Question 1

Large-scale efforts to make a firm less appealing in the midst of a potential merger are known as:
A)Proxy fights
B)Leveraged buyouts
C)Shark repellents
D)Poison pills

Accepted Answer

Large-scale efforts to make a firm less appealing in the midst of a potential merger are known as poison pills. Poison pills are strategies used by companies to discourage hostile takeovers or mergers by making the target company less attractive to the acquiring company. They involve implementing measures such as issuing new shares, offering special dividends, or implementing other defensive strategies to make the potential merger less appealing.

Question 2

When a management team buys the firm from current shareholders while continuing to manage and often incurring large segments of debt, it is known as a:
A)Management buyout
B)Spin-off
C)Successful greenmail attempt
D)Corporate break-up

Accepted Answer

A management buyout (MBO) is a transaction where a company's management team purchases the assets and operations of the business they manage. This is usually accomplished with the financial backing of private equity investors or by assuming a significant amount of debt. The existing shareholders, which may include institutional investors, individual investors, or the public, are typically bought out and receive a cash payment for their shares. MBOs are a form of corporate restructuring that enable management teams to take greater control of their businesses and create opportunities for growth and increased profitability.

Question 3

Other things equal, which of the following groups of stakeholders should expect to lose value as a result of an LBO?
A)Selling shareholders
B)Buying shareholders
C)Bondholders
D)Investment bankers

Accepted Answer

In an LBO, the acquiring company typically takes on significant debt to finance the acquisition, which can increase the risk for bondholders. As a result, bondholders should expect to lose value if the company does not generate enough cash flow to cover its debt obligations. Selling shareholders may also not receive as much value as they would in a traditional sale, since the acquiring company is using a large portion of debt to finance the transaction. Buying shareholders may benefit from an LBO if the acquisition is successful and the company generates strong cash flows, but this is not always guaranteed. Investment bankers may earn fees from advising on an LBO, but their overall value is not necessarily dependent on the success of the transaction.

Question 4

Which of the following methods is the least likely to provide a change of corporate management?
A)Successful proxy fight
B)Voluntary resignation of all managers
C)Leveraged buyout of the firm
D)Merger or acquisition

Accepted Answer

A successful proxy fight, a leveraged buyout, or a merger/acquisition could all lead to a change of corporate management. However, voluntary resignation of all managers is the least likely to result in a change of management as it implies that the current managers are willingly leaving their positions, rather than being replaced.

Question 5

In the case of a merger that is stock financed, the assumed merger cost may be incorrect if the:
A)Value of the acquired firm's shares changes after the merger announcement
B)Value of the acquiring firm's shares changes after the merger announcement
C)Long-term interest rates increase
D)Merger is either horizontal or vertical

Accepted Answer

The assumed merger cost may be incorrect if the value of the acquiring firm's shares changes after the merger announcement, as the stock used to finance the merger is valued based on the acquiring firm's share price.

Question 6

In which of the following ways can the management teams of many corporations influence the board of directors?
A)By merging with another firm
B)Through appointment of shareholders to replace current board members
C)Through management's nomination of board candidates
D)By declaring a liquidating cash dividend

Accepted Answer

The management teams of many corporations can influence the board of directors through management's nomination of board candidates. This allows the management team to have a say in who is on the board and therefore shape the direction of the company. A and D are not relevant to influencing the board of directors, and while B is possible, it would require a significant effort in convincing shareholders to replace current members.

Question 7

If Canfor (lumber products) were to acquire a national homebuilding firm, the combination would be termed a:
A)Horizontal merger
B)Vertical merger
C)Conglomerate merger
D)A spin-off by the national homebuilding firm

Accepted Answer

A vertical merger occurs when a company within a supply chain merges with a company that is either a supplier or customer, allowing for more control and efficiency in the production process. In this scenario, Canfor acquiring a national homebuilding firm would be a vertical merger as lumber products are a key component in the building process.

