Question 1

If the acquisition of the target is believed to be very important to implement the acquirer's strategy,the acquirer should be willing to pay up to the maximum purchase price.

Accepted Answer

False

Question 2

Cost savings are likely to be greatest when firms with dissimilar operations are consolidated.

Accepted Answer

Cost savings are likely to be greatest when firms with similar operations are consolidated. This is because they can eliminate redundancies and streamline processes more easily. Firms with dissimilar operations may have more difficulty integrating and may require more resources to do so.

Question 3

The target firm's underutilized borrowing capacity is often considered a source of value.

Accepted Answer

If a target firm has underutilized borrowing capacity, it means that it has the ability to borrow more money than it currently is. This can be seen as a source of value because the firm can use those funds to invest in growth opportunities, pay dividends to shareholders, or conduct share buybacks. By increasing the amount of money available to the firm, it can potentially increase its earnings and cash flow, which can lead to higher valuations and returns for shareholders.

Question 4

The share exchange ratio indicates the number of acquirer shares to be exchanged for each share of target stock based on the target firm's current share price.

Accepted Answer

The answer of The share exchange ratio indicates the number...

Question 5

The acquiring firm's existing loan covenants need not be considered in determining the feasibility of acquiring the target firm.

Accepted Answer

The acquiring firm's existing loan covenants should be carefully considered when evaluating the feasibility of acquiring the target firm. These covenants may impact the acquiring firm's ability to take on additional debt or may require approval from lenders for major business decisions, such as an acquisition.

Question 6

The maximum purchase price is the minimum price plus the present value of sources of value.True or False

Accepted Answer

The maximum purchase price is typically determined by the sum of the minimum price and the present value of expected future benefits or cash flows, not just the present value of sources of value.

Question 7

The effects of synergy resulting from combining the acquirer and target firms do not affect the acquirer's ability to finance the transaction.

Accepted Answer

The effects of synergy resulting from combining the acquirer and target firms can affect the acquirer's ability to finance the transaction, as the potential for increased profitability and cash flows from the combined entity may make it easier to obtain financing.

Question 8

The share exchange ratio is defined as offer price divided by the target firm's current share price.True or False

Accepted Answer

The share exchange ratio is defined as the number of acquiring firm's shares offered for each share of the target firm, not the offer price divided by the target firm's current share price.

Question 9

Non-compliance with environmental laws,product liabilities,pending lawsuits,poor product quality, patents,poorly written or missing customer contracts,and high employee turnover are all considered destroyers of value.

Accepted Answer

The answer of Non-compliance with environmental laws,product liabilities,pending lawsuits,poor product...

Question 10

Net synergy may be estimated as the difference between the sum of the present values of the target and acquiring firms,including the effects of synergy,and the value of the target firm including the effects of synergy.

Accepted Answer

Net synergy may be estimated as the difference between the sum of the present values of the target and acquiring firms, including the effects of synergy, and the value of the acquiring firm after the acquisition, including the effects of synergy.

Question 11

Improper revenue recognition is the most common form of financial reporting fraud.

Accepted Answer

Improper revenue recognition, such as recognizing revenue too early, is a common tactic used in financial reporting fraud. Other forms of financial reporting fraud include falsifying expenses, failing to disclose liabilities, and manipulating financial statements.

Question 12

Projecting as many of the key income,cash flow,and balance sheet components as a percent of projected revenue helps to ensure the internal consistency of the model.True or False

Accepted Answer

Yes, projecting the key components as a percentage of revenue helps to maintain internal consistency in the financial model. It ensures that the assumptions made in the model are reasonable and consistent with each other.

Question 13

Common size financial statements are useful for comparing businesses of different sizes in the same industry at different points in time.

Accepted Answer

The answer of Common size financial statements are useful for...

Question 14

The current stock price of the acquiring firm may decline,reflecting a potential dilution of its EPS or a growth in EPS of the combined firms,which is less than the growth that investors had anticipated for the acquirer as a standalone business.

Accepted Answer

When a firm acquires another firm, there is potential dilution of earnings per share (EPS) due to the issuance of new shares to finance the acquisition. This can lead to a decline in the stock price of the acquiring firm if investors believe that the growth in EPS of the combined firms will be less than what they had expected for the acquirer as a standalone business.

Question 15

In order to normalize the historical data of the target firm,it may be necessary to subtract large increases in
reserves and add back large decreases in reserves from cash flow.

Accepted Answer

The answer of In order to normalize the historical data...

Question 16

The scrupulous application of GAAP ensures both consistency in comparing one firm's financial
performance with another and the accuracy of the data.

Accepted Answer

While GAAP ensures consistency and comparability, it does not guarantee absolute accuracy, as it involves estimates and judgments.

Question 17

A target firm's high employee turnover is often considered a destroyer of value.

Accepted Answer

High employee turnover can lead to increased costs due to recruitment and training, decreased productivity and lowered morale, which can negatively impact the firm's value.

Question 18

When the target firm is an operating division of a larger firm,it is common for the parent to provide services to the target at below market prices.In calculating the target's standalone value,it is necessary to subtract the difference between the market price of these services and actual cost paid to the parent from the target firm's net income.

Accepted Answer

This statement is true. When the parent company provides services to the target firm at below market prices, it artificially inflates the target firm's net income. To arrive at the target's standalone value, this difference between the market price of the services and the actual cost paid to the parent must be subtracted from the target firm's net income to arrive at a more accurate representation of the target's financial performance.

Question 19

Minimum purchase price or initial offer price for a target is the target's standalone value or market value.

Accepted Answer

The answer of Minimum purchase price or initial offer price...

Question 20

The present value of net synergy is the difference between the present value of projected cash flows from sources and destroyers of value.

Accepted Answer

This is correct. The present value of net synergy is calculated by finding the difference between the present value of the projected cash flows from the sources of value (such as increased revenue, decreased costs, etc.) and the present value of projected cash flows from the destroyers of value (such as integration costs, lost productivity during the transition period, etc.).

Quiz 9: Applying Financial Models to Value, structure, and Negotiate Mergers and Acquisitions