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

Accepted Answer

If the total market value of the merged firms does not change, it may indicate that investors do not see any potential growth or cost savings from the merger, indicating no synergy. Alternatively, if the market value decreases, it could indicate that investors believe the merger will not be successful in achieving any synergies.

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

Accepted Answer

A conglomerate merger occurs when firms from different industries merge. This type of merger is done to diversify the business and reduce the risk associated with operating in a single industry. Both partners may or may not be large in size, and management teams may or may not remain intact after the merger. Large synergies may be expected, but this is not a defining factor of a conglomerate merger.

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

Accepted Answer

The cost of a merger equals the premium paid over the target's value as a separate entity. This is because the premium represents the amount paid to acquire the target firm above its standalone value, and therefore represents the additional cost of the merger. The other options do not fully capture the true cost of the merger as they do not take into account the premium paid or the potential dilution of stock if stock is used as a form of payment.

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

Accepted Answer

Repurchasing shares is the best option for a firm with excessive free cash flow. This helps to increase shareholder value by reducing the number of shares outstanding and increasing earnings per share. It also signals that the company has confidence in its future earnings and sends a positive message to the market. Acquiring a firm or conducting a leveraged buyout can be risky and may not be the best use of excess cash flow.

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

Accepted Answer

A leveraged buyout (LBO) involves an outside group, typically a private equity firm, using borrowed funds to acquire a company. In an LBO, the acquired company's assets are often used as collateral for the borrowed funds. This results in the acquired company having a significant amount of debt on its balance sheet.

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

Accepted Answer

An increase in EPS after a merger may not indicate increased value if the P/E ratios were different in the pre-merger firms, as the increase could be due to accounting changes rather than actual value creation.

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

Accepted Answer

Proxy fights are rarely effective in taking over management. Often, they are used as a way to bring attention to issues within a company or to pressure management to make changes, but they do not typically result in a complete takeover of management.

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

Accepted Answer

The answer of Firm B's one million shares of stock...

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

Accepted Answer

Mergers can result in economies of scale, where the combined company can achieve lower average production costs due to increased operational efficiency and spread fixed costs over a larger output.

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

Accepted Answer

The situation described is a management buyout (MBO), where the existing management of a company uses debt financing to take the company private. A tender offer is a public offer to buy shares of a company, often made by an external party. Greenmail involves an outside party buying a significant portion of a company's shares and threatening to take over control unless they receive a premium price for their shares. A hostile takeover involves an external party attempting to take control of a company against the wishes of the existing management.

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

Accepted Answer

A horizontal merger is when two companies of the same industry and level of production merge. Acquiring another automobile manufacturer would be a horizontal merger. The other options are not in the same industry as the automobile manufacturer and therefore would not be considered horizontal mergers.

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

Accepted Answer

The answer of In which merger type would it be...

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

Accepted Answer

Investors can diversify their own portfolios by investing in different companies or industries on their own. Mergers solely for the purpose of diversification do not necessarily create value for shareholders and may result in issues such as cultural clashes and integration challenges.

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

Accepted Answer

The cost of a merger may outweigh the potential gain if the acquired firm's shareholders receive more than the value of their firm, as this means that the payment made for the firm was too high, and the actual benefits of the merger may not outweigh the high cost. Option A and B are potential benefits of a merger, and C is a potential factor that can lead to cost savings and increase the value of the merged firms. However, the cost of the merger should also be taken into consideration to determine if it outweighs the potential benefits.

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

Accepted Answer

When one firm merges with another, the target firm will cease to exist and its assets, liabilities, and obligations will be transferred to the surviving firm. The boards of directors may also change, but it is not guaranteed. The approval by shareholders depends on the terms of the merger agreement and may vary.

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

Accepted Answer

A spin-off is when a portion of a company's assets are sold or separated off to form a new company. This new company is then owned by the shareholders of the original company. The spin-off allows the original company to focus on its core business, while the new company can focus on the spun-off assets and potentially grow in a different direction.

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

Accepted Answer

A tender offer is a proposal made directly to shareholders to purchase some or all of their shares at a specified price, often at a premium over the current market price, typically by an outsider or another company.

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

Accepted Answer

A proxy contest is a tactic used by shareholders to gather additional votes to challenge and potentially replace a company's existing management team. Shareholders solicit votes from other shareholders and present their case for why they believe management should be replaced. A management buyout is when a company's management team buys out the company from its current owners. A tender offer is when an investor offers to buy a significant portion or all of a company's outstanding shares. A poison pill is a defensive tactic used by a company to prevent a hostile takeover by making the company less attractive to the potential acquirer.

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

Accepted Answer

The market for corporate control suggests that management and ownership can make a significant difference in a firm's results. This is because the market for corporate control refers to the process by which companies are bought and sold, often through mergers and acquisitions, and the resulting changes in ownership and management can lead to changes in the company's performance.

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

Accepted Answer

The merger between Snapper Lawnmowers and Briggs and Stratton, both operating within the same industry, would be categorized as a vertical merger. This is because Snapper Lawnmowers produces lawnmowers, while Briggs and Stratton supplies them with gasoline-powered engines. Combining these firms would create a more integrated supply chain, allowing for greater operational efficiencies and cost savings.

Quiz 23: Options

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

A conglomerate merger occurs when:

The cost of a merger equals the:

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

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

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

The track record for proxy fights suggests they are:

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?

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

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

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

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

Diversification is often a poor motive for mergers because:

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

When one firm merges with another, the:

A spin-off is an action in which:

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

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

The market for corporate control suggests that:

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