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Corporate Finance, 12e (Ross)
1) One company wishes to acquire another. Which one of the following does not require a formal
vote by the shareholders of the acquired firm?
A) A merger
B) An acquisition of stock
C) A horizontal acquisition of assets
D) A consolidation
E) A vertical acquisition of assets
2) Firm A and Firm B join to create Firm AB. This is an example of:
A) a tender offer.
B) an acquisition of assets.
C) an acquisition of stock.
D) a consolidation.
E) a merger.
3) Suppose that Ford and General Motors were to merge. Ignoring potential antitrust problems,
this merger would be classified as a(n):
A) horizontal merger.
B) vertical merger.
C) conglomerate merger.
D) tax inversion merger.
E) equity carve-out merger.
4) Suppose that General Motors makes an offer to acquire General Mills. Ignoring potential
antitrust problems, this merger would be classified as a:
A) monopolistic merger.
B) horizontal merger.
C) vertical merger.
D) conglomerate merger.
E) equity carve-out merger.
5) Suppose that Arby's acquired a meat packing house. This merger would be classified as a:
A) monopolistic merger.
B) vertical merger.
C) conglomerate merger.
D) horizontal merger.
E) spin off.
6) A dissident group solicits votes in an attempt to replace existing management. This is called a:
A) tender offer.
B) shareholder derivative action.
C) proxy contest.
D) management freeze-out.
E) shareholder's revenge.
7) If the All-Star Fuel Filling Company, a chain of gasoline stations, acquires the Mid-States
Refining Company, a refiner of oil products, this would be an example of a:
A) conglomerate acquisition.
B) white knight.
C) vertical acquisition.
D) going-private transaction.
E) horizontal acquisition.
8) When the officers of a firm purchase all the equity shares and the shares of the firm are
delisted and no longer publicly available, this action is known as a(n):
A) consolidation.
B) vertical acquisition.
C) proxy contest.
D) going-private transaction.
E) equity carve-out.
9) A business deal in which all publicly owned stock in a firm is replaced with complete equity
ownership by a private group is called a:
A) tender offer.
B) proxy contest.
C) going-private transaction.
D) acquisition.
E) consolidation.
10) The complete absorption of one company by another, wherein the acquiring firm retains its
identity and the acquired firm ceases to exist as a separate entity, is called a:
A) merger.
B) consolidation.
C) tender offer.
D) spinoff.
E) divestiture.
11) A merger in which an entirely new firm is created and both the acquired and acquiring firms
cease to exist is called a:
A) divestiture.
B) consolidation.
C) tender offer.
D) spinoff.
E) conglomeration.
12) A public offer by one firm to directly buy the shares of another firm is called a:
A) merger.
B) consolidation.
C) tender offer.
D) spinoff.
E) divestiture.
13) The acquisition of a firm in the same industry as the bidder is called a ________ acquisition.
A) conglomerate
B) forward
C) backward
D) horizontal
E) vertical
14) The acquisition of a firm involved with a different production process stage than the bidder is
called a ________ acquisition.
A) conglomerate
B) forward
C) backward
D) horizontal
E) vertical
15) The acquisition of a firm whose business is not related to that of the bidder is called a
________ acquisition.
A) conglomerate
B) forward
C) backward
D) horizontal
E) vertical
16) An attempt to gain control of a firm by soliciting a sufficient number of stockholder votes to
replace the current board of directors is called a:
A) tender offer.
B) proxy contest.
C) going-private transaction.
D) leveraged buyout.
E) consolidation.
17) Which one of the following statements concerning mergers and acquisitions is correct?
A) Generally, two-thirds of the shareholders in each firm must approve a merger.
B) Acquisitions always result in at least one firm being dissolved.
C) The net present value of an acquisition should have no bearing on whether or not the
acquisition occurs.
D) Acquisitions of assets are generally quite simple and inexpensive from a legal and accounting
perspective.
E) At least one-half of the shareholders must vote to approve an acquisition of stock.
18) In a merger the:
A) legal status of both the acquiring firm and the target firm is terminated.
B) acquiring firm retains its name and legal status.
C) acquiring firm acquires the assets but not the liabilities of the target firm.
D) stockholders of the target firm have little, if any, say as to whether or not the merger occurs.
E) target firm always continues to exist as a subsidiary of the acquiring firm.
19) When a building supply store acquires a lumber mill it is making a ________ acquisition.
A) horizontal
B) longitudinal
C) conglomerate
D) vertical
E) complementary resources
20) If Microsoft were to acquire an airline, the acquisition would be classified as a ________
acquisition.
A) horizontal
B) longitudinal
C) conglomerate
D) vertical
E) complementary resources
21) Which one of the following combinations of firms would benefit the most through the use of
complementary resources?
