CHAPTER 23: CORPORATE RESTRUCTURING
1. Forms of business combinations include:
a. mergers
b. consolidations
c. holding companies and consolidations
d. mergers, consolidations, and holding companies
2. Which of the following terms are not associated with mergers and acquisitions?
a. white knight
b. tender offers
c. greenmail
d. declaration of bankruptcy
3. When the net income of the combined companies after merger exceeds the sum of the net incomes prior to the
merger, is said to exist.
a. goodwill
b. synergy
c. leverage
d. greenmail
4. The reasons why a company may choose external growth by merger over internal growth include
a. economies of scale
b. more rapid growth
c. tax considerations and rapid growth
d. economies of scale, tax considerations, and more rapid growth
5. When the market value of a company’s common stock is below the replacement value of the firm’s net assets,
this company is frequently referred to as a possible .
a. white knight
b. leveraged buyout
c. takeover candidate
d. conglomerate
Chapter 23: Corporate Restructuring
6. The acquisition of a company in which the buyer borrows a large amount of the purchase price, using the
purchased assets as collateral for a large portion of the borrowings, is known as a .
a. pooling of interests
b. leveraged buyout
c. conglomerate merger
d. tender offer
7. In general, the greatest economies of scale are possible with mergers.
a. conglomerate
b. vertical
c. horizontal
d. integrated
8. A combination of two or more companies in which neither competes directly with the other and no buyer-seller
relationship exists is known as a
a. conglomerate merger
b. vertical merger
c. horizontal merger
d. takeover
9. A combination of two or more companies that have a buyer-seller relationship with each other is known as a
a. conglomerate merger
b. vertical merger
c. horizontal merger
d. takeover
10. What is a form of business combination in which a company purchases all or a controlling block of another
company’s common shares and the two companies become affiliated?
a. horizontal merger
b. vertical merger
c. conglomerate
d. holding company
Chapter 23: Corporate Restructuring
11. A combination of two or more companies that compete directly with each other is known as a
a. conglomerate merger
b. vertical merger
c. horizontal merger
d. takeover
12. The major methods typically used to value merger candidates include all the following except
a. comparative price-earnings ratio method
b. adjusted book value method
c. discounted cash flow method
d. bottom line comparison method
13. The basic methods used in combining financial accounts in a merger include all of the following except the
a. goodwill consolidation method
b. purchase method
c. pooling of interests method
d. book value method
14. In the method of combining financial accounts in a merger, the acquired company’s assets are recorded on
the acquiring company’s books at their cost (net of depreciation) when originally acquired.
a. goodwill consolidation
b. purchase
c. pooling of interests
d. EVA
15. In the method for combining financial accounts in a merger, the total value paid or exchanged for the
acquired company’s assets is recorded on the acquiring company’s books.
a. pooling of interests
b. goodwill consolidation
c. purchase
d. book value
Chapter 23: Corporate Restructuring
16. In a form of business combination, a parent-subsidiary relationship exists between the acquiring and
acquired companies.
a. leveraged buyout
b. holding company
c. consolidation
d. leveraged buyout or consolidation
17. A form of business combination in which two (unaffiliated) companies contribute financial and/or physical
assets, as well as personnel, to a new company to engage in some economic activity is known as a .
a. joint venture
b. conglomerate merger
c. merger
d. consolidation
18. Employee Stock Ownership Plans (ESOPs) are useful instruments for financing leveraged buyouts because in
an ESOP transaction
a. employees have a greater voice in the final decision
b. lenders can offer below market interest rates
c. ESOPs can be used only when employees take over management functions
d. ESOPs attract greater external equity investments
19. In a(n) common stock in a division or subsidiary is distributed to shareholders of the parent company on a
pro rata basis.
a. spin-off
b. reverse LBO
c. equity carve-out
d. tender offer
20. In the method of accounting for mergers, the total value paid or exchanged for the acquired firm’s assets
is recorded on the acquiring company’s books.
a. purchase
b. goodwill
c. pooling of interests
d. stockholder’s equity
Chapter 23: Corporate Restructuring
21. One anti-takeover measure is the , where the target company makes a takeover bid for the stock of the
bidder.
a. poison put
b. black knight defense
c. pacman defense
d. shark repellent
22. The accounting method used in most mergers is the method.
a. pooling of interests
b. purchase
c. consolidation
d. merger
23. A reorganization plan is reviewed by the for fairness and feasibility.
a. bankruptcy court
b. Securities and Exchange Commission
c. Federal Trade Commission
d. bankruptcy court and the SEC
24. Legal bankruptcy proceedings focus on the decision of whether or not the firm’s value as a going concern is
greater than its
a. liquidation value
b. market value
c. equity value
d. historical value
25. Under Chapter(s) of the bankruptcy laws, a company’s assets are sold off and the proceeds are distributed
to the creditors.
a. 11
b. 7
c. 4
d. 7 and 11
Chapter 23: Corporate Restructuring
26. Under Chapter(s) of the bankruptcy laws, a company continues to operate while it attempts to work out a
reorganization plan.
a. 11
b. 7
c. 4
d. 4 and 11
27. A(n) is a situation in which a failing business is permitted to discharge its debt obligations by paying less
than the full amounts owed to creditors.
