Question 1

Holland Auto Parts is considering a merger with Workman Car Parts.Workman'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 Holland acquires Workman,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 Workman'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 D)

Question 2

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

Accepted Answer

A)   getting a white squire to purchase stock in the firm.
B)   getting white knights to bid for the firm.
C)   repurchasing their own stock.
D)   changing the bylaws to eliminate supermajority voting requirements.
E)   raising antitrust issues.F) A) and E)
G) None of the above

Question 3

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 4

Synergistic benefits can arise from a number of different sources,including operating economies of scale,financial economies,and increased managerial efficiency.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements is most CORRECT?

Accepted Answer

A)   Regulations in the United States prohibit acquiring firms from using common stock to purchase another firm.
B)   Defensive mergers are designed to make a company less vulnerable to a takeover.
C)   Hostile mergers always create value for the acquiring firm.
D)   In a tender offer,the target firm's management always remain after the merger is completed.
E)   A conglomerate merger is one where a firm combines with another firm in the same industry.F) A) and E)
G) None of the above B

Question 6

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

Question 7

Coca-Cola's acquisition of Columbia Pictures and its announcement that it would operate its new subsidiary separately could be described as primarily a financial merger.

Accepted Answer

A) True 
 B)False

Question 8

Only if a target firm's value is greater to the acquiring firm than its market value as a separate entity will a merger be financially justified.

Accepted Answer

A) True 
 B)False

Question 9

In a financial merger,the relevant post-merger cash flows are simply the sum of the expected cash flows of the two companies,measured as if they were operated independently.

Accepted Answer

A) True 
 B)False  True

Question 10

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) A) and E)
G) A) and D)

Question 11

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

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 stockholders.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements is most CORRECT?

Accepted Answer

A)   A defensive merger is one where the firm's managers decide to merge with another firm to avoid or lessen the possibility of being acquired through a hostile takeover.
B)   Acquiring firms send a signal that their stock is undervalued if they choose to use stock to pay for the acquisition.
C)   Cash payments are used in takeovers but never in mergers.
D)   Managers often are fired in takeovers,but never in mergers.
E)   If a company that produces military equipment merges with a company that manages a chain of motels,this is an example of a horizontal merger.F) C) and D)
G) C) and E)

Question 14

Juicers Inc.is thinking of acquiring Fast Fruit Company.Juicers expects Fast Fruit's NOPAT to be $9 million the first year,with no net new investment in operating capital and no interest expense.For the second year,Fast Fruit is expected to have NOPAT of $25 million and interest expense of $5 million.Also,in the second year only,Fast Fruit will need $10 million of net new investment in operating capital.Fast Fruit's marginal tax rate is 40%.After the second year,the free cash flows and the tax shields from Fast Fruit to Juicers will both grow at a constant rate of 4%.Juicers has determined that Fast Fruit's cost of equity is 17.5%,and Fast Fruit currently has no debt outstanding.Assume that all cash flows occur at the end of the year,Juicers must pay $45 million to acquire Fast Fruit.What it the NPV of the proposed acquisition? Note that you must first calculate the value to Juicers of Fast Fruit's equity.

Accepted Answer

A)   $45.0 million
B)   $68.2 million
C)   $86.5 million
D)   $113.2 million
E)   $133.0 millionF) A) and E)
G) D) and E)

Question 15

A two-tier merger offer is one where the acquiring company offers to purchase the target company in a two-part transaction.Cash is paid to some stockholders,bonds are issued to others,but the total values of each part of the transaction are equal.

Accepted Answer

A) True 
 B)False

Question 16

A parent holding company sells shares in its subsidiary such that the parent now owns only 65% of the subsidiary and,thus,the tax returns of the parent and its subsidiary can't be consolidated.The parent receives annual dividends from the subsidiary of $2,500,000.If the parent's marginal tax rate is 34% and if the exclusion on intercompany dividends is 70%,what is the effective tax rate on the intercompany dividends,and how much net dividends are received?

Accepted Answer

A)   10.2%;$2,245,000
B)   10.2%;$2,135,000
C)   23.8%;$1,905,000
D)   10.2%;$1,750,000
E)   34.0%;$1,650,000F) All of the above
G) None of the above A

Question 17

Borrowing funds on terms that would require immediate repayment of all funds if the firm is acquired,selling off valuable assets,and granting huge "golden parachutes" that open if the firm is acquired are three procedures used to defend against hostile takeovers.These strategies are known as "poison pills."

Accepted Answer

A) True 
 B)False

Question 18

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) B) and E)
G) A) and D)

Question 19

In a merger with true synergies,the post-merger value exceeds the sum of the separate companies' pre-merger values.

Accepted Answer

A) True 
 B)False

Question 20

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) C) and E)
G) A) and B)

Exam 22: Mergers and Corporate Control

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

Correct Answer
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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
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Synergistic benefits can arise from a number of different sources,including operating economies of scale,financial economies,and increased managerial efficiency.

Correct Answer
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Which of the following statements is most CORRECT?

Correct Answer
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B

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 Answer
verified

Coca-Cola's acquisition of Columbia Pictures and its announcement that it would operate its new subsidiary separately could be described as primarily a financial merger.

Correct Answer
verified

Only if a target firm's value is greater to the acquiring firm than its market value as a separate entity will a merger be financially justified.

Correct Answer
verified

In a financial merger,the relevant post-merger cash flows are simply the sum of the expected cash flows of the two companies,measured as if they were operated independently.

Correct Answer
verified
True

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

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

Which of the following statements is most CORRECT?

Correct Answer
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Correct Answer
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A two-tier merger offer is one where the acquiring company offers to purchase the target company in a two-part transaction.Cash is paid to some stockholders,bonds are issued to others,but the total values of each part of the transaction are equal.

Correct Answer
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Correct Answer
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A

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

Correct Answer
verified

In a merger with true synergies,the post-merger value exceeds the sum of the separate companies' pre-merger values.

Correct Answer
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Which of the following statements is most CORRECT?

Correct Answer
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Exam 22: Mergers and Corporate Control

Correct AnswerverifiedShow Answer

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

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

Synergistic benefits can arise from a number of different sources,including operating economies of scale,financial economies,and increased managerial efficiency.

Correct AnswerverifiedShow Answer

Which of the following statements is most CORRECT?

Correct AnswerverifiedB

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

Coca-Cola's acquisition of Columbia Pictures and its announcement that it would operate its new subsidiary separately could be described as primarily a financial merger.

Correct AnswerverifiedShow Answer

Only if a target firm's value is greater to the acquiring firm than its market value as a separate entity will a merger be financially justified.

Correct AnswerverifiedShow Answer

In a financial merger,the relevant post-merger cash flows are simply the sum of the expected cash flows of the two companies,measured as if they were operated independently.

Correct AnswerverifiedTrue

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

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

Which of the following statements is most CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A two-tier merger offer is one where the acquiring company offers to purchase the target company in a two-part transaction.Cash is paid to some stockholders,bonds are issued to others,but the total values of each part of the transaction are equal.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedA

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

In a merger with true synergies,the post-merger value exceeds the sum of the separate companies' pre-merger values.

Correct AnswerverifiedShow Answer

Which of the following statements is most CORRECT?

Correct AnswerverifiedShow Answer

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B

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True

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A

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