Question 1

Currently (2018), mergers can be accounted for using either the purchase method or the pooling method.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following statements is most CORRECT?

Accepted Answer

A)   The smaller the synergistic benefits of a particular merger, the greater the scope for striking a bargain in negotiations, and the higher the probability that the merger will be completed.
B)   Since mergers are frequently financed by debt rather than equity, a lower cost of debt or a greater debt capacity are rarely relevant considerations when considering a merger.
C)   Managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification, including more stable earnings.However, since shareholders are free to diversify their own holdings, and at what's probably a lower cost, diversification benefits is generally not a valid motive for a publicly held firm.
D)   Operating economies are never a motive for mergers.
E)   Tax considerations often play a part in mergers.If one firm has excess cash, purchasing another firm exposes the purchasing firm to additional taxes.Thus, firms with excess cash rarely undertake mergers.F) D) and E)
G) C) and E)

Question 3

Juicers Inc.is thinking of acquiring Fast Fruit Company.Juicers has determined that Fast Fruit's current cost of equity is 17.5%; Fast Fruit currently has no debt outstanding.In Year 1, Juicers expects Fast Fruit to generate $9 million in NOPAT and invest $50 million in total net operating capital.Fast Fruit will borrow to finance this expansion, with the first interest payment ($5 million)  due at Year 2.(There will be no interest due at Year 1.)  In Year 2, Fast Fruit will generate $25 million in NOPAT and invest $10 million in total net operating capital.Fast Fruit's marginal tax rate is 25%.After the second year, the free cash flows and the tax shields each will grow at a constant rate of 4%.Assume that all cash flows occur at the end of the year.If Juicers must pay $90 million to acquire Fast Fruit, what is the NPV of the proposed acquisition? (Report your answer in millions of dollars.)

Accepted Answer

A)   $16.75 million
B)   $17.63 million
C)   $18.56 million
D)   $19.53 million
E)   $20.56 millionF) A) and E)
G) A) and C)

Question 4

Any goodwill created in a merger must be amortized over its expected life, usually 40 years, for shareholder reporting purposes.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV)  approach is most CORRECT?

Accepted Answer

A)   The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the cost of debt.
B)   The horizon value is calculated by discounting the expected earnings at the WACC.
C)   The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the WACC.
D)   The horizon value must always be more than 20 years in the future.
E)   The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the levered cost of equity.F) None of the above
G) C) and E)

Question 6

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 7

Which of the following are legal and acceptable reasons for the high level of merger activity in the U.S.during the 1980s?

Accepted Answer

A)   A profitable firm acquires a firm with large accumulated tax losses that may be carried forward.
B)   Attempts to stabilize earnings by diversifying.
C)   Purchase of assets below their replacement costs.
D)   Reduction in competition resulting from mergers.
E)   Synergistic benefits arising from mergers.F) A) and B)
G) A) and C)

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV)  approach is most CORRECT?

Accepted Answer

A)   The value of equity is calculated by discounting the horizon value, the tax shields, and the free cash flows at the cost of equity.
B)   The value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows before the horizon date at the unlevered cost of equity.
C)   The value of equity is calculated by discounting the horizon value and the free cash flows at the cost of equity.
D)   The CAPV approach stands for the accounting pre-valuation approach.
E)   The value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows at the cost of equity.F) A) and B)
G) C) and E)

Question 10

The three main advantages of holding companies are (1) control with fractional ownership, (2) taxation benefits, and (3) isolation of operating risks.

Accepted Answer

A) True 
 B)False

Question 11

Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the discount rate can only be determined after the merger is consummated.

Accepted Answer

A) True 
 B)False

Question 12

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 13

Although goodwill created in a merger may not be amortized for shareholder reporting purposes, it may be amortized for Federal tax purposes.

Accepted Answer

A) True 
 B)False

Question 14

The distribution of synergistic gains between the stockholders of two merged firms is almost always based strictly on their respective market values before the announcement of the merger.

Accepted Answer

A) True 
 B)False

Question 15

The present value of the free cash flows discounted at the unlevered cost of equity is the value of the firm's operations if it had no debt.

