Question 1

Which of the following would shareholders regard as being an unacceptable reason for a takeover?
A)Increased market power.
B)Increase managerial perquisites.
C)Cost reductions.
D)Use of excess liquidity or free cash flows.

Accepted Answer

Shareholders would not consider an increase in managerial perquisites as an acceptable reason for a takeover because it would not result in any benefits to the shareholders themselves. Rather, it would benefit only the managers of the acquiring company. The other options (A, C, and D) are all commonly cited as legitimate reasons for a takeover and would likely be acceptable to shareholders.

Question 2

Bishop,Dodd and Officer (1987)reported a close relationship between changes in share prices and the number of:
A)takeovers.
B)horizontal takeovers.
C)vertical takeovers.
D)conglomerate takeovers.

Accepted Answer

Bishop, Dodd and Officer (1987) found a close relationship between changes in share prices and the number of takeovers. They did not distinguish between different types of takeovers, such as horizontal, vertical, or conglomerate. Therefore, the best choice is option A.

Question 3

Who restricts the use of past accumulated tax losses to situations where it can be shown that either the continuity of ownership test or the same business test is satisfied?
A)The chairperson of the ACCC.
B)The Minister of Finance.
C)The Treasurer.
D)The Commissioner of Taxation.

Accepted Answer

The Commissioner of Taxation restricts the use of past accumulated tax losses to situations where it can be shown that either the continuity of ownership test or the same business test is satisfied.

Question 4

Buzz Ltd,a tyre manufacturer,has recently taken over Bad-year Ltd,also a tyre manufacturer.This is an example of:
A)a horizontal takeover.
B)a vertical takeover.
C)a conglomerate takeover.
D)none of the given options.

Accepted Answer

A horizontal takeover refers to the acquisition of a company that is in the same industry and at the same stage of production as the acquiring company. In this case, Buzz Ltd and Bad-year Ltd are both tyre manufacturers, making it a horizontal takeover.

Question 5

'It is unlikely that undervaluation of targets is the main reason for takeover activity.' This statement is:
A)false,since markets have been proven to be inefficient.
B)true,since management of the bidding company may have private information.
C)false,since management of the bidding company may recognise the existence of alternative,better uses for assets of the target.
D)true,since market efficiency implies that such opportunities are rarely found.

Accepted Answer

Market efficiency suggests that all available information is already reflected in stock prices, making it unlikely for targets to be consistently undervalued.

Question 6

Horizontal takeover can be best defined as a takeover of:
A)a target company operating in the same line of business as the acquiring company.
B)a target company operating in a different line of business.
C)a company which is a supplier of goods to the acquiring company.
D)a target company in an unrelated type of business.

Accepted Answer

Horizontal takeover refers to the acquisition of a target company that operates in the same line of business as the acquiring company. This type of takeover helps the acquirer to increase its market share, reduce competition, and achieve economies of scale.

Question 7

Which effect means that lenders to one company can now be paid out of the combined assets of both companies?
A)The insurance effect.
B)The co-insurance effect.
C)The taxation effect.
D)The free cash flow effect.

Accepted Answer

The effect being described is the co-insurance effect. This occurs when two companies merge and the lenders to one company can now be paid out of the combined assets of both companies. This is because the two companies are now jointly liable for the debts of each other, effectively creating a co-insurance arrangement for the lenders.

Question 8

Conglomerate takeovers are likely to indicate:
A)agency problems between management and shareholders.
B)benefits from diversification for shareholders.
C)companies can reduce risk.
D)that shareholders can benefit from lower risk of default on debt due to less than perfectly correlated earnings streams between the bidder and target.

Accepted Answer

Conglomerate takeovers often suggest agency problems as management may pursue such takeovers to increase their own power and control rather than to maximize shareholder value.

Question 9

Cost saving is less likely to be a reason for takeover activity in:
A)horizontal takeovers.
B)vertical takeovers.
C)conglomerate takeovers.
D)both horizontal and vertical takeovers.

