Question 1

The cost of a merger equals the:

Accepted Answer

The cost of a merger is equal to the premium paid over the target's value as a separate entity. This means that the acquiring company pays a price above the fair market value of the target company in order to acquire it. This premium represents the cost of the merger as it is the additional amount that the acquiring company is paying to complete the transaction. The other options (A, B, and D) do not accurately reflect the cost of the merger.

Question 2

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

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 designed to make the target company less attractive to the acquiring company, and they can take the form of various measures such as issuing new securities, diluting existing shares, or implementing severe anti-takeover provisions. The purpose of poison pills is to discourage hostile takeovers and to protect the target company's shareholders by giving them more leverage in negotiations.

Question 3

A conglomerate merger occurs when:

Accepted Answer

A conglomerate merger involves the merging of companies from different industries. This is in contrast to a vertical or horizontal merger where the companies are in the same or related industries.

Question 4

A spinoff is an action in which:

Accepted Answer

A spinoff is an action in which a portion of the firm's assets is sold off to form a new company. This new company operates independently of its former parent company, with its own management team and board of directors. Ultimately, the goal of a spinoff is to create two separate companies that can both grow and succeed on their own, without being weighed down by the costs and inefficiencies of a larger organization.

Question 5

An increase in earnings per share may be increased by a merger if the:

Accepted Answer

An increase in earnings per share (EPS) can occur if the acquirer's price-to-earnings (P/E) ratio is higher than that of the target, as the merger can lead to a more favorable valuation and improved EPS.

Question 6

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

Accepted Answer

Mergers can result in economies of scale, which arise from a larger scale of production reducing average cost per unit. This can occur due to increased bargaining power with suppliers, greater utilization of fixed assets, and spreading of administrative and other costs over a larger volume of production. Increased market price (A) may benefit the merged entity but will not necessarily reduce average production costs. Increased financing (B) may improve access to capital but will not necessarily reduce average production costs. Diversification (D) may provide benefits such as risk reduction but does not directly relate to average production cost reductions.

Question 7

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

Accepted Answer

A horizontal merger occurs when two firms in the same industry merge or are acquired by each other. Acquiring a rival automobile manufacturer would be an example of a horizontal merger as both firms are in the same industry. Acquiring a steel mill, tire producer, or bank would not be considered a horizontal merger as they are not in the same industry as automobile manufacturing.

Question 8

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

Accepted Answer

If the acquired firm's shareholders receive more than the value of their firm, it means that the price paid for the merger is too high, and it may not be worth it. In this case, the cost of the merger outweighs the potential gain, as the acquirer is paying more than what the acquired firm is worth. Therefore, D is the best choice.

Question 9

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

Accepted Answer

A merger between Snapper Lawnmowers and Briggs and Stratton, where Snapper is acquiring the engine manufacturer, would be a vertical merger. This is because the two companies operate in different but related stages of the supply chain (lawnmower manufacturer and engine manufacturer). A conglomerate merger involves two companies with no common business interests, a leveraged buyout involves the acquisition of a company using borrowed funds, and a horizontal merger involves two companies in the same industry and stage of the supply chain.

Question 10

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

Accepted Answer

Repurchasing shares is a good choice for a firm with excessive free cash flow as it can improve the value of the remaining shares by reducing the number of outstanding shares. This can also indicate to investors that the firm has confidence in its future prospects. Acquiring a firm to diversify or bootstrap earnings requires careful consideration and may not always be the best choice, while a leveraged buyout involves taking on debt, which may not be appropriate for a firm with excessive free cash flow.

Question 11

ABC Corp.has offered 1 million shares having a total market value of $8 million for XYZ.After the merger is announced,shares in ABC trade for $7 each.If ABC is confident about XYZ's value,then the cost of the merger:

Accepted Answer

Preannouncement:Cost of merger = ($8 × 1m) − Value of acquired firmPost announcement:Cost of merger = ($7 × 1m) − Value of acquired firmDifference = ($7 − 8) × 1m = −$1mSince the value of XYZ is assumed constant, the cost of the merger has decreased by $1 million.

Question 12

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

Accepted Answer

In a tender offer, shareholders are given the opportunity to sell their shares directly to a would-be acquirer, often at a premium price.

Question 13

Diversification is often a poor motive for mergers because:

Accepted Answer

Investors have the ability to diversify their own portfolio without the need for a merger. Therefore, diversification is not a strong enough motive for a company to pursue a merger.

Question 14

In the case of a merger that is stock financed,the merger cost may change if the:

Accepted Answer

The merger cost in a stock-financed merger is affected by the value of the acquiring firm's shares, as the number of shares issued to finance the merger will depend on the acquiring firm's share price.

Question 15

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

Accepted Answer

A leveraged buyout, or LBO, is a type of acquisition where an outside group (usually a private equity firm) acquires a company primarily through the use of borrowed funds, often with the intention of restructuring and/or selling the company for a profit. In an LBO, the assets of the acquired company are often used as collateral for the debt used to finance the acquisition, making it a high-risk strategy.

Question 16

When one firm merges with another,the:

Accepted Answer

When one firm merges with another, the target firm is typically acquired by the acquiring firm and ceases to exist as a separate public company. The acquiring firm may then absorb the target firm's assets and liabilities. The boards of directors of the two firms may or may not merge, depending on the specific terms of the merger agreement. Shareholder approval is typically required, but the specific percentage required may vary depending on the jurisdiction and the terms of the merger agreement.

Question 17

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

Accepted Answer

If the total market value of the merged firms remains the same, it suggests that investors do not see any potential benefits or synergies resulting from the merger. This could be an indication that the merged firms are not expected to create value greater than the sum of their individual values, and therefore, the merger is not expected to result in any significant financial advantages.

Question 18

Firm B's 1 million shares of stock currently sell for $12 each,but firm A is preparing a tender offer of $18 per share.Firm A estimates the NPV of the merger to be $5 million.What percentage of the merger gains will be captured by firm B's stockholders?

Accepted Answer

Firm B % of gain = [($18 − $12) × 1m] / {[($18 − 12) × 1m] + $5m} = 0.5455, or 54.55%

Question 19

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

Accepted Answer

A buyout is when a firm's management takes the firm private with the aid of substantial debt. This involves acquiring all outstanding shares of the company and removing it from public trading. Tender offers involve an offer from an outside purchaser to buy a substantial number of shares from existing shareholders. Greenmail offers are when a hostile bidder purchases a significant portion of a target company's shares, then threatens a hostile takeover unless the company buys the shares back at a premium. Hostile takeovers involve the acquisition of a target company without the approval of its management.

Question 20

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

Accepted Answer

A proxy contest is when shareholders attempt to gather additional votes to change or replace management or the board of directors. A management buyout is when a company's management team purchases the company from its shareholders. A tender offer is a public offer to buy a significant portion of a company's shares. A poison pill is a defensive measure used by a company to make its shares less attractive to potential acquirers.

Quiz 21: Mergers,Acquisitions,and Corporate Control