A) A ski resort and a travel trailer sales outlet
B) A golf resort and a ski resort
C) A hotel and a home improvement center
D) A swimming pool distributor and a kitchen designer
E) A fast food restaurant and a dry cleaner
22) Which one of the following is most likely a good candidate for an acquisition that could
benefit from the use of complementary resources?
A) A sports arena that is home only to an indoor hockey team
B) A hotel in a busy downtown business district of a major city
C) A day care center located near a major route into the main business district of a large city
D) An amusement park located in a centralized Florida location
E) A fast food restaurant located near a major transportation hub
23) The value of a target firm to the acquiring firm is equal to the:
A) value of the target firm as a separate entity plus the synergy derived from the acquisition.
B) purchase cost of the target firm.
C) value of the merged firm minus the value of the target firm as a separate entity.
D) purchase cost plus the incremental value derived from the acquisition.
E) incremental value derived from the acquisition.
24) The positive incremental net gain associated with the combination of two firms through a
merger or acquisition is called:
A) the agency conflict.
B) goodwill.
C) the merger cost.
D) the consolidation effect.
E) synergy.
25) All the following represent potential gains from an acquisition except:
A) the replacement of ineffective managers.
B) lower costs per unit produced.
C) an increase in production size such that diseconomies of scale are realized.
D) increased asset utilization.
E) spreading of overhead costs.
26) The shareholders of a target firm benefit the most when:
A) an acquiring firm has the better management team and replaces the target firm's managers.
B) the management of the target firm is more efficient than the management of the acquiring
firm which replaces them.
C) the management of both the acquiring firm and the target firm are as equivalent as possible.
D) their current management team is kept in place even though the managers of the acquiring
firm are more suited to manage the target firm's situation.
E) their management team is technologically knowledgeable yet ineffective.
27) A proposed acquisition may create synergy by doing all the following except:
A) increasing the market power of the combined firm.
B) improving the distribution network of the acquiring firm.
C) reducing the acquiring firm's distribution costs.
D) reducing the utilization of the acquiring firm's assets.
E) providing the combined firm with a strategic advantage.
28) ________ can provide a potential tax gain from an acquisition.
A) A reduction in the level of debt
B) An increase in surplus funds
C) The combining of multi-state operations
D) A decreased use of leverage
E) Increased diseconomies of scale
29) A key reason for acquisitions is synergy. Synergy includes all the following except:
A) revenue enhancements.
B) cost reductions.
C) increased debt capacity.
D) decreased cash flows.
E) increased efficiency.
30) Assume two firms are at their maximum level of debt. How can a merger between these
firms create synergy based on debt capacity?
A) By increasing firm size
B) By lowering risk
C) By lowering taxes
D) By lowering the tax shield
E) They can't.
31) Assume a well-established firm is operating at high levels of efficiency and profitability. A
group of recent college grads recently opened a new firm in the same industry. The well-
established firm might be interested in acquiring the new firm primarily to:
A) reduce economies of scale.
B) use the established firm's tax losses.
C) transfer technology knowledge.
D) obtain the new firm's surplus funds.
E) control the production of purchased component parts.
32) The IRS is most apt to disallow an acquisition if it:
A) moves the foreign operations of the acquired firm to the U.S.
B) is totally financed with debt.
C) is designed primarily to reduce federal taxes.
D) is designed to transfer technology in a tax-free transfer.
E) allows shareholders to avoid currently realizing their gains from a stock acquisition.
33) If an acquisition does not create value, then the:
A) earnings per share of the acquiring firm must be the same both before and after the
acquisition.
B) earnings per share can change but the stock price of the acquiring company should remain
constant.
C) price per share of the acquiring company should increase because of the growth of the firm.
D) earnings per share will most likely increase while the price-earnings ratio remains constant.
E) price-earnings ratio should remain constant regardless of any changes in the earnings per
share.
34) For the acquiring firm, diversification:
A) will automatically produce gains.
B) will reduce both risk and debt capacity.
C) may or may not provide financial benefits.
D) will provide risk reduction for all shareholders' portfolios.
E) may result in a risk-free firm.
35) Assume a merger of two levered firms produced no synergy. In this case, the:
A) acquiring firm's shareholders would neither gain nor lose any value.
B) bondholders would probably benefit at shareholders' expense.
C) diversification effect would only benefit the acquired firm's shareholders.
D) combined shareholders would benefit at the expense of all debt holders.
E) shareholders and bondholders would fail to realize any benefits or losses.
36) Assume a merger of two unlevered firms produced no synergy. In this case:
A) the acquiring firm's shareholders would gain while the acquired firm's shareholders would
lose.
B) the shareholders of both firms would realize equal gains.
C) the diversification effect would only benefit the acquired firm's shareholders.
D) the acquired firm's shareholders would gain at the expense of the acquiring firm's
shareholders.