Accepted Answer

A) True 
 B)False

Question 16

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 17

Post-merger control and the negotiated price paid by the acquirer are two of the most important issues in agreeing on the terms of a merger.

Accepted Answer

A) True 
 B)False

Question 18

One of the main reasons why foreign firms are interested in buying U.S.companies is to gain entrance to the U.S.market.A decline in the value of the dollar relative to most foreign currencies makes this competitive strategy especially attractive.

Accepted Answer

A) True 
 B)False

Question 19

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) True 
 B)False

Question 20

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) True 
 B)False

Exam 22: Mergers and Corporate Control

Any goodwill created in a merger must be amortized over its expected life, usually 40 years, for shareholder reporting purposes.

Correct Answer
verified

Currently (2018), mergers can be accounted for using either the purchase method or the pooling method.

Correct Answer
verified

Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV) approach is most CORRECT?

Correct Answer
verified

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 Answer
verified

Which of the following statements is most CORRECT?

Correct Answer
verified

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.

Correct Answer
verified

Which of the following are legal and acceptable reasons for the high level of merger activity in the U.S.during the 1980s?

Correct Answer
verified

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

Correct Answer
verified

The present value of the free cash flows discounted at the unlevered cost of equity is the value of the firm's operations if it had no debt.

Correct Answer
verified

Although goodwill created in a merger may not be amortized for shareholder reporting purposes, it may be amortized for Federal tax purposes.

Correct Answer
verified

One of the main reasons why foreign firms are interested in buying U.S.companies is to gain entrance to the U.S.market.A decline in the value of the dollar relative to most foreign currencies makes this competitive strategy especially attractive.

Correct Answer
verified

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 Answer
verified

Correct Answer
verified

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.

Correct Answer
verified

The three main advantages of holding companies are (1) control with fractional ownership, (2) taxation benefits, and (3) isolation of operating risks.

Correct Answer
verified

The distribution of synergistic gains between the stockholders of two merged firms is almost always based strictly on their respective market values before the announcement of the merger.

Correct Answer
verified

Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the discount rate can only be determined after the merger is consummated.

Correct Answer
verified

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

Correct Answer
verified

Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV) approach is most CORRECT?

Correct Answer
verified

Post-merger control and the negotiated price paid by the acquirer are two of the most important issues in agreeing on the terms of a merger.

Correct Answer
verified

Exam 22: Mergers and Corporate Control

Any goodwill created in a merger must be amortized over its expected life, usually 40 years, for shareholder reporting purposes.

Correct AnswerverifiedShow Answer

Currently (2018), mergers can be accounted for using either the purchase method or the pooling method.

Correct AnswerverifiedShow Answer

Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV) approach is most CORRECT?

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

Which of the following statements is most CORRECT?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Which of the following are legal and acceptable reasons for the high level of merger activity in the U.S.during the 1980s?

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

The present value of the free cash flows discounted at the unlevered cost of equity is the value of the firm's operations if it had no debt.

Correct AnswerverifiedShow Answer

Although goodwill created in a merger may not be amortized for shareholder reporting purposes, it may be amortized for Federal tax purposes.

Correct AnswerverifiedShow Answer

One of the main reasons why foreign firms are interested in buying U.S.companies is to gain entrance to the U.S.market.A decline in the value of the dollar relative to most foreign currencies makes this competitive strategy especially attractive.

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

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

The three main advantages of holding companies are (1) control with fractional ownership, (2) taxation benefits, and (3) isolation of operating risks.

Correct AnswerverifiedShow Answer

The distribution of synergistic gains between the stockholders of two merged firms is almost always based strictly on their respective market values before the announcement of the merger.

Correct AnswerverifiedShow Answer

Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the discount rate can only be determined after the merger is consummated.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements about valuing a firm using the compressed adjusted present value (CAPV) approach is most CORRECT?

Correct AnswerverifiedShow Answer

Post-merger control and the negotiated price paid by the acquirer are two of the most important issues in agreeing on the terms of a merger.

Correct AnswerverifiedShow Answer

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