Accepted Answer

Conglomerate takeovers typically involve companies in unrelated industries, so cost savings through synergies is less likely to be a motivation for the takeover. Instead, the motivation may be to diversify the acquiring company's portfolio, expand its customer base, or gain access to new markets or technologies. Horizontal and vertical takeovers, on the other hand, often involve companies in the same or related industries and can result in cost savings through economies of scale or vertical integration.

Question 10

Which of the following reasons is least likely to explain takeover activity?
A)Target companies are undervalued.
B)The presence of economies of scale in servicing shareholders.
C)Increased market power resulting from takeovers.
D)There are tax benefits.

Accepted Answer

While economies of scale can be a reason for takeover activity, it is the least likely reason compared to the other options. Target companies being undervalued, increased market power resulting from takeovers, and tax benefits are all more common reasons for takeover activity.

Question 11

Which section of the Corporations Act gives a broad outline of the steps involved in a market bid?
A)Section 634.
B)Section 634A.
C)Section 634B.
D)Section 634C.

Accepted Answer

Section 634 of the Corporations Act outlines the steps involved in making a market bid, providing a framework for the process.

Question 12

Jetull Ltd,a furniture manufacturer,has recently acquired control of Pulp Ltd,a pulp and paper manufacturer.This is an example of:
A)a horizontal takeover.
B)a vertical takeover.
C)a conglomerate takeover.
D)none of the given options.

Accepted Answer

This is a conglomerate takeover because Jetull Ltd and Pulp Ltd operate in different industries, furniture manufacturing and pulp and paper manufacturing, respectively.

Question 13

A likely reason for a larger,listed company to acquire a smaller,unlisted company is that:
A)the smaller company is undervalued.
B)smaller companies are associated with greater tax benefits.
C)the management of the smaller company may lack expertise in some areas.
D)smaller companies tend to have excess liquidity.

Accepted Answer

A larger company may acquire a smaller company if it lacks expertise in certain areas that the smaller company can provide. This allows the larger company to expand its operations and potentially increase its profitability. The other options (undervalued, tax benefits, excess liquidity) may also be potential reasons for acquisition, but are not necessarily the most common or compelling reasons.

Question 14

Fluctuations in domestic takeover activity over time is generally considered to be related to:
A)investment optimism and regulation.
B)managerial expertise.
C)changes in dividend policies.
D)waves in the degree of market efficiency over time.

Accepted Answer

Fluctuations in domestic takeover activity over time are related to investment optimism and regulation. When there is optimism in the economy, there is an increase in takeover activity, and when there is pessimism, there is a decrease. Similarly, regulatory changes can affect takeover activity. For example, if the government enacts stricter regulations on mergers and acquisitions, it can discourage takeover activity.

Question 15

The market for corporate control can be defined as:
A)a market in which alternative teams of managers compete for the right to control corporate assets and make top-level management decisions.
B)the market of takeover activity.
C)the competition between management of a company to become the chief executive of a corporation.
D)an auction whereby alternative management teams make a bid to control a company.

Accepted Answer

The market for corporate control refers to the environment where different management teams vie for the opportunity to manage and make decisions for a company's assets, which aligns with option A.

Question 16

'Takeovers are value enhancing only because of synergistic gains'.Which of the following answers is most accurate regarding the aforementioned statement?
A)True.
B)False,value won't be affected by takeovers.
C)False,takeovers may also be value decreasing.
D)False,takeovers may be value enhancing for other reasons (e.g.replacing inefficient management).

Accepted Answer

Takeovers can enhance value not only through synergistic gains but also by other means such as replacing inefficient management, gaining access to new markets or technologies, achieving economies of scale, and more. Therefore, the statement is too narrow in its assertion that value enhancement comes solely from synergistic gains.

