Question 1

The cost of capital of Firm A is 11.2 percent compared to 14.1 percent for Firm B.The market rate of return is 10.8 percent and the risk-free rate is 4 percent.Firm A is considering the acquisition of Firm B.Should this acquisition occur,it will be financed with debt at an interest cost of 8.7 percent.Which of these rates is most appropriate to use as the discount rate when analyzing the acquisition of Firm B by Firm A?

Accepted Answer

D

Question 2

In a true merger,not a consolidation,the acquirer

Accepted Answer

In a true merger, the acquirer assumes the liabilities and debts of the target firm, while the target firm ceases to exist as a separate entity.

Question 3

Which of these may be a source of synergy?
I.Unused debt capacity
II.Economies of scale
III.Increase in overall revenue
IV.Unused net operating losses

Accepted Answer

Synergy can arise from various sources, including unused debt capacity, economies of scale, increased revenue, and unused net operating losses, as they all can enhance the combined value of merging entities.

Question 4

Assume Firm A acquires Firm B.As a result,the EPS of Firm A increase by 10 percent.Given this increase,you know for certain that the

Accepted Answer

The increase in EPS indicates that the total earnings of the combined firm increased relative to the total number of shares, leading to a higher EPS.

Question 5

Synergy is created in an acquisition only if the

Accepted Answer

Synergy is created in an acquisition only if the value of the combined firm exceeds the sum of the individual firm's separate values. This means that the value of the merged entity should be greater than the total value of the two companies if they were to continue operating separately. Only then can the acquisition be said to have created synergy.

Question 6

A taxable acquisition

Accepted Answer

Taxable acquisitions are generally more expensive than tax-free acquisitions because they can trigger immediate tax liabilities for the shareholders of the target firm, increasing the overall cost of the acquisition.

Question 7

Rizzo's is a new,well-financed manufacturing firm with high fixed costs.The firm has a strong demand,efficient operations and distribution systems,and low taxes.Rizzo's is most apt to acquire a target firm that will provide

Accepted Answer

Rizzo's high fixed costs make it a good candidate for economies of scale, which can help spread those fixed costs over a larger volume of output and lead to lower unit costs. Acquiring a target firm that will provide economies of scale can help Rizzo's achieve this goal. Vertical integration, unused debt capacity, marketing gains, or net operating losses may not necessarily provide this benefit.

Question 8

When a small number of investors acquire all of the equity shares in a firm using borrowed funds,the transaction is best described as a

Accepted Answer

A leveraged buyout (LBO) is an acquisition in which a small number of investors acquire all of the equity shares in a firm using borrowed funds. In an LBO, the debt is collateralized by the assets and cash flows of the target company, and the buyer typically uses the cash flows generated by the target to repay the debt. This results in a highly leveraged firm, which carries a significant amount of debt on its balance sheet. LBOs are often used as a way to take a company private, and they can be used to restructure a company or pursue growth opportunities that might not otherwise be available under public ownership.

Question 9

Which one of these statements is true?

Accepted Answer

Mergers require the approval of both the target and bidder firm's shareholders, making it a disadvantage due to the complexity and time involved in obtaining such approvals.

Question 10

Which one of these is the best justification for acquiring a firm?

Accepted Answer

The best justification for acquiring a firm is to create financial value by combining the bidder and target firms. This can be achieved through economies of scale, access to new markets, diversification of products and services, and synergies between the two companies. A successful acquisition can lead to increased revenue, profitability, and shareholder value. The other options listed do not provide a valid justification for acquiring a firm.

Question 11

As it applies to an acquisition,the term goodwill is defined as the difference between the

Accepted Answer

Goodwill is the amount paid for an acquisition that exceeds the estimated fair market value of the net assets acquired. In other words, it represents the value of the target firm's intangible assets such as brand name, customer relationships, and reputation that are not reflected in the book value of its assets. Therefore, option B is the correct definition of goodwill in the context of an acquisition.

Question 12

A tender offer is often contingent upon the

Accepted Answer

A tender offer typically includes a condition that the bidder acquires a certain percentage of voting shares in the target firm, which is usually a majority. This is known as the minimum tender condition or the acceptance threshold, and the offer is usually contingent upon the bidder achieving this threshold. Other conditions may include regulatory approval, completion of due diligence, or the absence of material adverse changes in the target firm's business. However, the approval of the target firm's board of directors, officers, or shareholders is not necessarily required for the tender offer to proceed.

Question 13

Which two of these are required for an acquisition to be considered tax-free?
I.The bidder must purchase the target firm for less than its current market value.
II.The acquisition must have a business purpose other than the avoidance of taxes.
III.The stockholders in the target firm must retain an equity interest in the bidder.
IV.The acquisition must be a lump sum cash transaction.