E) all shareholders would fail to realize any benefits.
37) In a merger or acquisition, a firm should be acquired if it:
A) generates a positive net present value to the shareholders of the acquiring firm.
B) is a firm in the same line of business in which the acquirer has expertise.
C) is a firm in a totally different line of business which will diversify the firm.
D) pays a large dividend which will provide a cash pass through to the acquirer.
E) increases the firm's market share.
38) When evaluating an acquisition, you should:
A) concentrate on book values and ignore market values.
B) focus on the total cash flows of the merged firm.
C) include synergies.
D) ignore any one-time acquisition fees or transaction costs.
E) ignore any potential changes in management.
39) The Williams Act requires Schedule 13D be filed with the SEC within ________ days of
obtaining a ________ percent holding in a target firm's stock.
A) 5; 10
B) 10; 5
C) 15; 5
D) 5; 15
E) 15; 10
40) A tender offer generally offers a price that is ________ the current market price for a
________ number of shares.
A) equal to; minimum
B) above; minimum
C) above; maximum
D) below; maximum
E) equal to; maximum
41) Assume an acquiring firm obtained control of a target firm through a tender offer. This group
is now proposing a merger that is generally referred to as a:
A) proxy fight.
B) street sweep.
C) waning motion.
D) toehold.
E) cleanup merger.
42) A change in the corporate charter making it more difficult for the firm to be acquired by
increasing the percentage of shareholders that must approve a merger offer is called a:
A) supermajority amendment.
B) standstill agreement.
C) greenmail provision.
D) poison pill amendment.
E) white knight provision.
43) Assume Uptown Markets just made a tender offer to purchase shares of its own stock. This
offer was made to all its shareholders except for the largest outside shareholder. This offer is
referred to as a(n):
A) limited recapitalization.
B) white knight offer.
C) exclusionary self-tender.
D) asset restructuring.
E) greenmail offer.
44) A contract wherein the bidding firm agrees to limit its holdings in the target firm is called a:
A) supermajority amendment.
B) standstill agreement.
C) greenmail provision.
D) poison pill amendment.
E) white knight provision.
45) The payments made by a firm to repurchase shares of its outstanding stock from an
individual investor in an attempt to eliminate a potentially unfriendly takeover attempt are
referred to as:
A) a golden parachute.
B) standstill payments.
C) greenmail.
D) a poison pill.
E) a white knight.
46) A tactic designed to make unfriendly takeover attempts financially unappealing, if not
impossible, is called:
A) a golden parachute.
B) a standstill agreement.
C) greenmail.
D) a poison pill.
E) a white knight.
47) Generous compensation packages paid to a firm's top managers in the event of a takeover are
referred to as:
A) golden parachutes.
B) poison puts.
C) white knights.
D) shark repellents.
E) bear hugs.
48) A friendly suitor that a target firm turns to as an alternative to a hostile bidder is called a:
A) golden suitor.
B) poison put.
C) white knight.
D) shark repellent.
E) crown jewel.
49) A classified board is:
A) a communication network that identifies firms that are willing to be acquired
B) the inclusion a super majority provision to prevent a small number of directors from exerting
total control over the board's decisions.
C) a board where only a portion of the directors are elected in any one year.
D) a communication network that distributes resumes for potential board candidates.
E) a listing of criteria that a firm is seeking for a targeted purchase.
50) All the following will tend to discourage a takeover except:
A) a supermajority provision.
B) the hoarding of cash.
C) an exclusionary self-tender offer.
D) a leveraged recapitalization.
E) the divestiture of key assets.
51) In a tax-free acquisition, the shareholders of the target firm:
A) receive income that is considered to be tax-exempt.
B) gift their shares to a tax-exempt organization and therefore have no taxable gain.
C) are viewed as having exchanged their shares.
D) sell their shares to a qualifying entity thereby avoiding both income and capital gains taxes.
E) sell their shares at cost thereby avoiding the capital gains tax.
52) Which one of the following statements is correct?
A) If an acquisition is made with cash, then the cost of that acquisition is dependent upon the
acquisition gains.
B) Acquisitions made by exchanging shares of stock are normally taxable transactions.
C) Shareholders of the acquired firm must immediately realize capital gains/losses in a cash
acquisition.
D) Shareholders of the acquired firm are generally indifferent between a cash or a stock
transaction.
E) Acquisitions based on legitimate business purposes are not taxable transactions regardless of
the means of financing used.
53) In a taxable transaction:
A) the acquiring firm has no immediate tax effects but gains valuable future depreciation tax
benefits on the marked up assets.
B) the shareholders of both firms realize immediate capital gains.
C) acquiring firms generally do not write up the assets of the acquired firm.
D) the assets of both the acquiring and acquired firms are written up to their current market
values.
E) shares of the acquiring firm are exchanged for the target firm's shares.
