Question 1

If the constant growth model is used to calculate the value of a target company,the terminal value is an insignificant cash flow analysis.

Accepted Answer

The terminal value is a significant cash flow analysis in the constant growth model. It represents the cash flow that a company will generate beyond the forecast period and is used to calculate the present value of all future cash flows.

Question 2

In a financial merger,the relevant post-merger cash flows are simply the sum of the expected cash flows of the two companies,measured as if they were operated independently.

Accepted Answer

True

Question 3

Merger activity is likely to heat up when interest rates are high because target firms can expect to receive an especially high premium over the pre-announcement stock price.

Accepted Answer

Merger activity is actually more likely to occur when interest rates are low, as borrowing costs are cheaper and companies can more easily finance deals. When interest rates are high, the cost of borrowing money increases, making it less attractive for companies to pursue mergers and acquisitions. Therefore, target firms may not necessarily receive an especially high premium over the pre-announcement stock price.

Question 4

Interest expense must be explicitly included in a merger incremental cash flow analysis.

Accepted Answer

Interest expense is a cash outflow and must be included in a merger incremental cash flow analysis as it affects the profitability of the investment decision. It is important to assess the impact of interest expense on the cash flows and overall value of the merged entity. Therefore, interest expense is an explicit item and should be properly taken into consideration.

Question 5

If a petrochemical firm that used oil as feedstock merged with an oil producer that had large oil reserves and a drilling subsidiary,this would be a vertical merger.

Accepted Answer

A vertical merger is when two companies from different levels of the supply chain merge. In this case, the petrochemical firm and the oil producer with a drilling subsidiary would be merging from two different levels of the oil supply chain.

Question 6

Three procedures used to defend against hostile takeovers are borrowing funds on terms that would require immediate repayment of all funds if the firm is acquired,selling off valuable assets,and granting huge "golden parachutes" that open if the firm is acquired.These strategies are known as "poison pills."

Accepted Answer

The statement accurately describes the use of poison pills as a defense mechanism against hostile takeovers, including borrowing on strict repayment terms, selling valuable assets, and granting large severance packages.

Question 7

Since a manager's central goal is to maximize the firm's common share price,any merger offer that provides shareholders with significant gains over the current share price will be approved by the current management team.

Accepted Answer

While maximizing the firm's common share price is a central goal, management may reject merger offers that provide significant gains if they believe the merger is not in the long-term interest of the company, could lead to loss of control, or if there are better alternatives available.

Question 8

Since managers' central goal is to maximize stock price,managerial control issues do not interfere with mergers that would benefit the target firm's shareholders.

Accepted Answer

While maximizing stock price is a central goal for managers, there are often concerns about the potential impact of mergers on managerial control and job security, which may impede or alter the decision-making process. Therefore, managerial control issues can sometimes interfere with mergers that would otherwise benefit the target firm's shareholders.

Question 9

Currently,mergers in Canada can be accounted for using either the purchase method or the pooling method.

Accepted Answer

As of the current standards, the pooling of interests method is no longer allowed for accounting for mergers in Canada. The Canadian accounting standards now require the use of the acquisition method (previously known as the purchase method) for business combinations.

Question 10

The primary reason managers give for most mergers is to acquire more assets so as to increase sales and market share.

Accepted Answer

The answer of The primary reason managers give for most...

Question 11

A spin-off is a type of divestiture in which the assets of a division are sold to another firm.

Accepted Answer

In a spin-off, a division or part of a company is separated to form a new independent company, not sold to another firm.

Question 12

A merger will be financially justified only if a target firm's value is greater to the acquiring firm than its market value as a separate entity.

Accepted Answer

A merger is justified only if the acquiring firm perceives that the value of the target firm is greater than its market value as a separate entity. This is because the acquiring firm aims to gain synergies and improve its overall financial position, which it believes is not possible to achieve alone. Therefore, a merger should result in increased shareholder value for both firms.

Question 13

The purchase of assets at below their replacement cost and tax considerations are two factors that motivate mergers.

Accepted Answer

The purchase of assets at below their replacement cost and tax considerations are two commonly cited factors that motivate mergers.

Question 14

Since the primary rationale for any operating merger is synergy,in planning such mergers the development of accurate pro forma cash flows is the single most important action.

Accepted Answer

Accurately projecting pro forma cash flows is crucial in determining the potential financial benefits (synergy) of an operating merger.

Question 15

A company seeking to fight off a hostile takeover might employ the services of an investment banking firm to develop a defensive strategy.

Accepted Answer

This is true. Investment banking firms can assist companies in developing and implementing defensive strategies to prevent a hostile takeover.

Question 16

A congeneric merger is one where the merging firms operate in related businesses but do not necessarily produce the same products or have a producer-supplier relationship.

Accepted Answer

A congeneric merger involves firms that operate in related businesses but may not produce the same products or have a direct producer-supplier relationship. This type of merger is often pursued to achieve economies of scale and scope, reduce competition, or diversify risk.

Question 17

In a carve-out,a majority interest in a corporate subsidiary is sold to new shareholders,so the parent gains new equity financing yet retains control.

Accepted Answer

In a carve-out, a parent company sells a minority interest in a subsidiary to new shareholders through an initial public offering (IPO), which means the parent company retains control by holding onto the majority of the subsidiary's shares.

Question 18

Leveraged buyouts (LBOs) occur when a firm's managers,generally backed by private equity groups,try to gain control of a publicly owned company by buying out the public shareholders using large amounts of borrowed money.

Accepted Answer

This is a correct definition of leveraged buyouts.

Question 19

Foreign firms are interested in buying Canadian companies to gain entrance to Canada.A decline in the value of the dollar relative to most foreign currencies makes this competitive strategy especially attractive.

Accepted Answer

A decline in the value of the dollar relative to most foreign currencies makes Canadian companies cheaper for foreign firms to buy, thus making it an attractive strategy for them to gain entrance to the Canadian market.

Question 20

A conglomerate merger occurs when two firms with either a horizontal or a vertical business relationship combine.

Accepted Answer

A conglomerate merger occurs when two firms with unrelated business activities combine, while a horizontal or vertical merger involves firms with related business activities.

Quiz 23: Mergers,Acquisitions,and Restructuring