Question 8

ABC Corp.has offered one million shares having a total market value of $8 million for XYZ Corp.After the merger is announced, shares in ABC trade for $7 each.If ABC is confident about XYZ's value, what has happened to the cost of the merger?
A)It increases by $1 million
B)It decreases by $1 million
C)It increases by $9 million
D)It remains constant Pre-Announcement:
Cost of merger = Value of acquired firm
= ($8 x 1 million) - value of acquired firm
= $8 million - value of acquired firm
Post-Announcement:
Cost of merger = $7 million - value of acquired firm

Accepted Answer

Since the market value of ABC's shares decreased from $8 to $7 after the announcement of the merger, the cost of the merger (i.e. the value of the acquired firm) must have decreased by $1 million. Therefore, the cost of the merger decreases by $1 million.

Question 9

The "Bootstrap Game" is played somewhat in defiance of traditional merger logic in that it:
A)Provides immediate benefit through improved management
B)Does not offer a positive NPV from the merger
C)Stays in effect only until EPS are increased
D)Does not require the approval of a majority of shareholders

Accepted Answer

The "Bootstrap Game" refers to mergers that do not create real economic value or positive NPV but are pursued to increase EPS through accounting or financial manipulation.

Question 10

Proxy fights are conducted in order to achieve a goal of:
A)Changing the corporate charter
B)Bringing about economies of scale
C)Replacing the current board and management team
D)Having a public tender offer

Accepted Answer

Proxy fights are conducted by shareholders who want to replace the current board and management team with their preferred candidates in order to influence the company's decision-making and strategy. Changing the corporate charter, bringing about economies of scale, and having a public tender offer are other ways in which shareholders can achieve their goals, but they do not necessarily involve a proxy fight.

Question 11

The free-cash-flow theory of takeovers predicts that:
A)Firms without free cash flow will become the most common LBOs
B)Firms with free cash flow will continue to be the acquirers
C)Firms with excess cash do not have a tendency to use it wisely
D)The riskiest takeover candidates are those with large amounts of free cash flow

Accepted Answer

The free-cash-flow theory of takeovers predicts that firms with excess cash do not have a tendency to use it wisely, leading to potential acquisitions as a way to utilize their excess funds. Therefore, the answer is C, which suggests that firms with free cash flow may not use it wisely. The other options are not supported by the theory.

Question 12

Which of the following is least likely to provide a motivation for vertical integration?
A)A continuous source of raw materials
B)A desire to spread fixed costs across more output
C)Access to an efficient distribution channel
D)Acquisition of an established customer base

Accepted Answer

The answer of Which of the following is least likely...

Question 13

The observation that cash-rich firms often use the funds to diversify rather than increase dividends indicates that:
A)Diversification is too costly for individuals
B)Growth is often valued for the sake of growth alone
C)Diversification is synergistic
D)Dividend-pricing models are of questionable value

Accepted Answer

Firms may pursue growth through diversification for reasons other than financial synergy, such as managerial incentives or perceived strategic benefits, even if it doesn't maximize shareholder value.

Question 14

One of the reasons why proxy fights are rarely successful is that:
A)Management is always viewed as performing their jobs well
B)Management can use corporate resources to defend against the fight
C)Mergers are a cheaper form of changing management
D)Shareholders are unconcerned with corporate management

Accepted Answer

Management has access to corporate resources such as legal teams, public relations teams, and other means to defend against a proxy fight. This often puts the dissident shareholders at a disadvantage in terms of resources and makes it difficult to overcome management's defenses.

Question 15

Which of the following is not correct concerning a proposed merger of firms?
A)The acquired firm will cease to exist
B)Shareholders of the acquired firm may receive securities in the acquiring firm
C)Mergers are sometimes combinations of equals
D)Shareholder approval to merge is not required

Accepted Answer

Shareholder approval is typically required for a merger to occur.

Question 16

The shareholders of firm A have offered one million shares valued at $10 each to acquire firm B After the merger is announced, stock A trades for $9 per share.Which of the following statements is not correct?
A)Firm A appears to have overbid for firm B

B)The NPV of the merger may differ from expectations
C)Shareholders of A absorb all additional "cost"
D)A's stockholders are better off than if the merger were cash financed for $10 million

Accepted Answer

The answer of The shareholders of firm A have offered...

