Question 1

Normally, the acquiring firm pays a price that is a premium above the market price of the acquired firm. This means that the ratio of exchange in market price is

Accepted Answer

The acquiring firm pays a premium above the market price of the acquired firm, which means the ratio of exchange in market price is greater than 1. This is because the acquiring firm is willing to pay more than the current market price to acquire the benefits and synergies that the acquired firm can offer.

Question 2

Acquisitions are especially attractive when the acquired firm's stock price is high, because fewer shares must be exchanged to acquire the firm.

Accepted Answer

Acquisitions are especially attractive when the acquired firm's stock price is low, because fewer shares must be exchanged to acquire the firm.

Question 3

The actual ratio of exchange in a stock-exchange acquisition is the ratio of the

Accepted Answer

The actual ratio of exchange in a stock-exchange acquisition is the ratio of the amount paid per share of the target company to the per share market price of the acquiring firm. This represents the actual price paid for each share of the target company in relation to the market value of the acquiring firm's shares. Choices A and B both use book value, which may not reflect the current market value of the firms, while choice C uses the market value of the target company, which may not accurately reflect the actual price paid in the acquisition.

Question 4

A method of acquisition in which the acquiring firm exchanges its shares of stock for shares of the target company according to a predetermined ratio is called a leveraged buyout.

Accepted Answer

The given method of acquisition is called a stock swap, while a leveraged buyout is a method in which a significant amount of debt is used to finance the acquisition of another company.

Question 5

If the P/E paid is equal to the P/E of the acquiring company, the effect on the earnings per share of the acquired company will be

Accepted Answer

If the P/E paid is equal to the P/E of the acquiring company, the effect on the earnings per share of the acquired company will be neutral, as there is no change in the ratio of price to earnings.

Question 6

If the P/E paid for a target company is equal to the P/E of the acquiring company, the effect on the earnings per share of the acquiring company will be

Accepted Answer

If the P/E paid for the target company is equal to the P/E of the acquiring company, then the effect on the earnings per share of the acquiring company will be neutral. This is because the P/E ratio is calculated as the price per share divided by the earnings per share. If the acquiring company pays a P/E multiple equal to its own, it means that it is paying the same multiple of earnings for the target company as it is for itself. Therefore, there will be no significant impact on the earnings per share of the acquiring company.

Question 7

When the ratio of exchange in a merger is equal to one and both the acquiring and the target companies have the same premerger earnings per share, the merged firm's earnings per share will initially

Accepted Answer

If the ratio of exchange is equal to one and both companies have the same premerger earnings per share, then the earnings per share of the merged firm will be the same as the premerger earnings per share. Therefore, it will remain constant.

Question 8

A method of acquisition in which the acquiring firm exchanges its shares of stock for shares of the target company according to a predetermined ratio is called a stock swap transaction.

Accepted Answer

A stock swap transaction involves exchanging shares of the acquiring company for shares of the target company at a predetermined ratio.

Question 9

The earnings per share of the merged firm are generally above the premerger earnings per share of one firm and below the premerger earnings per share of the other, after making the necessary adjustment for the ratio of exchange.

Accepted Answer

This statement is generally true. Earnings per share (EPS) can be affected by the merger as the number of shares outstanding may change due to the merger. The ratio of exchange would adjust the EPS of both firms before the merger. After the merger, the EPS of the merged firm tends to be higher than one firm's premerger EPS and lower than the other firm's premerger EPS. However, this may not always be the case, as the EPS of the merged firm can also be lower than both firms' premerger EPS if the merger does not generate expected synergies.

Question 10

Marketing Concepts, Inc. is considering the acquisition of Management Theories, Inc. at a cash price of $1.5 million. Management Theories, Inc. has short-term liabilities of $500,000. As a result of acquiring Management Theories, Inc., Marketing Concepts, Inc. would acquire the copyrights to a national best-seller which would provide an estimated cash flow of $300,000 for the next five years. The firm has a cost of capital of 20 percent. The approximate net present value of this acquisition is

Accepted Answer

The answer of Marketing Concepts, Inc. is considering the acquisition...

Question 11

The actual ratio of exchange in a stock-exchange acquisition is the ratio of the amount paid per share of the target company to the per-share market price of the acquiring firm.

Accepted Answer

The answer of The actual ratio of exchange in a...

Question 12

The basic difficulty in applying the capital budgeting approach to the acquisition of a going concern is the estimation of initial cash flows and certain risk consideration.

Accepted Answer

The answer of The basic difficulty in applying the capital...

Question 13

A stock swap transaction is an acquisition method in which the acquiring firm exchanges its shares for shares of the target company according to a predetermined ratio.

Accepted Answer

This statement is true, a stock swap transaction is a form of acquisition where the acquirer exchanges its shares for the shares of the target company in a predetermined ratio.

Question 14

If the P/E paid for a target company is greater than the P/E of the acquiring company, the effect on the earnings per share of the acquiring company will be

Accepted Answer

If the P/E paid for a target company is greater than the P/E of the acquiring company, the acquiring company will be paying a higher price for each dollar of the target company's earnings. This means that the acquiring company's earnings per share will be diluted, causing a negative effect.

Question 15

If the P/E paid is greater than the P/E of the acquiring company, the effect on the earnings per share of the acquired company will be

Accepted Answer

The higher P/E paid by the acquiring company indicates that the market values the acquired company's earnings more highly than the acquiring company's earnings. This will result in a positive effect on the earnings per share of the acquired company.

Question 16

If the P/E paid is greater than the P/E of the acquiring company, on a postmerger basis the target firm's EPS increases and the acquiring firm's EPS decreases.

Accepted Answer

This is because the acquiring company is paying a higher price for each dollar of earnings compared to its own P/E ratio, which dilutes its own EPS while increasing the target firm's EPS.

Question 17

Cash acquisitions of going concerns are best analyzed using

Accepted Answer

Cash acquisitions of going concerns involve a significant outlay of capital and a long-term commitment of resources. Therefore, they should be evaluated using capital budgeting techniques to ascertain their feasibility and expected returns. Ratio analysis may provide useful information, but it alone is usually insufficient for making investment decisions. The weighted marginal cost of capital theory and investment opportunity schedules may be relevant in other contexts, but they are not directly applicable to cash acquisitions of going concerns.

Question 18

When the ratio of exchange in a merger is equal to one and both the acquiring and the target companies have the same premerger earnings per share, both the acquiring and the target companies have the same

Accepted Answer

When the ratio of exchange in a merger is equal to one and both companies have the same premerger earnings per share (EPS), it implies that they also have the same price-to-earnings (P/E) ratio. This is because the P/E ratio is calculated by dividing the market price per share by the earnings per share. If the earnings per share are the same and the exchange ratio is one, it suggests that their market valuations in terms of P/E are aligned.

Question 19

The ratio of exchange in market price indicates the market price per share of the acquiring firm paid for each dollar of market price per share of the target firm.

Accepted Answer

The ratio of exchange in market price is calculated by dividing the market price per share of the acquiring firm by the market price per share of the target firm. This helps in evaluating the relative valuations of the two firms and determining the share exchange ratio in case of a merger or acquisition.

Question 20

Acquisitions are especially attractive when the acquiring firm's stock price is high, because fewer shares must be exchanged to acquire the firm.

Accepted Answer

This statement is true. When the acquiring firm's stock price is high, the value of each share is higher which means that fewer shares need to be exchanged to meet the purchase price, making the acquisition more attractive.

Quiz 18: Mergers, Lbos, Divestitures, and Business Failure