Question 1

Which of the following is incorrect regarding accounting for acquisitions?
A) Goodwill resulting from an acquisition may not be amortized.
B) Companies use the purchase method for accounting for acquisitions.
C) Additional paid in capital is the excess of what the acquirer paid for the target that could not be accounted for in fair market value.
D) The acquirer assumes all the assets and liabilities of the target and all operating results from the date of acquisition going forward.

Accepted Answer

Additional paid-in capital refers to the amount of capital that is paid in by investors above the par value of the shares, not the excess of what the acquirer paid for the target that could not be accounted for in fair market value. This excess is typically recorded as goodwill in the context of acquisitions.

Question 2

The following illustration is best described as a merger.

Accepted Answer

The answer of The following illustration is best described as...

Question 3

Acquisitions and mergers can be pure cash transactions, or pure share transactions, but cannot be cash and share transactions.

Accepted Answer

Acquisitions and mergers can involve a combination of cash and share transactions, allowing companies flexibility in how they structure the deal.

Question 4

In a merger, both sets of shareholders have to agree to exchange their existing shares for shares in the new company.

Accepted Answer

In a merger, shareholders of both companies involved typically must agree to exchange their existing shares for shares in the newly formed entity, as part of the terms of the merger agreement. This process is essential for the merger to proceed, as it ensures that the owners of both companies approve of the consolidation and are willing to become shareholders of the combined entity.

Question 5

A fairness opinion is a document signed by a potential buyer guaranteeing it will keep confidential any information it sees in the data room about a target company.

Accepted Answer

A fairness opinion is a professional evaluation by an investment bank or financial services firm to assess whether the terms of a merger, acquisition, buyout, or selling price are fair. It is not a confidentiality agreement related to data room information.

Question 6

If a company or other investor buys an interest in a publicly traded company that is more than 1 percent of that publicly traded company's stock, the purchaser of the interest must file a Schedule 13D with the SEC.

Accepted Answer

The correct threshold for filing a Schedule 13D with the SEC is a purchase of more than 5% of a publicly traded company's stock, not 1%.

Question 7

Because of the no-shop clause the bidder of a tender offer must pay all security holders that tender shares the highest price paid in the tender offer.

Accepted Answer

The no-shop clause prevents the target company from seeking out other buyers, but it does not dictate the terms of how much the bidder must pay to the security holders. The "best price rule" or similar regulations might require paying the highest price to all tendering shareholders, but this is not directly related to the no-shop clause.

Question 8

A data room is more likely to be used in a friendly acquisition than with a hostile takeover.

Accepted Answer

In a friendly acquisition, both parties are cooperative and share detailed information willingly, often using a data room for due diligence. In a hostile takeover, the target company is unlikely to voluntarily provide access to a data room due to the adversarial nature of the acquisition.

Question 9

When an acquisition is made for cash, it is taxable in the hands of the target company shareholders, while a share swap is usually non-taxable.

Accepted Answer

In a cash acquisition, the target company's shareholders receive cash for their shares, which is typically considered a taxable event, resulting in capital gains tax. In contrast, a share swap, where shareholders receive shares of the acquiring company instead of cash, is often structured as a tax-free reorganization, avoiding immediate taxation.

Question 10

Cash acquisitions have tax-advantages for shareholders of the target company.

Accepted Answer

Cash acquisitions typically result in immediate tax liabilities for shareholders of the target company, as they must pay capital gains tax on the difference between the acquisition price and their original purchase price of the shares.

Question 11

An offering memorandum is usually prepared in hostile takeovers.

Accepted Answer

An offering memorandum is typically prepared for private placements of securities, not for hostile takeovers. It provides detailed information about the investment for potential investors, unlike the public and confrontational nature of hostile takeovers.

Question 12

Increased company size can sometimes be a good motive for mergers and acquisitions, and can also sometimes be a bad motive for mergers and acquisitions.

Accepted Answer

Increased company size through mergers and acquisitions can provide benefits such as economies of scale, market dominance, and diversification. However, it can also lead to negative outcomes like reduced efficiency, cultural clashes, and regulatory scrutiny, making it both a potentially good and bad motive.

Question 13

Diversification is a good motive for mergers and acquisitions.

Accepted Answer

The answer of Diversification is a good motive for mergers...

Question 14

The merger of two video game companies would best be described as a conglomerate merger.

Accepted Answer

A merger between two video game companies is typically considered a horizontal merger because it involves companies within the same industry combining operations.

Question 15

There is a potential merger in the U.S. snack cake industry. The current HHI is 1,700 and the new HHI would be 2,700. The U.S. Department of Justice would classify this as an un-concentrated market, which would increase the likelihood of this merger being approved.

Accepted Answer

The U.S. Department of Justice considers markets with an HHI below 1,500 as unconcentrated, between 1,500 and 2,500 as moderately concentrated, and above 2,500 as highly concentrated. An increase from 1,700 to 2,700 would move the market from moderately concentrated to highly concentrated, potentially raising antitrust concerns.

Question 16

A software company buying a sports franchise would best be described as a vertical merger.

Accepted Answer

A software company buying a sports franchise would be described as a conglomerate merger, as it involves companies from unrelated business activities or industries.

Question 17

ABC Company has a premerger value of $20 million and Company XYZ has a premerger value of $2.5 million. After merging the new company is worth $25.5 million. The synergy value of the merger is 25.5 million.

Accepted Answer

The synergy value of the merger is calculated by subtracting the sum of the individual premerger values of the companies from the post-merger value of the new company. In this case, it's $25.5 million - ($20 million + $2.5 million) = $3 million.

Question 18

Fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.

Accepted Answer

Fair market value is indeed defined as the price at which property would change hands between a willing buyer and a willing seller, both having reasonable knowledge of the relevant facts and neither being under any compulsion to buy or sell.

Question 19

When valuing a merger or acquisition using the discounted cash flow approach, free cash flows should be used when running the calculation as opposed to traditional cash flow.

Accepted Answer

Free cash flows are used in the discounted cash flow approach for valuing mergers or acquisitions because they represent the cash that is available to all investors (both equity and debt holders) after all operating expenses, taxes, and investments in working capital and fixed assets have been made, providing a more accurate measure of the company's available cash.

Question 20

Goodwill resulting from an acquisition is how much a company has overpaid to acquire another company.

Accepted Answer

Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired.

Quiz 21: Mergers and Acquisitions

Which of the following is incorrect regarding accounting for acquisitions?