Question 17

Mergers that attempt to bootstrap earnings may obtain increased current earnings per share at the expense of:
A)A higher price-earnings ratio
B)Higher total combined market value
C)Reduced future growth prospects
D)Increased free-cash-flow

Accepted Answer

Mergers that focus solely on obtaining increased current earnings may sacrifice long-term growth prospects. This may be due to the fact that the merging companies are not focused on improving operations and instead rely on cost-cutting measures to boost earnings in the short term. As a result, future growth prospects can be dampened, which can negatively impact the company's value in the long run. Higher price-earnings ratios and total combined market values may be positive outcomes of mergers, but they are not necessarily a direct result of bootstrapping earnings. Similarly, increased free-cash-flow may or may not be a result of these types of mergers.

Question 18

A firm seeking a friendly acquirer to avoid a hostile takeover is in need of a:
A)Bootstrap
B)White knight
C)Poison pill
D)Greenmail attempt

Accepted Answer

A white knight is a friendly acquirer that is sought by a firm to avoid a hostile takeover.

Question 19

A public offer to purchase the shares of existing shareholders in order to take the firm over is called a:
A)Tender offer
B)Greenmail attempt
C)Spin-off
D)Divestiture

Accepted Answer

A public offer to purchase the shares of existing shareholders in order to take the firm over is called a tender offer. Greenmail attempt refers to the act of a company repurchasing its own stock from an investor who has amassed a large stake only to sell it back to the same investor at a premium. Spin-off is a corporate action in which a company "spins off" a subsidiary or division as a separate entity, and divestiture refers to the sale or disposal of a subsidiary, division, or asset by a company.

Question 20

Firms with substantial amounts of free-cash-flow often discover that:
A)Conglomerate mergers are the best use for the funds
B)Accounting profits are what truly matter
C)They have become takeover targets
D)Their capital budgets have been too low

Accepted Answer

Firms with substantial amounts of free-cash-flow often become takeover targets because they have excess cash that is not needed for reinvestment in the business. This excess cash can make the company attractive to potential acquirers who could use the cash for other purposes, such as financing growth or paying dividends.

Quiz 23: Options

Large-scale efforts to make a firm less appealing in the midst of a potential merger are known as:

When a management team buys the firm from current shareholders while continuing to manage and often incurring large segments of debt, it is known as a:

Other things equal, which of the following groups of stakeholders should expect to lose value as a result of an LBO?

Which of the following methods is the least likely to provide a change of corporate management?

In the case of a merger that is stock financed, the assumed merger cost may be incorrect if the:

In which of the following ways can the management teams of many corporations influence the board of directors?

If Canfor (lumber products) were to acquire a national homebuilding firm, the combination would be termed a:

ABC Corp.has offered one million shares having a total market value of $8 million for XYZ Corp.After the merger is announced, shares in ABC trade for $7 each.If ABC is confident about XYZ's value, what has happened to the cost of the merger?

The "Bootstrap Game" is played somewhat in defiance of traditional merger logic in that it:

Proxy fights are conducted in order to achieve a goal of:

The free-cash-flow theory of takeovers predicts that:

Which of the following is least likely to provide a motivation for vertical integration?

The observation that cash-rich firms often use the funds to diversify rather than increase dividends indicates that:

One of the reasons why proxy fights are rarely successful is that:

Which of the following is not correct concerning a proposed merger of firms?

The shareholders of firm A have offered one million shares valued at $10 each to acquire firm B After the merger is announced, stock A trades for $9 per share.Which of the following statements is not correct?

Mergers that attempt to bootstrap earnings may obtain increased current earnings per share at the expense of:

A firm seeking a friendly acquirer to avoid a hostile takeover is in need of a:

A public offer to purchase the shares of existing shareholders in order to take the firm over is called a:

Firms with substantial amounts of free-cash-flow often discover that: