Question 1

Which of the following statements is most CORRECT?

Accepted Answer

A)   Firms that are acquired usually have a market price below book value before the merger offer is made. However, once the initial offer is made, the price can rise above book value, but the purchase price, especially in large acquisitions, generally remains within 20% of book value.
B)   When Texaco purchased Getty Oil, many financial analysts felt that the deal made sense because it increased Texaco's market share and expanded its shrinking oil reserves. This merger exemplified the belief among the natural resource companies that buying reserves through acquisitions was less costly than exploring and finding them in the field.
C)   When Mobil Oil Company tried to acquire Conoco, which was another oil company, stockholders were concerned that the U.S. Justice Department would try to block the merger because it would lessen competition. Thus, antitrust considerations affected this proposed horizontal merger.
D)   Answers b and c are correct.
E)   All of the statements above are false.F) A) and B)
G) C) and D)

Question 2

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 3

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

Accepted Answer

A) True 
 B)False

Question 4

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 5

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

Accepted Answer

A) True 
 B)False

Question 6

Great Subs Inc., a regional sandwich chain, is considering purchasing a smaller chain, Eastern Pizza, which is currently financed using 20% debt at a cost of 8%. Great Subs' analysts project that the merger will result in incremental free cash flows and interest tax savings of $2 million in Year 1, $4 million in Year 2, $5 million in Year 3, and
$117 million in Year 4. (The Year 4 cash flow includes a horizon value of $107 million.)  The acquisition would be made immediately, if it is to be undertaken. Eastern's pre-merger beta is 2.0, and its post- merger tax rate would be 34%. The risk-free rate is 8%, and the market risk premium is 4%. What is the appropriate rate for use in discounting the free cash flows and the interest tax savings?

Accepted Answer

A)   12.0%
B)   13.9%
C)   14.4%
D)   16.0%
E)   16.9%F) A) and C)
G) A) and B)

Question 7

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 8

What is the value of Dustvac's equity to Magiclean? (Round your answer to the closest thousand dollars.)

Accepted Answer

A)   $16,019,000
B)   $17,111,000
C)   $18,916,000
D)   $22,111,000
E)   $22,916,000F) C) and E)
G) A) and E)

Question 9

Firms use defensive tactics to fight off undesired mergers. These tactics do not include

Accepted Answer

A)   raising antitrust issues.
B)   getting a white squire to purchase stock in the firm.
C)   getting white knights to bid for the firm.
D)   repurchasing their own stock.
E)   changing the bylaws to eliminate supermajority voting requirements.F) A) and C)
G) D) and E)

Question 10

Which of the following statements about valuing a firm using the APV 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 levered cost of equity.
B)   The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the cost of debt.
C)   The horizon value is calculated by discounting the expected earnings at the WACC.
D)   The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the WACC.
E)   The horizon value must always be more than 20 years in the future.F) A) and D)
G) A) and E)

Question 11

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 12

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

Question 13

Since managers' central goal is to maximize stock price, managerial control issues do not interfere with mergers that would benefit the target firm's stockholders.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following statements is most CORRECT?

Accepted Answer

A)   A conglomerate merger is one where a firm combines with another firm in the same industry.
B)   Regulations in the United States prohibit acquiring firms from using common stock to purchase another firm.
C)   Defensive mergers are designed to make a company less vulnerable to a takeover.
D)   Hostle mergers always create value for the acquiring firm.E) None of the above
F) All of the above

Question 15

The rate used to discount projected merger cash flows should be the cost of capital of the new consolidated firm because it incorporates the actual capital structure of the new firm.

Accepted Answer

A) True 
 B)False

Question 16

Kelly Tubes is considering a merger with Reilly Tires. Reilly's market-determined beta is 0.9, and the firm currently is financed with 20% debt, at an interest rate of 8%, and its tax rate is 25%. If Kelly acquires Reilly, it will increase the debt to 60%, at an interest rate of 9%, and the tax rate will increase to 35%. The risk-free rate is 6% and the market risk premium is 4%. What will Reilly's required rate of return on equity be after it is acquired?

Accepted Answer

A)   7.4%
B)   8.9%
C)   9.3%
D)   9.6%
E)   9.7%F) A) and B)
G) B) and E)

Question 17

The purchase of assets at below their replacement cost and tax considerations are two factors that motivate mergers.

Accepted Answer

A) True 
 B)False

Question 18

The distribution of synergistic gains between the stockholders of 2 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 19

A joint venture is one in which 2, 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 20

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

Exam 21: Mergers, Lbos, Divestitures, and Holding Companies

Correct Answer
verified

A joint venture is one in which 2, or sometimes more, independent companies agree to combine resources in order to achieve a specific objective, usually limited in scope.

Correct Answer
verified

Since managers' central goal is to maximize stock price, managerial control issues do not interfere with mergers that would benefit the target firm's stockholders.

Correct Answer
verified

Correct Answer
verified

Which of the following statements is most CORRECT?

Correct Answer
verified

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 Answer
verified

The distribution of synergistic gains between the stockholders of 2 merged firms is almost always based strictly on their respective market values before the announcement of the merger.

Correct Answer
verified

The rate used to discount projected merger cash flows should be the cost of capital of the new consolidated firm because it incorporates the actual capital structure of the new firm.

Correct Answer
verified

Which of the following statements about valuing a firm using the APV approach is most CORRECT?

Correct Answer
verified

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

Correct Answer
verified

What is the value of Dustvac's equity to Magiclean? (Round your answer to the closest thousand dollars.)

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

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

Firms use defensive tactics to fight off undesired mergers. These tactics do not include

Correct Answer
verified

Which of the following statements is most CORRECT?

Correct Answer
verified

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

Correct Answer
verified

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

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

The purchase of assets at below their replacement cost and tax considerations are two factors that motivate mergers.

Correct Answer
verified

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

Correct Answer
verified

Exam 21: Mergers, Lbos, Divestitures, and Holding Companies

Correct AnswerverifiedShow Answer

A joint venture is one in which 2, or sometimes more, independent companies agree to combine resources in order to achieve a specific objective, usually limited in scope.

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 stockholders.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is most CORRECT?

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 distribution of synergistic gains between the stockholders of 2 merged firms is almost always based strictly on their respective market values before the announcement of the merger.

Correct AnswerverifiedShow Answer

The rate used to discount projected merger cash flows should be the cost of capital of the new consolidated firm because it incorporates the actual capital structure of the new firm.

Correct AnswerverifiedShow Answer

Which of the following statements about valuing a firm using the APV approach is most CORRECT?

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

What is the value of Dustvac's equity to Magiclean? (Round your answer to the closest thousand dollars.)

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

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

Firms use defensive tactics to fight off undesired mergers. These tactics do not include

Correct AnswerverifiedShow Answer

Which of the following statements is most CORRECT?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

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

The purchase of assets at below their replacement cost and tax considerations are two factors that motivate mergers.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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verified

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