Accepted Answer

I) is incorrect because purchasing the target firm for less than its market value is not a requirement for a tax-free acquisition.

II) is correct because there must be a legitimate business purpose for the acquisition, and it cannot simply be for the purpose of avoiding taxes.

III) is correct because the stockholders in the target firm must retain an equity interest in the bidder in order for the acquisition to be tax-free.

IV) is incorrect because the acquisition does not have to be a lump sum cash transaction in order to be tax-free.

Question 14

The value of Firm B to Firm A is equal to:

Accepted Answer

The value of Firm B to Firm A is the sum of the benefits of acquiring B's assets (V_B) and the synergies created from the acquisition (ΔV). Option A includes the acquisition of B's liabilities, Option B subtracts the value of B's liabilities, Option D subtracts the synergies from the value of B's assets, and Option E includes the value of B's liabilities, which is not necessary for calculating the value of B to A.

Question 15

Which one of these statements is correct?

Accepted Answer

An acquisition of stock in a target firm may be followed by a formal merger. This allows the acquiring firm to gradually acquire more control over the target firm, and can also provide a way for the target firm's shareholders to receive a premium for their shares. However, approval from both parties and regulatory bodies may be required for the merger to take place. The other options are incorrect - in a merger, the titles to the target firm's assets are typically transferred to the acquirer, approval from the target firm's managers is not always required for an acquisition, and a tender offer can be effective even if it is not accepted by all of the target firm's shareholders.

Question 16

Under the purchase accounting method,

Accepted Answer

Under the purchase accounting method, acquired assets are recorded at fair market value. This means that the acquirer records the assets and liabilities of the target company at their fair market values at the time of acquisition, rather than their book values. Goodwill is also recorded as the excess of the purchase price over the fair market value of the net assets acquired. Goodwill is not amortized, but instead is tested for impairment annually or more frequently if events or circumstances indicate that it may be impaired.

Question 17

Which one of these statements is true?

Accepted Answer

An acquisition financed with shares of stock is generally a tax-free transaction for all involved shareholders because it is considered an exchange of shares rather than a taxable sale of assets or securities. This allows shareholders to defer any capital gains taxes until they actually sell the new shares they receive.

Question 18

Alto's is known for its efficient production and distribution of musical instruments and related products.Tenor's is a well-known brand of musical instruments with a marginal distribution system.Tenor's might appeal to Alto's as an acquisition target due to the potential synergy resulting from

Accepted Answer

The answer of Alto's is known for its efficient production...

Question 19

Which one of these should be the primary appeal of unused debt capacity to a bidder firm?

Accepted Answer

The primary appeal of unused debt capacity for a bidder firm is the tax savings resulting from increased interest expense on additional debt. This is because the interest payments on debt are tax-deductible, which reduces the bidder firm's tax liability. Therefore, the ability to increase interest expense on additional debt through unused debt capacity can be a significant tax-saving opportunity for the firm. The other options presented (A, B, C, and E) are not desirable reasons for a bidder firm to use unused debt capacity.

Question 20

The purchase ________ best fits the definition of a vertical acquisition.

Accepted Answer

A vertical acquisition occurs when a company acquires a supplier or a customer in the supply chain. In this case, the purchase of a coal mine by an electric utility company fits this definition as the utility company is acquiring a supplier of a critical input for their business.

Quiz 21: Mergers and Acquisitions Web Only

In a true merger,not a consolidation,the acquirer

Which of these may be a source of synergy? I.Unused debt capacity II.Economies of scale III.Increase in overall revenue IV.Unused net operating losses

Assume Firm A acquires Firm B.As a result,the EPS of Firm A increase by 10 percent.Given this increase,you know for certain that the

Synergy is created in an acquisition only if the

A taxable acquisition

Rizzo's is a new,well-financed manufacturing firm with high fixed costs.The firm has a strong demand,efficient operations and distribution systems,and low taxes.Rizzo's is most apt to acquire a target firm that will provide

When a small number of investors acquire all of the equity shares in a firm using borrowed funds,the transaction is best described as a

Which one of these statements is true?

Which one of these is the best justification for acquiring a firm?

As it applies to an acquisition,the term goodwill is defined as the difference between the

A tender offer is often contingent upon the

The value of Firm B to Firm A is equal to:

Which one of these statements is correct?

Under the purchase accounting method,

Which one of these statements is true?

Alto's is known for its efficient production and distribution of musical instruments and related products.Tenor's is a well-known brand of musical instruments with a marginal distribution system.Tenor's might appeal to Alto's as an acquisition target due to the potential synergy resulting from

Which one of these should be the primary appeal of unused debt capacity to a bidder firm?

The purchase ________ best fits the definition of a vertical acquisition.