Question 1

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

Accepted Answer

A) True 
 B)False  False

Question 2

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

A) True 
 B)False

Question 3

A joint venture is one in which two, or sometimes more, independent companies agree to combine resources in order to achieve a specific objective, usually limited in scope.

Accepted Answer

A) True 
 B)False

Question 4

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

A) True 
 B)False

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

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

A) True 
 B)False

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

Which statement best describes a merger concept?

Accepted Answer

A)   A conglomerate merger is one where a firm combines with another firm in the same industry.
B)   Regulations in Canada prohibit acquiring firms from using common shares to purchase another firm.
C)   Defensive mergers are designed to make a company less vulnerable to a takeover.
D)   The corporate valuation method and the equity residual method, even properly applied, produce different results.E) A) and D)
F) All of the above

Question 9

Which of the following factors does NOT influence the consideration of a merger and an acquisition of stocks?

Accepted Answer

A)   Shareholders are dealt with directly to bypass the target management and board of directors.
B)   In a tender offer, usually some minority shareholders do not tender stopping complete firm absorption.
C)   Target management may be unfriendly and resist an offer. Resistance usually makes the stock price higher.
D)   The target company's supplier has developed a new high-quality product.E) B) and C)
F) A) and D)

Question 10

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

A) True 
 B)False

Question 11

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

A) True 
 B)False

Question 12

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

A) True 
 B)False

Question 13

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

Accepted Answer

A) True 
 B)False  True

Question 14

Which of the following is a valid, acceptable reason for a closely held firm proposing a merger activity?

Accepted Answer

A)   synergistic benefits arising from mergers
B)   reduction in competition resulting from mergers
C)   attempts to stabilize earnings by diversifying
D)   minimizing taxes when disposing of excess cashE) A) and B)
F) A) and C)

Question 15

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

A) True 
 B)False

Question 16

Most defensive mergers occur as a result of managers' actions to maximize shareholders' wealth.

Accepted Answer

A) True 
 B)False  False

Question 17

Using the purchase accounting method to report mergers, goodwill is not amortized, rather it is subject to an annual impairment test.

Accepted Answer

A) True 
 B)False

Question 18

The income statement of the post-merger firm will be the same regardless of the accounting method used.

Accepted Answer

A) True 
 B)False

Question 19

Two firms merge and no synergies occur. Which statement best explains this unlikely result?

Accepted Answer

A)   The reduction in risk in the combined firm benefits the bondholders at the expense of the shareholders.
B)   The value of the debt in the combined firm will likely be greater than the value of the debt in the two separate firms.
C)   The size of the gain to the bondholders depends on the specific reductions in bankruptcy probabilities after the merger.
D)   The share price of the acquiring or combined company increases substantially.E) A) and D)
F) B) and D)

Question 20

If the capital structure is stable, and free cash flows are expected to be growing at a constant rate at the horizon date, then the horizon value is calculated by discounting the free cash flows plus the expected future tax shields at the weighted average cost of capital.

Accepted Answer

A) True 
 B)False

Exam 24: Mergers, Acquisitions, and Restructuring

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

Correct AnswerverifiedFalse

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.

Correct AnswerverifiedShow Answer

A joint venture is one in which two, or sometimes more, independent companies agree to combine resources in order to achieve a specific objective, usually limited in scope.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which statement best describes a merger concept?

Correct AnswerverifiedShow Answer

Which of the following factors does NOT influence the consideration of a merger and an acquisition of stocks?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedTrue

Which of the following is a valid, acceptable reason for a closely held firm proposing a merger activity?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Most defensive mergers occur as a result of managers' actions to maximize shareholders' wealth.

Correct AnswerverifiedFalse

Using the purchase accounting method to report mergers, goodwill is not amortized, rather it is subject to an annual impairment test.

Correct AnswerverifiedShow Answer

The income statement of the post-merger firm will be the same regardless of the accounting method used.

Correct AnswerverifiedShow Answer

Two firms merge and no synergies occur. Which statement best explains this unlikely result?

Correct AnswerverifiedShow Answer

If the capital structure is stable, and free cash flows are expected to be growing at a constant rate at the horizon date, then the horizon value is calculated by discounting the free cash flows plus the expected future tax shields at the weighted average cost of capital.

Correct AnswerverifiedShow Answer

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