54) The purchase accounting method for mergers requires that:
A) the excess of the purchase price over the fair market value of the target firm be recorded as a
one-time expense on the income statement of the acquiring firm.
B) goodwill be amortized on a yearly basis.
C) the equity of the acquiring firm be reduced by the excess of the purchase price over the fair
market value of the target firm.
D) the assets of the acquired firm be recorded at their fair market value on the balance sheet of
the acquiring firm.
E) the excess amount paid for the target firm be recorded as a tangible asset on the books of the
acquiring firm.
55) A going-private transaction in which a large percentage of the money used to buy the
outstanding stock is borrowed is called a:
A) tender offer.
B) proxy contest.
C) merger.
D) leveraged buyout.
E) consolidation.
56) The two sources of value created by an LBO are:
A) the tax benefit of debt and increased sales.
B) lower tax and interest payments.
C) lower interest expenses and increased efficiency.
D) increased efficiency and the interest tax shield.
E) lower taxes and lower dividends.
57) The sale of stock in a wholly owned subsidiary via an initial public offering is referred to as
a(n):
A) split-up.
B) carve-out.
C) counter-tender offer.
D) white knight gift.
E) spin-off.
58) Which one of these is least associated with takeovers?
A) Leveraged buyouts
B) Management buyouts
C) Proxy contests
D) Acquisition of assets
E) Spin-offs
59) A firm may want to divest itself of some of its assets for all the following reasons except to:
A) raise cash.
B) eliminate unprofitable operations.
C) eliminate some recently acquired assets.
D) cash in on profitable operations.
E) eliminate some synergy.
60) Which one of the following statements is correct?
A) A carve-out generates cash for the parent firm.
B) A split-up frequently follows a spin-off.
C) A carve-out is a specific type of acquisition.
D) A spin-off involves an initial public offering.
E) A divestiture means that the original firm ceases to exist.
61) The distribution of shares in a subsidiary to existing parent company stockholders is called
a(n):
A) lockup transaction.
B) bear hug.
C) equity carve-out.
D) spin-off.
E) split-up.
62) Firm V has a market value of $450 and Firm A has a market value of $375. If the two firms
merged their estimated combined value is $900. What is the synergy of the merger?
A) $50
B) $75
C) $25
D) $20
E) $40
63) Herbal Gardens has a market value of $380 while Veggies has a market value of $530.
Veggies is merging with Herbal Gardens and expects the combined firm to have a market value
of $950. If the current Herbal Garden shareholders obtain $400 of equity in the new firm, how
much synergy was allocated to the Veggies shareholders?
A) $0
B) $20
C) $25
D) $15
E) $40
64) Firm A is planning on merging with Firm B. Firm A will pay Firm B’s stockholders the
current value of their stock in shares of Firm A because no synergy will be created. Firm A
currently has 3,000 shares of stock outstanding at a market price of $15 a share. Firm B has
1,000 shares outstanding at a price of $10 a share. What is the value of the merged firm?
A) $25,000
B) $45,000
C) $55,000
D) $60,000
E) $50,000
65) Firm A is planning on merging with Firm B. Firm A will pay Firm B’s stockholders the
current value of their stock plus $120, which equals one-half of the synergy, in shares of Firm A.
Firm A currently has 4,000 shares of stock outstanding at a market price of $21 a share. Firm B
has 1,200 shares outstanding at a price of $10 a share. What is the value of the merged firm?
A) $88,120
B) $96,240
C) $96,000
D) $84,120
E) $92,360
66) Jay’s has a market value of $3,600 and believes that if it acquires Benny’s in a stock
transaction the combination of the new firm will be worth $6,000 given the expected synergy of
$200. If Jay’s wants to keep 75 percent of the synergy for itself, what should be the value of the
stock it issues to Benny’s?
A) $2,050
B) $2,250
C) $2,150
D) $2,000
E) $2,500
67) Brite Industries has agreed to merge with Nu-Day in exchange for receiving shares in the
combined firm equal to Brite’s current market value. There are two economic scenarios with
equal probabilities of occurrence that must be considered. The market value of Brite will be
either $45 a share or $30 a share depending on the economic state. Similarly, the market value of
Nu-Day will be either $75 or $50 a share. What value per share will the original Nu-Day
shareholders receive in the combined firm assuming no synergy is created by the merger?
