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The term A in this equation refers to ________.
A) the premerger, or standalone, value of the acquirer
B) new shares to pay for the target
C) the value of the synergies created by the merger
D) the premerger (standalone) value of the target
Answer: A
Dif: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
2) Consider the following equation:
<
The term S in this equation refers to ________.
A) the premerger (standalone) value of the target
B) the premerger, or standalone, value of the acquirer
C) the value of the synergies created by the merger
D) new shares to pay for the target
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
11
3) Consider the following equation:
<
The term x in this equation refers to ________.
A) the value of the synergies created by the merger
B) the premerger, or standalone, value of the acquirer
C) new shares to pay for the target
D) the premerger (standalone) value of the target
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
4) Consider the following equation:
<
The term T in this equation refers to ________.
A) the premerger, or standalone, value of the acquirer
B) the value of the synergies created by the merger
C) the premerger (standalone) value of the target
D) new shares to pay for the target
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
12
5) Which of the following questions is FALSE?
A) The method of payment (cash or stock) afects how the value of the target's assets is
recorded for tax purposes and it afects the combined irm's inancial statements for
inancial reporting.
B) The combined irm must mark up the value assigned to the target's assets on the
inancial statements by allocating the purchase price to target assets according to their fair
market value.
C) Any goodwill created in a merger deal can be amortized for tax purposes over 15 years.
D) Many transactions are carried out as acquisitive reorganizations under the tax code.
These structures allow the target shareholders to defer their tax liability on the part of the
payment made in acquirer stock but they do not allow the acquirer to step up the book
value of the target assets.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
6) Which of the following questions is FALSE?
A) Any acquirer shares received in full or partial exchange for target shares triggers an
immediate tax liability for target shareholders.
B) In a friendly takeover, the target board of directors supports the merger, negotiates with
potential acquirers, and agrees on a price that is ultimately put to a shareholder vote.
C) How the acquirer pays for the target afects the taxes of both the target shareholders
and the combined irm.
D) If the acquirer purchases the target assets directly (rather than the target stock), then it
can step up the book value of the target's assets to the purchase price.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
13
7) Which of the following questions regarding risk arbitrage is FALSE?
A) Once a tender ofer is announced, the uncertainty about whether the takeover will
succeed reduces the volatility of the stock price. This uncertainty creates an opportunity
for investors to speculate on the outcome of the deal without bearing the risk of volatility.
B) Traders known as risk-arbitrageurs, who believe that they can predict the outcome of a
deal, take positions based on their beliefs.
C) A potential proit arises from the diference between the target's stock price and the
implied ofer price, and is referred to as the merger-arbitrage spread.
D) However, it is not a true arbitrage opportunity because there is a risk that the deal will
not go through. If the takeover did not ultimately succeed, the risk-arbitrageur would
eventually have to unwind his position at whatever market prices prevailed.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
8) Which of the following questions is FALSE?
A) Once the acquirer has completed the valuation process, it is in the position to make a
tender ofer—that is, a public announcement of its intention to purchase a large block of
shares for a speciied price.
B) If we view the pre-bid market capitalization as the stand-alone value of the target, then
from the bidder's perspective, the takeover is a positive-NPV project only if the synergies
created do not exceed the premium it pays.
C) Purchasing a corporation usually constitutes a very large capital investment decision, so
it requires a more accurate estimate of value that includes careful analysis of both
operational aspects of the irm and the ultimate cash lows the deal will generate.
D) A stock-swap merger is a positive-NPV investment for the acquiring shareholders if the
share price of the merged irm (the acquirer's share price after the takeover) exceeds the
premerger price of the acquiring irm.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
14
9) KT corporation has announced plans to acquire MJ corporation. KT is trading for $25 per
share and MJ is trading for $45 per share, with a premerger value for MJ of $3 billion
dollars. If the projected synergies from the merger are $750 million, what is the maximum
exchange ratio that KT could ofer in a stock swap and still generate a positive NPV?
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
22.5 Takeover Defenses
1) A rights ofering that gives existing target shareholders the right to buy shares in either
the target or an acquirer at a deeply discounted price once certain conditions are met is
called a ________.
A) golden parachute
B) poison pill
C) classiied board
D) white knight
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
2) For a hostile takeover to succeed, the acquirer must appeal to the target shareholders;
this is usually done through ________.
