Question 1

The two-step buyout is a recent merger ploy that has which of the following characteristics?

Accepted Answer

The two-step buyout involves the acquiring firm offering to pay a very high price for the target company's stock for a limited time only, after which it will pay a lower price. This is different from option A, as it is negotiated in a business setting, and options B and D are not entirely accurate descriptions of the two-step buyout.

Question 2

The price that a company has to pay to purchase another firm is usually

Accepted Answer

When a company purchases another firm, it typically has to pay a premium over the current market value in order to acquire it. This is because the current market value only reflects the current state of the company, while potential future growth and synergies from the acquisition must also be taken into account. Therefore, the price paid is usually a higher amount than the current market value.

Question 3

The typical merger premium is ________.

Accepted Answer

The typical merger premium is around 40-60%, meaning the acquiring company pays a premium of 40-60% on the current market value of the target company's shares. This premium compensates the shareholders of the target company for giving up their ownership and control of the company. Premiums outside of this range are less common and may signal unusual circumstances or a particularly competitive bidding situation.

Question 4

An example of a horizontal merger would be

Accepted Answer

A horizontal merger occurs between companies operating in the same industry. Coca-Cola and Dr Pepper are both beverage companies, making their merger horizontal.

Question 5

Which of the following is NOT a motive for stockholders of the acquired company to sell?

Accepted Answer

The answer of Which of the following is NOT a...

Question 6

Which of the following types of mergers goes against the antitrust policy?

Accepted Answer

A horizontal merger involves the combination of two companies that are in direct competition with each other. This type of merger can reduce market competition, increase market power and raise prices, which is against antitrust policy that aims to promote fair competition and prevent monopolies.

Question 7

Nonfinancial motives for mergers include

Accepted Answer

Nonfinancial motives for mergers often include synergy and vertical integration. Synergy refers to the idea that the combined company can achieve higher efficiency or market power than the two companies separately. Vertical integration involves merging with a company in the supply chain, either a supplier or distributor, to increase control over the production and distribution process.

Question 8

In the event that Active Corp., which has a low P/E ratio, acquires Basic Corp., which has a higher P/E ratio, we could be assured that one of the following would occur, with everything else being equal. Which one would occur?

Accepted Answer

When a company with a low P/E ratio acquires another company with a higher P/E ratio, it generally means the acquiring company is paying a premium relative to its own earnings valuation. This typically results in an immediate dilution of the acquiring company's earnings per share (EPS), hence an immediate decrease in EPS for Active Corp.

Question 9

Aardvark Software Inc. can purchase all the stock of Zebra Computer Services for $1,200,000 in cash. Zebra is expected to generate net after-tax cash flows of $100,000 per year for each of the next 12 years. Based solely on the facts provided, Aardvark should

Accepted Answer

Present value of future after-tax benefits is less than the cost.

Question 10

Which of the following is NOT a financial motive, but rather an operating motive for mergers and consolidations?

Accepted Answer

Synergy is considered an operating motive for mergers and consolidations because it involves combining resources, expertise, and capabilities to improve operations and achieve greater efficiency. The other options listed (portfolio diversification, tax loss carryforward, and greater financing capability) are financial motives because they all relate to improving the financial performance or position of the merged or consolidated entity.

Question 11

Which of the following terms is not specifically related to an unfriendly buyout?

Accepted Answer

Synergy is not specific to an unfriendly buyout. It refers to the potential for increased value or improved efficiency that can result from the combination of two companies. A, B, and C are all terms frequently associated with unfriendly buyouts.

Question 12

White knights

Accepted Answer

White knights offer a higher purchase price and "friendlier offer" in the event of an unsolicited and unfriendly takeover attempt.

Question 13

The Prada Corporation is considering a merger with the Stone Company, which has 500,000 outstanding shares selling for $30. An investment banker has advised that to succeed in its merger, Prada Corp. would have to offer $45 per share for Stone's stock. Currently, Prada Corp. stock is selling for $25. How many shares of Prada Corp. stock would have to be exchanged to acquire all of Stone Company's stock?

Accepted Answer

To acquire all of Stone Company's stock, Prada Corp. needs to offer $45 per share. With 500,000 shares, the total cost is 500,000 * $45 = $22,500,000. At Prada's current stock price of $25, the number of shares needed is $22,500,000 / $25 = 900,000 shares.

Question 14

Selling stockholders who are offered cash or another company's stock in a merger may be willing to part with the shares because

Accepted Answer

Selling stockholders who are offered cash or another company's stock in a merger may be willing to part with the shares because the offered shares may be more easily marketable, the price they are offered may be above market value and they can attain a greater degree of diversification as a result. Therefore, all of these options are true.

Question 15

The elimination of overlapping functions and the meshing of two firms' strong areas or products creates the managerial incentive for mergers known as

Accepted Answer

The managerial incentive for mergers known as synergy refers to the creation of greater value or increased efficiency through the elimination of duplicate functions or the combination of strong areas or products of two firms. Horizontal and vertical integration refer to different types of mergers, while the portfolio effect generally refers to the diversification benefits of holding a variety of assets. Therefore, the best choice is C.

Question 16

Which of the following is NOT a form of compensation that selling stockholders could receive?

Accepted Answer

Stock options are not a form of compensation for selling stockholders; they are a right to buy stock in the future at a set price, typically used as an incentive for employees, not a form of payment for selling shares.

Question 17

Earnings per share of the purchasing firm usually goes in which direction during a merger?

Accepted Answer

Typically, when a firm with a lower P/E ratio is acquired, it means that the purchasing firm is paying less for each share of its earnings. This can lead to an immediate increase in earnings per share (EPS) for the purchasing firm. However, if the purchased firm is not profitable or has a negative P/E ratio, the effect on EPS may be negative. It's also important to note that other factors such as the cost of the merger and any dilution of shares can also affect EPS.

Question 18

In planning mergers, there is a tendency to ________ synergistic benefits.

Accepted Answer

There is a natural tendency to overestimate the potential benefits or synergies in mergers due to optimism and eagerness to make the deal happen. However, in reality, achieving these benefits might be much more difficult or time-consuming than initially assumed. Therefore, it is crucial to conduct thorough due diligence and realistic projections before finalizing a merger.

Question 19

Which of the following types of mergers decreases competition?

Accepted Answer

A horizontal merger is between two companies that operate in the same industry, and it can decrease competition by reducing the number of players in the market. The other options, vertical mergers, cash purchases, and stock-for-stock exchanges, may not necessarily decrease competition.

Question 20

The portfolio effect in a merger has to do with

Accepted Answer

The portfolio effect in a merger refers to the reduction of risk that results from combining two companies. By diversifying their product lines, customer bases, and other factors, the new company can better withstand market fluctuations or other challenges that may have affected either company on its own. The other choices (increasing EPS, creating tax advantages, and writing off goodwill) may also be factors in a merger but do not specifically relate to the portfolio effect.

Quiz 20: External Growth Through Mergers