CHAPTER 21—MERGERS AND ACQUISITIONS
1. In a merger with true synergies, the post-merger value exceeds the sum of the separate companies’ pre-merger values.
a.
True
b.
False
True
EASY
21-1 Rationale for Mergers
False
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2. Synergistic benefits can arise from a number of different sources, including operating economies of scale, financial
economies, and increased managerial efficiency.
a.
True
b.
False
True
EASY
21-1 Rationale for Mergers
False
JFND-GO4R-ER3U-1C31
CHAPTER 21—MERGERS AND ACQUISITIONS
3. Most defensive mergers occur as a result of managers’ actions to maximize shareholders’ wealth.
a.
True
b.
False
False
EASY
21-1 Rationale for Mergers
False
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4. A conglomerate merger occurs when two firms with either a horizontal or a vertical business relationship combine.
a.
True
b.
False
False
EASY
21-2 Types of Mergers
False
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5. Merger activity is likely to heat up when interest rates are high because target firms can expect to receive an especially
CHAPTER 21—MERGERS AND ACQUISITIONS
high premium over the pre-announcement stock price.
a.
True
b.
False
False
EASY
21-3 Level of Merger Activity
False
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6. A company seeking to fight off a hostile takeover might employ the services of an investment banking firm to develop
a defensive strategy.
a.
True
b.
False
True
EASY
21-4 Hostile Versus Friendly Takeovers
False
JFND-GO4R-ER3U-1C3S
CHAPTER 21—MERGERS AND ACQUISITIONS
7. Post-merger control and the negotiated price paid by the acquirer are two of the most important issues in the terms to
merger agreements.
a.
True
b.
False
True
EASY
21-5 Merger Analysis
False
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8. Since the primary rationale for any operating merger is synergy, in planning such mergers the development of accurate
pro forma cash flows is the single most important task.
a.
True
b.
False
True
EASY
21-5 Merger Analysis
False
JFND-GO4R-ER3U-1C3W
CHAPTER 21—MERGERS AND ACQUISITIONS
9. Borrowing funds on terms that would require immediate repayment of all loans if the firm is acquired, selling off at
bargain prices the assets that originally made the firm a desirable target, and granting huge “golden parachutes” that open
if the firm is acquired are 3 procedures used to defend against hostile takeovers. These strategies are known as “poison
pills.”
a.
True
b.
False
True
EASY
21-6 The Role of Investment Bankers
False
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10. A joint venture is one in which two, or sometimes more, independent companies agree to combine resources in order
to achieve a specific objective, usually limited in scope.
a.
True
b.
False
True
EASY
21-8 Corporate Alliances
False
JFND-GO4R-ER3U-1CNB
CHAPTER 21—MERGERS AND ACQUISITIONS
11. Leveraged buyouts (LBOs) occur when a firm’s managers, generally backed by private equity groups, try to gain
control of a publicly owned company by buying shares in the company using large amounts of borrowed money.
a.
True
b.
False
True
EASY
21-9 Private Equity Investments
False
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12. A spin-off is a type of divestiture in which the assets of a division are sold to another firm.
a.
True
b.
False
False
EASY
21–10 Divestitures
False
Spin-off
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GO4W-NQNBEE
CHAPTER 21—MERGERS AND ACQUISITIONS
13. The purchase of assets at below their replacement cost and tax considerations are two factors that motivate mergers.
a.
True
b.
False
True
MODERATE
21-1 Rationale for Mergers
False
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14. The primary reason given by managers for most mergers is the acquisition of more assets so as to increase sales and
market share.
a.
True
b.
False
False
MODERATE
21-1 Rationale for Mergers
False
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GO4W-NQNBEE
CHAPTER 21—MERGERS AND ACQUISITIONS
15. Since managers’ central goal is to maximize stock price, managers’ personal incentives do not interfere with mergers
that would benefit the target firm’s stockholders.
a.
True
b.
False
False
MODERATE
21-1 Rationale for Mergers
False
JFND-GO4R-ER3U-1CNR
16. If a petrochemical firm that used oil as feedstock merged with an oil producer that had large oil reserves and a drilling
subsidiary, this would be a vertical merger.
a.
True
b.
False
True
MODERATE
21-2 Types of Mergers
False
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4OTI-GO4W-NQNBEE
CHAPTER 21—MERGERS AND ACQUISITIONS
17. A congeneric merger is one where the merging firms operate in related businesses but do not necessarily produce the
same products or have a producer-supplier relationship.
a.
True
b.
False
True
MODERATE
21-2 Types of Mergers
False
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18. One of the main reasons why foreign firms are interested in buying U.S. companies is to gain entrance to the U.S.
market. A decline in the value of the dollar relative to most foreign currencies makes this competitive strategy especially
attractive.
a.
True
b.
False
True
MODERATE
21-3 Level of Merger Activity
False
CHAPTER 21—MERGERS AND ACQUISITIONS
19. Since a manager’s central goal is to maximize the firm’s stock price, any merger offer that provides stockholders with
significant gains over the current stock price will be approved by the current management team.
a.
True
b.
False
False
MODERATE
21-4 Hostile Versus Friendly Takeovers
False
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20. Only if a target firm’s value is greater to the acquiring firm than its market value as a separate entity will a merger be
financially justified.
a.
True
b.
False
True
MODERATE
21-5 Merger Analysis
False
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CHAPTER 21—MERGERS AND ACQUISITIONS
21. Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the
discount rate can only be determined after the merger is consummated.
a.
True
b.
False
False
MODERATE
21-5 Merger Analysis
False
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22. In a financial merger, the relevant post-merger cash flows are simply the sum of the expected cash flows of the two
companies, measured as if they were operated independently.
a.
True
b.
False
True
MODERATE
21-5 Merger Analysis
False
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CHAPTER 21—MERGERS AND ACQUISITIONS
23. The rate used to discount projected merger cash flows should be the overall cost of capital of the new consolidated
firm because it incorporates the actual capital structure of the new firm.
a.
True
b.
False
False
MODERATE
21-5 Merger Analysis
False
JFND-GO4R-ER3U-1CBI
24. The distribution of synergistic gains between the stockholders of two merged firms is almost always based strictly on
their respective market values before the announcement of the merger.
a.
True
b.
False
False
MODERATE
21-7 Do Mergers Create Value? The Empirical Evidence
False
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