Question 1

Realizing the benefits of a merger is easier when the merging companies have differing:

Accepted Answer

When merging companies have differing resources, they can complement each other, leading to synergies and enhanced capabilities, making it easier to realize the benefits of the merger.

Question 2

When two firms merge,the value of the acquiring firm will change by the:

Accepted Answer

The NPV (Net Present Value) of the merger represents the expected value of the merged entity, taking into account the costs and benefits of the merger. Therefore, the value of the acquiring firm will change by the NPV of the merger.

Question 3

The merger between Uptown Bank and Downtown Bank is an example of a:

Accepted Answer

A horizontal merger occurs when two companies in the same industry merge to become one entity. In this case, Uptown Bank and Downtown Bank are both banks, so this would be considered a horizontal merger.

Question 4

Why might shareholders of an acquiring firm prefer to finance mergers with stock rather than with cash?

Accepted Answer

When a merger is financed with stock, the shareholders of the acquiring firm are not required to pay out cash, which can be beneficial if the firm is short on cash reserves. Additionally, if the merger benefits turn out to be overestimated, the target-firm shareholders who received the stock will bear part of the cost instead of the acquiring firm's shareholders.

Question 5

A merger is expected to produce cost savings of $50 million and the acquired firm's shareholders will receive a premium of 20% over the $150 million value of their firm.The gain of the merger to the acquirer is:

Accepted Answer

Gain_A = $50 million − ($0.20 × $150m) = $20m

Question 6

Which one of the following is not a method of changing the management of a firm?

Accepted Answer

An MBO (Management Buyout) involves the existing management team buying out the company, rather than changing the management.

Question 7

Which one of the following statements is correct concerning the cost of two firms merging? The cost:

Accepted Answer

The answer of Which one of the following statements is...

Question 8

The most likely interpretation of headlines that read "ABC Corp.adopts shark repellent" is that ABC:

Accepted Answer

The use of "shark repellent" is a common anti-takeover measure adopted by companies to make it more difficult for other firms to acquire them. Therefore, option A is the most likely interpretation.

Question 9

CBA Corp.is worth $15 million as a stand-alone firm.ABC Corp.has offered 350,000 shares valued at $50 each to acquire CBA.After the announcement,however,the price of ABC's shares falls to $45.What was the cost of the merger?

Accepted Answer

Cost = (350,000 × $45) − $15 million = $0.75 million

Question 10

What type of financing is typically instrumental in bringing about leveraged buyouts?

Accepted Answer

Leveraged buyouts involve acquiring a company using a significant amount of debt, which is typically financed through speculative-grade bonds. This allows the acquirer to use the assets of the target company as collateral for the debt, increasing the potential returns. Common-stock and preferred-stock financing are less commonly used in leveraged buyouts, as they involve diluting ownership and control of the company. Investment-grade bonds are typically used for more conservative financing needs.

Question 11

XYZ Corp has made a cash tender offer for 2 million shares of ABC Corp.at a price of $20,which is $6 higher than ABC's current stand-alone value.What is the cost of the merger?

Accepted Answer

$6 × 2m = $12m

Question 12

Which one of the following is correct concerning a spin-off?

Accepted Answer

A spin-off involves taking a division of a firm and reconstituting it as a new, independent firm. It is not necessarily related to profitability or free cash flow, and it does not involve managers buying a division or divesting an unprofitable division (although those actions may be related to or occur during a spin-off).

Question 13

What does empirical evidence suggest about the distribution of gains from mergers?

Accepted Answer

Empirical evidence suggests that shareholders of the acquired firm typically gain the most from mergers, often receiving a premium on their shares.

Question 14

According to the free-cash-flow theory of takeovers,many acquisitions are motivated by:

Accepted Answer

According to the free-cash-flow theory of takeovers, many acquisitions are motivated by the belief that free cash flow will no longer be misused. This theory suggests that when companies have excess cash flow, they may use it inefficiently by investing in negative-NPV projects or hoarding cash, which lowers shareholder value. In this situation, another company could acquire the first company and use the excess cash flow more efficiently, resulting in a positive change in shareholder value. Therefore, the motivation behind many acquisitions is to prevent the misuse of free cash flow.

Question 15

A merger adds value by creating synergies.Which one of these is not a possible source of synergy?

Accepted Answer

Diversification is not a source of synergy because it involves expanding into unrelated business areas, which may not have any complementary resources or lead to economies of scale or vertical integration. As such, diversification may actually dilute the value of the merged company rather than add value through synergies.

Question 16

Shares of a corporation can,under certain circumstances,be priced at different amounts to different investors under the terms of a:

Accepted Answer

A poison pill is a strategy used by companies to prevent or discourage hostile takeovers. It can involve issuing new shares to existing shareholders at a discount, which dilutes the value of shares held by a potential acquirer, effectively pricing shares differently for different investors.

Question 17

Conglomerate mergers involve companies in:

Accepted Answer

Conglomerate mergers involve companies in unrelated lines of business, meaning they are not in the same industry or have similar products/services.

Question 18

Splitting one firm into four separate firms is an example of a:

Accepted Answer

Splitting one firm into four separate firms is an example of a spin-off, where a parent company creates a new independent company through the sale or distribution of new shares of an existing business or division of the parent company. A leveraged buyout (A) refers to the acquisition of a company using a significant amount of borrowed money. A management buyout (C) occurs when the existing management team of a company acquires the entire or a significant portion of the ownership of the company. A tender offer (D) is a public offer made by a prospective acquirer to buy a substantial portion or all of the outstanding shares of a company directly from its shareholders.

Question 19

If Microsoft were to acquire Dell Computer,it would be an example of a:

Accepted Answer

A vertical merger involves the merger of companies that are in different stages of the same industry's value chain. In this case, Microsoft and Dell are in different stages of the computer industry's value chain, with Microsoft mainly providing software and Dell mainly providing hardware. Thus, if Microsoft acquires Dell, it would be a vertical merger.

Question 20

Which one of the following is the most appropriate reason for an acquiring firm's shareholders to prefer using stock financing for acquisitions?

Accepted Answer

Using stock financing for acquisitions is preferred by acquiring firm's shareholders when the target firm is overvalued. This is because the acquiring firm's shareholders exchange their overvalued shares for the target firm's shares, which are also overvalued. Therefore, the effects of overvaluation of the target firm are mitigated by issuing stock rather than paying cash.

Quiz 21: Mergers,Acquisitions,and Corporate Control