A) $63.50
B) $54.25
C) $56.00
D) $57.75
E) $62.50
68) Goodday is merging with Bakers. Goodday has debt with a face value of $80 and Baker has
debt with a face value of $40. Bakers’ stockholders receive stock in the combined firm in an
amount equal to the stand-alone market value of Bakers. The pre-merger values of the firms
given two economic states with equal probabilities of occurrence are as follows:
Pre-merger Values:
Stage 1
Stage 2
Market Value
Goodday:
Assets
$
160
$
$
100
Debt
80
60
Equity
80
40
Barkers:
Assets
$
20
$
$
50
Debt
20
30
Equity
0
20
What will be the gain or loss to the current shareholders of Goodday if the merger provides no
synergy?
A) −$10
B) $0
C) −$5
D) $5
E) $10
Post-merger Values
Stage 1
Stage 2
Market Value
Goodday-Bakers
Assets
$
180
$
120
$
150
Debt
120
120
120
Equity
60
0
30
69) Tiger’s is merging with Lion’s. Tiger’s has debt with a face value of $80 and Lion’s has debt
with a face value of $50. The pre-merger values of the firms given two economic states with
equal probabilities of occurrence are as follows:
Pre-merger Values
Stage 1
Stage 2
Market Value
Tiger’s:
Assets
$
130
$
50
$
90
Debt
80
50
65
Equity
50
0
25
Lion’s:
Assets
$
30
$
90
$
60
Debt
30
50
40
Equity
0
40
20
What will be the combined gain or loss to the bondholders of these two firms if the merger
provides no synergy and Lion’s stockholders receive stock in the combined firm in an amount
equal to the stand-alone value of Lion’s?
A) $0
B) $25
C) −$5
D) $5
E) $10
Stage 2
Tiger-Lion’s:
Assets
$
160
$
140
$
150
Debt
130
130
130
Equity
30
10
20
70) Alexandra’s is being acquired by David’s for $75,000 cash. The acquisition is being financed
internally from retained earnings. Alexandra’s currently has 3,000 shares of stock outstanding at
a price of $24 a share. David’s has 10,000 shares outstanding with a market value of $48 a share.
The acquisition will create $4,000 of synergy. What is the value of David’s after the acquisition?
A) $556,000
B) $409,000
C) $438,000
D) $521,000
E) $481,000
71) The market values of Firm V and Firm A are $1,800 and $600, respectively. Assume Firm V
acquires Firm A at a cost of $650 and creates $150 in synergy. What would be the NPV of this
acquisition to Firm V?
A) $50
B) $100
C) $125
D) $150
E) $0
72) Cassandra’s has 6,100 shares outstanding at a market price per share of $24. Adrian’s has
3,500 shares outstanding at a market price of $56 a share. Neither firm has any debt. Adrian’s is
acquiring Cassandra’s for $155,000 in cash. The synergy of the acquisition is $22,500. What is
the value of Cassandra’s to Adrian’s?
A) $155,000
B) $132,500
C) $168,900
D) $158,200
E) $146,400
73) Ferns and Plants are all-equity firms. Ferns has 2,500 shares outstanding at a market price of
$28 a share. Plants has 2,500 shares outstanding at a price of $41 a share. Plants is acquiring
Ferns for $72,000 in cash. The synergy of the acquisition is $3,500. What is the value of Ferns to
Plants?
A) $66,500
B) $70,000
C) $36,000
D) $73,500
E) $79,500
74) ABC and XYZ are all-equity firms. ABC has 1,750 shares outstanding at a market price of
$20 a share while XYZ has 2,500 shares outstanding at a price of $28 a share. ABC is acquiring
XYZ for $75,000 in cash. The incremental value of the acquisition is $8,000. What is the net
present value of acquiring XYZ to ABC?
A) $2,000
B) $3,000
C) $6,000
D) $4,000
E) $8,000
75) Firm A is acquiring Firm B for $40,000 in cash. Firm A has a current market value of
$66,000 while Firm B’s current market value is $38,000. The synergy value from the acquisition
is $2,500. What is the value of Firm A after the acquisition?
A) $108,500
B) $68,500
C) $45,000
D) $66,500
E) $106,500