29) 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.
30) Which of the following questions is false?
A) The method of payment (cash or stock) affects how the value of the target’s assets is recorded for tax
purposes and it affects the combined firm’s financial statements for financial reporting.
B) The combined firm must mark up the value assigned to the target’s assets on the financial 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.
31) 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 affects the taxes of both the target shareholders and the combined
firm.
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.
32) Which of the following questions regarding risk arbitrage is false?
A) Once a tender offer 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 profit arises from the difference between the target’s stock price and the implied offer 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.
33) 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 offer—that
is, a public announcement of its intention to purchase a large block of shares for a specified 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 firm
and the ultimate cash flows 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 firm (the acquirer’s share price after the takeover) exceeds the premerger price of the
acquiring firm.
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
34) KT corporation has announced plans to acquire MJ corporation. KT is trading for $45 per share and MJ is
trading for $25 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 offer in a stock swap and
still generate a positive NPV?
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
35) A rights offering that gives existing target shareholders the right to buy shares in either the target or the
acquirer at a deeply discounted price once certain conditions are met is called a
A) golden parachute.
B) poison pill.
C) classified board.
D) white knight.
36) For a hostile takeover to succeed, the acquirer must appeal to the target shareholders; this is usually done
through:
A) a tender offer and a proxy fight.
B) a tender offer and a poison pill.
C) a white knight and a proxy fight.
D) a staggered board and a white knight.
37) 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) classified board.
C) poison pill.
D) golden parachute.
38) 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) classified board.
C) golden parachute.
D) white knight.
39) An extremely lucrative severance package that is guaranteed to a firm’s senior managers in the event that the
firm is taken over and the managers are let go is called a
A) golden parachute.
B) white knight.
C) poison pill.
D) classified board.
40) 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 firm when negotiating with the acquirer
because poison pills make it difficult to complete the takeover without the cooperation of the target
board.
D) By adopting a poison pill, a company effectively entrenches its management by making it much more
difficult for shareholders to replace bad managers, thereby potentially destroying value.
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
41) What is a white knight?
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
42) 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 efficiency gains, often removing the principal motivation for the
takeover in the first place.
C) By increasing leverage on its own, the target firm can reap the benefit 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.
43) Which of the following statements is false?
A) SEC rules make it difficult for investors to buy much more than about 10% of a firm 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 offers 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 offer 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.
44) Consider a case in which existing shareholders do not have to invest time and effort, but still participate in
the gains from a takeover, while the bidder who puts in the time and effort is forced to give up substantial
profits. This situation is called:
A) the free rider problem.
B) a toehold.
C) a leveraged buyout.
D) a freezeout merger.
45) 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 offer in total to acquire 50% of Mayo‘s shares?
A) $300 million
B) $150 million
C) $100 million
D) $10 million
46) 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
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
47) You work for a levered buyout firm 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 offer $25 per share for control of the company. Assuming you get 50% control, what will
your gain from the transaction be?
