Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
Which of the following statements regarding mergers and taxes is false?
1)
A)
Like a large portfolio, large firms bear less idiosyncratic risk, so often mergers are justified on
the basis that the combined firm is less risky.
B)
Because most stockholders will already be holding a well–diversified portfolio, they get no
further benefit from the firm diversifying through acquisition.
C)
Because these employees are obligated to hold idiosyncratic risk, they benefit when the firm
reduces that risk by conglomerating.
D)
Because it may be easier to measure performance accurately in a conglomerate, agency costs
may be reduced and resources may be more efficiently allocated.
2)
Which of the following statements regarding vertical integration is false?
2)
A)
A company might not be happy with how its products are being distributed, so it might
decide to take control of its distribution channels.
B)
The principal benefit of vertical integration is coordination. By putting two companies under
central control, management can ensure that both companies work toward a common goal.
C)
A company might conclude that it can enhance its product if it has direct control of the inputs
required to make the product.
D)
Vertically integrated companies may be large, but unlike other large corporations, since they
remain focused in one industry they are easy to run.
3)
Which of the following statements is false?
3)
A)
It is possible to combine two companies with the result that the earnings per share of the
merged company exceed the premerger earnings per share of either company, even when the
merger itself creates no economic value.
B)
When an acquirer buys a private target, it provides the target’s owners with a way to reduce
their risk exposure by cashing out their investment in the private target and reinvesting in a
diversified portfolio.
C)
To justify a takeover based on operating losses, management would have to argue that the tax
savings are over and above what the firm would save using carryback and carryforward
provisions.
D)
All else being equal, larger firms, because they are more diversified, have an increased
probability of bankruptcy.
4)
Which of the following questions is false?
4)
A)
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.
B)
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.
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.
5)
Which of the following statements is false?
5)
A)
Mergers and acquisitions are part of what is often referred to as “the market for corporate
control.”
B)
The takeover market is also characterized by merger waves–peaks of heavy activity followed
by quiet troughs of few transactions.
C)
There are two primary mechanisms by which ownership and control of a public corporation
can change: Either another corporation or group of individuals can acquire the target firm, or
the target firm can merge with another firm.
D)
Merger activity is greater during economic contractions than during expansions.
6)
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
6)
A)
golden parachute.
B)
poison pill.
C)
white knight.
D)
classified board.
7)
The merger of two companies in the same industry that make products required at different stages
of the production cycle is called
7)
A)
vertical integration.
B)
economies of scope.
C)
economies of scale.
D)
horizontal integration.
8)
When a hostile takeover appears to be inevitable, a target company will sometimes look for
another, friendlier company to acquire it called a
8)
A)
classified board.
B)
poison pill.
C)
golden parachute.
D)
white knight.
9)
Which of the following statements regarding recapitalization as a takeover defense is false?
9)
A)
Restructuring itself can produce efficiency gains, often removing the principal motivation for
the takeover in the first place.
B)
Another defense against a takeover is a recapitalization, in which a company changes its
capital structure to make itself less attractive as a target.
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.
10)
Which of the following statements regarding poison pills is false?
10)
A)
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.
B)
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.
C)
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.
D)
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.
11)
This period is known for hostile, “bust–up” takeovers, in which the acquirer purchased a poorly
performing conglomerate and sold off its individual business units for more than the purchase
price:
11)
A)
1960s
B)
1970s
C)
1980s
D)
1990s
12)
This period is known as the conglomerate wave because firms typically acquired firms in unrelated
businesses:
12)
A)
1960s
B)
1970s
C)
1980s
D)
1990s
13)
Which of the following statements is false?
13)
A)
When a bid is announced, the target shareholders enjoy a gain of 16% on average in their
stock price.
B)
In most U.S. states, the law requires that when existing shareholders of a target firm are
forced to sell their shares, they receive the market price for their shares. In most cases, this
concept is interpreted as the value inclusive of any value that arises because of the merger
itself.
C)
A bidder is unlikely to acquire a target company for less than its current market value.
D)
In practice, most acquirers pay a substantial acquisition premium, which is the percentage
difference between the acquisition price and the premerger price of the target firm.
14)
Savings that come from combining the marketing and distribution of different types of related
products. are called
14)
A)
economies of scope.
B)
horizontal integration.
C)
economies of scale.
D)
vertical integration.
15)
Which of the following questions regarding risk arbitrage is false?
15)
A)
Traders known as risk–arbitrageurs, who believe that they can predict the outcome of a deal,
take positions based on their beliefs.
B)
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.
C)
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.
D)
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.
16)
This period is known for known for “strategic” or “global” deals that were more likely to be friendly
and to involve companies in related businesses; these mergers often were designed to create strong
firms on a scale that would allow them to compete globally:
16)
A)
1960s
B)
1970s
C)
1980s
D)
1990s
17)
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
17)
A)
classified board.
B)
golden parachute.
C)
poison pill.
D)
white knight.
18)
Consider the following equation:
x
NT<T + S
ANA
NT
The term A in this equation refers to
18)
A)
the premerger, or standalone, value of the acquirer.
B)
new shares to pay for the target.
C)
the premerger (standalone) value of the target.
D)
the value of the synergies created by the merger.
19)
Which of the following statements regarding efficiency gains is false?