Question 17

Which section of the Competition and Consumer Act 2010 prohibits a company from acquiring the shares or assets of another company where the acquisition is likely to result in a substantial lessening of competition in a market?
A)Section 52.
B)Section 50.
C)Section 51.
D)Section 53.

Accepted Answer

Section 50 of the Competition and Consumer Act 2010 prohibits a company from acquiring the shares or assets of another company where the acquisition is likely to result in a substantial lessening of competition in a market. Section 52 pertains to misleading and deceptive conduct, section 51 deals with anti-competitive arrangements, and section 53 relates to boycotts.

Question 18

Which of the following takeovers are most likely to be motivated by management inefficiency?
A)Horizontal takeover.
B)Vertical takeover.
C)Conglomerate takeover.
D)All of the given options.

Accepted Answer

Horizontal takeovers involve the acquisition of a company that operates in the same industry as the acquiring firm. This type of takeover is most likely to be motivated by management inefficiency as the acquiring company aims to eliminate competition, reduce costs, and improve efficiency by integrating operations. In contrast, vertical takeovers involve the acquisition of a company that operates in a different stage of the supply chain, and conglomerate takeovers involve the acquisition of a company in an unrelated industry, both of which may be motivated by other strategic considerations beyond management inefficiency.

Question 19

Synergy can best be demonstrated as:
A)Value (A + B)< Value (A)+ Value (B)
B)Value (A + B)> Value (A)+ Value (B)
C)Value (A + B)= Value (A)+ Value (B)
D)Value (A + B)= or > Value (A)+ Value (B)

Accepted Answer

Synergy occurs when the combined value and performance of two companies are greater than the sum of the separate individual parts, hence option B) Value (A + B) > Value (A) + Value (B) accurately represents this concept.

Question 20

Conglomerate takeover can be best defined as a takeover of:
A)a target company operating in the same line of business as the acquiring company.
B)a target company operating in a different line of business.
C)a company which is a supplier of goods to the acquiring company.
D)a target company in an unrelated type of business.

Accepted Answer

Conglomerate takeover refers to the acquisition of a company that operates in an unrelated line of business from the acquiring company. The acquiring company seeks to diversify its operations and reduce risks by investing in businesses that are not directly related to its core operations. This allows the acquiring company to spread its risks across different industries and profit from the diversified portfolio of businesses.

Quiz 19: Analysis of Takeovers

Which of the following would shareholders regard as being an unacceptable reason for a takeover?

Bishop,Dodd and Officer (1987) reported a close relationship between changes in share prices and the number of:

Who restricts the use of past accumulated tax losses to situations where it can be shown that either the continuity of ownership test or the same business test is satisfied?

Buzz Ltd,a tyre manufacturer,has recently taken over Bad-year Ltd,also a tyre manufacturer.This is an example of:

'It is unlikely that undervaluation of targets is the main reason for takeover activity.' This statement is:

Horizontal takeover can be best defined as a takeover of:

Which effect means that lenders to one company can now be paid out of the combined assets of both companies?

Conglomerate takeovers are likely to indicate:

Cost saving is less likely to be a reason for takeover activity in:

Which of the following reasons is least likely to explain takeover activity?

Which section of the Corporations Act gives a broad outline of the steps involved in a market bid?

Jetull Ltd,a furniture manufacturer,has recently acquired control of Pulp Ltd,a pulp and paper manufacturer.This is an example of:

A likely reason for a larger,listed company to acquire a smaller,unlisted company is that:

Fluctuations in domestic takeover activity over time is generally considered to be related to:

The market for corporate control can be defined as:

'Takeovers are value enhancing only because of synergistic gains'.Which of the following answers is most accurate regarding the aforementioned statement?

Which section of the Competition and Consumer Act 2010 prohibits a company from acquiring the shares or assets of another company where the acquisition is likely to result in a substantial lessening of competition in a market?

Which of the following takeovers are most likely to be motivated by management inefficiency?

Synergy can best be demonstrated as:

Conglomerate takeover can be best defined as a takeover of: