Question 1

The elimination of overlapping functions and the meshing of two firms' strong areas or products creates the managerial incentive for mergers known as:

Accepted Answer

The description of the managerial incentive for mergers, where overlapping functions are eliminated and strong areas/products are meshed, suggests the creation of synergy. Synergy is the idea that the combined strengths of two companies will result in a greater output than the sum of their separate strengths. Horizontal integration refers to the merging of firms in the same industry, while vertical integration refers to the integration of firms in different stages of production. The portfolio effect refers to the reduction of risk that comes from diversifying investments. None of these options fit the description of the merger incentive given in the question.

Question 2

Which of the following is not a motive for selling by the shareholders of the acquired company?

Accepted Answer

The answer of Which of the following is not a...

Question 3

Aardvark Software,Inc.can purchase all the stock of Zebra Computer Services for $1,000,000 in cash.Zebra is expected to generate net after-tax cash flows of $100,000 per year for each of the next 10 years.Aardvark should:

Accepted Answer

The net present value (NPV) of the cash flows from Zebra, discounted at any positive cost of capital, will be less than $1,000,000, making the purchase unattractive.

Question 4

A white knight benefits the:

Accepted Answer

A white knight benefits the potential acquired firm because they are an alternative bidder who can potentially offer better terms and conditions than the original acquiring firm. This can result in a higher price for the acquired firm and more favorable outcomes for its shareholders and officers.

Question 5

Which of the following is not a potential benefit of a merger?

Accepted Answer

Increased standard deviation of earnings per share is not a potential benefit of a merger, as it indicates greater volatility and uncertainty in the earnings of the merged entity. The other options listed (greater access to financial markets, risk reduction, and potential tax benefits) are all potential benefits of a merger.

Question 6

Synergy is:

Accepted Answer

Synergy refers to the concept where the combined value and performance of two companies will be greater than the sum of the separate individual parts, hence the "2 + 2 = 5 effect." This means that by working together, they can achieve more than they could separately.

Question 7

Selling shareholders who are offered cash in a merger may be willing to part with the shares they hold because:

Accepted Answer

Selling shareholders may be willing to part with their shares if they are offered a price higher than the book value or market value of their shares. This provides an opportunity for the shareholders to receive a premium on their investment, which may be attractive to them. Choices A, B, and C do not address the main reason why selling shareholders may be willing to part with their shares in a merger.

Question 8

The financial motives for merger activity include all of the following except:

Accepted Answer

Vertical integration is a strategic motive, not a financial motive, for mergers.

Question 9

The portfolio effect after a merger should provide the firm with risk reduction benefits that result in:

Accepted Answer

The portfolio effect after a merger should provide the firm with risk reduction benefits that result in a decline in the standard deviation of possible outcomes as a result of risk reduction through diversification. While the expected value of earnings per share may remain relatively constant, it is not expected to decline. Therefore, the correct choice is D.

Question 10

The portfolio effect in a merger has to do with:

Accepted Answer

The portfolio effect in a merger refers to the reduction of risk that results from combining the portfolios of two companies. By combining resources and diversifying the portfolio, the risk of the overall investment is reduced. The other choices do not accurately describe the portfolio effect.

Question 11

Non-financial motives for mergers include:

Accepted Answer

Marketing expansion is a non-financial motive for mergers because it involves increasing the reach and customer base of the company, rather than purely financial benefits such as access to capital or tax benefits. Portfolio effect can also be considered a non-financial motive, but it is a more mixed motive as it can involve both financial and non-financial benefits. Access to capital and tax loss carry-forward are both purely financial motives for mergers.

Question 12

The Prad Corporation is considering a merger with the Stone Company which has 400,000 outstanding shares selling for $25.An investment dealer has advised that to succeed in its merger Prad Corp.would have to offer $45 per share for Stones' stock.Prad Corp.stock is selling for $30.How many shares of Prad Corp.stock would have to be exchanged to acquire all of Stones' stock?

Accepted Answer

The answer of The Prad Corporation is considering a merger...

Question 13

Which of the following type of merger creates goodwill?

Accepted Answer

The answer of Which of the following type of merger...

Question 14

In planning mergers,there is a tendency to _____ synergistic benefits.

Accepted Answer

There is often optimism surrounding mergers, and companies may overestimate the benefits that they will receive from the combination. This can lead to unrealistic expectations and potentially negative outcomes if the expected synergies do not materialize.

Question 15

An example of a horizontal merger would be:

Accepted Answer

A horizontal merger occurs between companies that operate in the same industry. Coca Cola and Canada Dry both produce soft drinks, making their merger horizontal.

Question 16

All of the following are potential benefits to a corporation in offering share purchases rather than non-equity compensation except:

Accepted Answer

The answer of All of the following are potential benefits...

Question 17

The Celluloid Collar Corporation has $360,000 in tax loss carry-forwards.The Bowstring Shirt Company,a firm in the 30% tax bracket,would be willing to pay (on a non-discounted basis)the sum of ______________ for the carry-forward alone.

Accepted Answer

The tax loss carry-forward can be used to offset future taxable income, reducing taxes by 30% of the carry-forward amount. Therefore, $360,000 * 30% = $108,000.

Question 18

When a tobacco firm merges with a steel company,it would be called:

Accepted Answer

A conglomerate merger is when two companies from unrelated industries merge together. In this case, a tobacco firm and a steel company are from different industries and therefore the merging of the two would be considered a conglomerate merger.

Question 19

Which of the following is not a financial motive but rather an operating motive for merger and consolidation?

Accepted Answer

Desire for greater size is an operating motive for merger and consolidation, as it can lead to economies of scale and increased market power. The other options listed are financial motives, as they relate to improving financial performance or flexibility.

Question 20

Which of the following type of merger is most likely to lead to diversification benefits?

Accepted Answer

A conglomerate merger involves the combination of two or more companies that operate in unrelated industries. This type of merger can result in diversification benefits, as the merged entity can reap the benefits of operating in multiple industries and reduce overall risk through diversification.

Quiz 20: External Growth Through Mergers