19)
A)
Although identifying poorly performing corporations is relatively easy, fixing them is another
matter entirely.
B)
A chief executive of an inefficiently run corporation can be ousted by current shareholders
voting to replace the board of directors, and in fact a large number of ineffective managers are
replaced in this way.
C)
A justification that acquirers cite for paying a premium for a target is efficiency gains, which
are often achieved through an elimination of duplication.
D)
Takeovers relying on the improvement of target management are difficult to complete, and
post–takeover resistance to change can be great. Thus not all inefficiently run organizations
are necessarily more efficient following a takeover.
20)
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
20)
A)
white knight.
B)
classified board.
C)
golden parachute.
D)
poison pill.
21)
The fact that a large company can enjoy savings from producing goods in high volume, that are not
available to a small company is called
21)
A)
horizontal integration.
B)
economies of scale.
C)
economies of scope.
D)
vertical integration.
22)
Which of the following statements regarding mergers and taxes is false?
22)
A)
Carryback and carryforward provisions essentially deliver the benefits of conglomeration to a
small firm with volatile earnings.
B)
The IRS will disallow a tax break if it can show that the principal reason for a takeover is tax
avoidance, so it is unlikely that the tax advantage could, by itself, be a valid reason to acquire
another firm.
C)
Companies with current–year losses can also use them to offset earnings (carryback) for the
twenty prior years.
D)
It might appear that a conglomerate has a tax advantage over a single–product firm simply
because losses in one division can offset profits in another division.
23)
The justification for the benefits of diversification from mergers include all of the following except
23)
A)
tax loss benefits.
B)
direct risk reduction.
C)
liquidity enhancement.
D)
lower cost of debt or increased debt capacity.
24)
Consider the following equation:
x
NT<T + S
ANA
NT
The term S in this equation refers to
24)
A)
the value of the synergies created by the merger.
B)
the premerger (standalone) value of the target.
C)
new shares to pay for the target.
D)
the premerger, or standalone, value of the acquirer.
25)
Which of the following statements is false?
25)
A)
Cost–reduction synergies are hard to predict and achieve.
B)
There may also be costs associated with size.
C)
Because the CEOs of small firms receive information so quickly, small firms are often able to
react in timely way to changes in the economic environment.
D)
Synergies usually fall into two categories: cost reductions and revenue enhancements.
26)
Consider the following equation:
x
NT<T + S
ANA
NT
The term T in this equation refers to
26)
A)
new shares to pay for the target.
B)
the premerger (standalone) value of the target.
C)
the value of the synergies created by the merger.
D)
the premerger, or standalone, value of the acquirer.
B
27)
Which of the following questions is false?
27)
A)
How the acquirer pays for the target affects the taxes of both the target shareholders and the
combined firm.
B)
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.
C)
Any acquirer shares received in full or partial exchange for target shares triggers an
immediate tax liability for target shareholders.
D)
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
A
28)
Consider the following equation:
x
NT<T + S
ANA
NT
The term x in this equation refers to
28)
A)
the value of the synergies created by the merger.
B)
new shares to pay for the target.
C)
the premerger, or standalone, value of the acquirer.
D)
the premerger (standalone) value of the target.
29)
Which of the following statements is false?
29)
A)
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.
B)
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.
C)
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.
D)
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.
30)
Which of the following questions is false?
30)
A)
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.
B)
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.
C)
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.
D)
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.
31)
Which of the following statements regarding monopoly mergers is false?
31)
A)
It is often argued that merging with or acquiring a major rival enables a firm to substantially
reduce competition within the industry and thereby increase profits.
B)
While only the merging company benefits when competition is reduced, all companies in an
industry pay the associated costs.
C)
Society as a whole bears the cost of monopoly strategies, so most countries have antitrust laws
that limit such activity.
D)
Financial researchers have found that the share prices of other firms in the same industry did
not significantly increase following the announcement of a merger within the industry.
32)
Which of the following statements is false?
32)
A)
For most investors an investment in the stock market is a zero–NPV investment.
B)
An acquirer might be able to add economic value, as a result of an acquisition, that an
individual investor cannot add.
C)
Diversification benefits are by far the most common justification that bidders give for the
premium they pay for a target.
D)
Chief among the costs associated with size is that larger firms are more difficult to manage.
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
33)
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?
Use the information for the question(s) below.
Martin Manufacturing has earnings per share (EPS) of $3.00, 5 million shares outstanding, and a share price of $32. Martin
is considering buying Luther Industries, which has earnings per share of $2.50, 2 million shares outstanding, and a share
price of $20. Marin will pay for Luther by issuing new shares. There are no expected synergies from the transaction.
34)
Assume that Martin pays no premium to acquire Luther. Calculate Martin’s price–earnings (P/E) ratio both pre
and post merger.
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35)
What is a white knight?
Use the information for the question(s) below.
Martin Manufacturing has earnings per share (EPS) of $3.00, 5 million shares outstanding, and a share price of $32. Martin
is considering buying Luther Industries, which has earnings per share of $2.50, 2 million shares outstanding, and a share
price of $20. Marin will pay for Luther by issuing new shares. There are no expected synergies from the transaction.
36)
If Martin pays no premium to acquire Luther, what will the earnings per share be after the merger?
37)
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?
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Answer Key
Testname: C28
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Answer Key
Testname: C28
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