankrupt firm.

Accepted Answer

The main objective of a Plan of Arrangement is to restructure the operations of a financially distressed firm in order to make it solvent again. This may involve debt restructuring, renegotiation of contracts, or other measures to improve the company's financial position. While a Plan of Arrangement may involve winding-down operations in some cases, this is not its primary objective.

Question 15

The synergy of mergers is the economies of scale resulting from merged firms' lower overhead.

Accepted Answer

The synergy of mergers refers to the benefits that result from the combination of two or more firms, including economies of scale, increased market power, and enhanced financial resources. One of the main advantages of mergers is the ability to reduce overhead costs by combining operations and resources, resulting in increased efficiency and profitability.

Question 16

Tender offer is a formal offer to purchase a given number of shares of a firm's stock at a specified price.

Accepted Answer

A tender offer is indeed a formal offer by a prospective acquirer to purchase a specific number of shares in a publicly traded company at a specified price.

Question 17

Vertical merger may result in expansion of operations in an existing product line and elimination of a competitor.

Accepted Answer

A vertical merger involves companies at different stages of production in the same industry, not direct competitors, so it doesn't eliminate a competitor but may expand operations.

Question 18

Stock swap transaction is an acquisition method in which the acquiring firm exchanges its shares for shares of the target company according to a predetermined ratio.

Accepted Answer

The statement is true.

Quiz 18: Mergers and Acquisitions, and Business Failure