A) a tender ofer and a proxy ight
B) a tender ofer and a poison pill
C) a white knight and a proxy ight
D) a staggered board and a white knight
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
15
3) A situation where every director serves a three-year term and the terms are staggered
so that only one-third of the directors are up for election each year is called a ________.
A) white knight
B) classiied board
C) poison pill
D) golden parachute
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
4) When a hostile takeover appears to be inevitable, a target company will sometimes look
for another, friendlier company to acquire it called a ________.
A) poison pill
B) classiied board
C) golden parachute
D) white knight
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
5) An extremely lucrative severance package that is guaranteed to a irm's senior managers
in the event that the irm is taken over and the managers are let go is called a ________.
A) golden parachute
B) white knight
C) poison pill
D) classiied board
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
16
6) Which of the following statements regarding poison pills is FALSE?
A) Companies with poison pills are harder to take over, and when they are taken over, the
premium that existing shareholders receive for their stock is higher.
B) Because a poison pill increases the cost of a takeover, all else equal, a target company
must be in better shape to justify the expense of waging a takeover battle.
C) Poison pills also increase the bargaining power of the target irm when negotiating with
the acquirer because poison pills make it diicult to complete the takeover without the
cooperation of the target board.
D) By adopting a poison pill, a company efectively entrenches its management by making
it much more diicult for shareholders to replace bad managers, thereby potentially
destroying value.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
7) Which of the following statements regarding recapitalization as a takeover defense is
FALSE?
A) Another defense against a takeover is a recapitalization, in which a company changes its
capital structure to make itself less attractive as a target.
B) Restructuring itself can produce eiciency gains, often removing the principal
motivation for the takeover in the irst place.
C) By increasing leverage on its own, the target irm can reap the beneit of the interest tax
shields.
D) In many cases, a substantial portion of the synergy gains that an acquirer anticipates
from a takeover are savings from a decrease in leverage as well as other cost reductions.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
17
8) What is a white knight?
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
22.6 Who Gets the Value Added from a Takeover?
1) Which of the following statements is FALSE?
A) SEC rules make it diicult for investors to buy much more than about 10% of a irm in
secret. After an acquirer acquires such an initial stake in the target, called a toehold, they
would have to make their intentions public by informing investors of his large stake.
B) With the availability of both the freezeout merger and the leveraged buyout as
acquisition strategies, most of the value added accrues to the acquiring shareholders.
C) The laws on tender ofers allow the acquiring company to freeze existing shareholders
out of the gains from merging by forcing non-tendering shareholders to sell their shares for
the tender ofer price.
D) Premiums in LBO transactions are often quite substantial—while they can avoid the
free-rider problem acquirers must still get board approval to overcome other defenses such
as poison pills, as well as outbid other potential acquirers.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
18
2) Consider a case in which existing shareholders do not have to invest time and efort, but
still participate in the gains from a takeover, while the bidder who puts in the time and
efort is forced to give up substantial proits. This situation is called ________.
A) the free rider problem
B) a toehold
C) a leveraged buyout
D) a freezeout merger
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
3) Mayo Corporation is currently trading at $30 per share. There are 10 million shares
outstanding, and the company has no debt. You believe that the value of the company
would increase by 50% if the management were replaced. How much would you need to
ofer in total to acquire 50% of Mayo's shares?
A) $300 million
B) $150 million
C) $100 million
D) $10 million
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
19
4) Mayo Corporation is currently trading at $30 per share. There are 10 million shares
outstanding, and the company has no debt. You believe that the value of the company
would increase by 50% if the management were replaced. How much would you gain from
acquiring 50% of Mayo's shares by borrowing, attaching the debt to the company and
replacing the management?
A) $150 million
B) $225 million
C) $300 million
D) $10 million
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
5) You work for a levered buyout irm and are evaluating a potential buyout of Boogle Inc.
Boogle's stock price is $18, and it has 3 million shares outstanding. You believe that if you
buy the company and replace its dismal management team, its value will increase by 50%.
You are planning on doing a levered buyout of Boogle and will ofer $25 per share for
control of the company. Assuming you get 50% control, what will your gain from the
transaction be?
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
20