a. assignment
b. composition
c. extension
d. insolvency
28. A(n) is a situation in which a failing business is permitted to lengthen the amount of time it has to meet its
obligations with creditors.
a. assignment
b. composition
c. extension
d. insolvency
29. Technical insolvency occurs when
a. the firm is unable to meet its current obligations as they come due, even though the value of its assets
exceeds its liabilities
b. the recorded value of the firm’s assets is less than the recorded value of its liabilities
c. the firm files a bankruptcy petition in accordance with the Federal bankruptcy laws
d. the owners of the businesses lack experience
30. Legal insolvency occurs when
a. the firm is unable to meet its current obligations as they come due, even though the value of its assets
exceeds its liabilities
b. the recorded value of the firm’s assets is less than the recorded value of its liabilities
c. the firm files a bankruptcy petition in accordance with the Federal bankruptcy laws
d. the owners of the businesses lack experience
Chapter 23: Corporate Restructuring
31. Bankruptcy occurs when the firm
a. is unable to pay its debts
b. files a bankruptcy petition in accordance with the Federal bankruptcy laws
c. is more than 6 months overdue to its creditors
d. is unable to pay its debts and files a bankruptcy petition in accordance with the Federal bankruptcy laws
32. equals the proceeds that would be received from the sale of the firm’s assets minus its liabilities.
a. Market value
b. Equity value
c. Going-concern value
d. Liquidation value
33. equals the capitalized value of the company’s operating earnings minus its liabilities.
a. Market value
b. Equity value
c. Going-concern value
d. Liquidation value
34. The process of liquidating a business outside of the jurisdiction of the bankruptcy courts is called a(n)
a. assignment
b. composition
c. extension
d. voluntary insolvency
35. Chapter 11 bankruptcy proceedings may be initiated by or more of its unsecured creditors who have
aggregate claims of at least .
a. 2, $1,000
b. 2, $5,000
c. 3, $500
d. 3, $5,000
Chapter 23: Corporate Restructuring
36. A combination in which all of the combining companies are dissolved and a new firm is formed is known as a
.
a. holding company
b. leveraged buyout
c. consolidation
d. composition
37. In a , the acquiring company effectively announces that it will pay a certain price above the current
existing price for a merger candidate’s shares.
a. leveraged buyout
b. tender offer
c. equity carve-out
d. divestiture
38. All of the following are anti-takeover measures except:
a. black knight
b. staggered board
c. super major voting rules
d. golden parachute
39. In analyzing a merger the is the number of the acquiring company shares received per share of acquired
company stock owned.
a. assignment
b. composition
c. price-purchase ratio
d. exchange ratio
Chapter 23: Corporate Restructuring
40. A bond that contains a put option that can be exercised only if an unfriendly takeover occurs, is an example of
a
____.
a. pacman defense
b. liability restructuring
c. poison pill
d. standstill option
Essex
Twinsburg
$500 million
$50 million
$40 million
$3.74 million
5 million
1 million
$8.00
$3.74
$3.00
$1.00
$64
$24
8
6.42
41. Calculate the exchange ratio if Essex offers the Twinsburg stockholders a 20% premium over Twinsburg’s
current market price.
a. 0.375
b. 2.22
c. 0.45
d. 0.288
42. Calculate the post-merger earnings per share if the exchange ratio is 0.4 shares of Essex for each share of
Twinsburg. (Assume total post-merger earnings are $43,740,000.)
a. $8.10
b. $7.33
c. $7.29
d. $7.42
Chapter 23: Corporate Restructuring
43. What is Essex’s post-merger share price if the post-merger price/earnings ratio is 7.5, and the exchange ratio is
0.4? Assume total post-merger earnings are $43,740,000.
a. $60.75
b. $54.98
c. $64.80
d. $30.42
44. What are the total assets and stockholders’ equity (in $ millions) if the purchase method is used as the
accounting method for this merger?
a. $130, $63
b. $130, $67
c. $132, $65
d. $132, $67
45. What are the total assets and stockholders’ equity (in $ millions) if the pooling of interests method had been
used as the accounting method for this merger?
a. $130, $63
b. $130, $67
c. $132, $65
d. $132, $67
Chapter 23: Corporate Restructuring
46. Osicom Tech is acquiring Rexon’s outstanding common stock for $32 million. Before acquisition financial
information on these two firms is given as follows (in $ millions):
Osicom Tech
Rexon
Total assets
$120
$50
Liabilities
60
25
Stockholders’ equity
60
25
What are the total assets and stockholders’ equity (in $ millions) if the purchase method is used as the
accounting method for this merger?
a. $170, $85
b. $177, $92
c. $170, $92
d. $85, $92
47. The annual after-tax free cash flow from the acquisition by Pacific Care of Universal Health is projected to be
$12 million. These flows are expected to continue for 20 years. No value is placed on cash flows beyond 20
years. If the appropriate risk-adjusted discount rate for the merged firm is 15 percent, what is the maximum
amount Pacific Care should pay to acquire Universal Health?
a. $79,476,000
b. $70,164,000
c. $75,108,000
d. cannot be determined from the information provided
48. After a merger with Velo Blind, Sunlite’s earnings per share are $1.50. If Sunlite had a P/E ratio of 14 times
before the merger and a price of $28 a share after the merger, what is Sunlite’s post-merger P/E?
a. 16.8
b. 14.3
c. 20.2
d. 18.7