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Ch 22 Mergers and Corporate Control
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
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
Ch 22 Mergers and Corporate Control
3. A spin-off is a type of divestiture in which the assets of a division are sold to another firm.
a.
True
b.
False
4. The purchase of assets at below their replacement cost and tax considerations are two factors that motivate mergers.
a.
True
b.
False
Ch 22 Mergers and Corporate Control
5. The primary reason managers give for most mergers is to acquire more assets so as to increase sales and market share.
a.
True
b.
False
6. Since managers' central goal is to maximize stock price, managerial control issues do not interfere with mergers that
would benefit the target firm's stockholders.
a.
True
b.
False
Ch 22 Mergers and Corporate Control
7. Which of the following are legal and acceptable reasons for the high level of merger activity in the U.S. during the
1980s?
a.
A profitable firm acquires a firm with large accumulated tax losses that may be carried forward.
b.
Attempts to stabilize earnings by diversifying.
c.
Purchase of assets below their replacement costs.
d.
Reduction in competition resulting from mergers.
e.
Synergistic benefits arising from mergers.
8. Which of the following statements is most CORRECT?
a.
The smaller the synergistic benefits of a particular merger, the greater the scope for striking a bargain in
negotiations, and the higher the probability that the merger will be completed.
b.
Since mergers are frequently financed by debt rather than equity, a lower cost of debt or a greater debt
capacity are rarely relevant considerations when considering a merger.
c.
Managers who purchase other firms often assert that the new combined firm will enjoy benefits from
diversification, including more stable earnings. However, since shareholders are free to diversify their own
holdings, and at what's probably a lower cost, diversification benefits is generally not a valid motive for a
publicly held firm.
d.
Operating economies are never a motive for mergers.
e.
Tax considerations often play a part in mergers. If one firm has excess cash, purchasing another firm exposes
the purchasing firm to additional taxes. Thus, firms with excess cash rarely undertake mergers.
Ch 22 Mergers and Corporate Control
9. A conglomerate merger occurs when two firms with either a horizontal or a vertical business relationship combine.
a.
True
b.
False
10. 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
Ch 22 Mergers and Corporate Control
attractive.
a.
True
b.
False
11. 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
Ch 22 Mergers and Corporate Control
12. 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
13. A parent holding company sells shares in its subsidiary such that the parent now owns only 65% of the subsidiary and,
thus, the tax returns of the parent and its subsidiary can't be consolidated. The parent receives annual dividends from the
subsidiary of $2,500,000. If the parent's marginal tax rate is 34% and if the exclusion on intercompany dividends is 70%,
what is the effective tax rate on the intercompany dividends, and how much net dividends are received?
a.
10.2%; $2,245,000
b.
10.2%; $2,135,000
c.
23.8%; $1,905,000
d.
10.2%; $1,750,000
e.
34.0%; $1,650,000
Ch 22 Mergers and Corporate Control
14. Merger activity is likely to heat up when interest rates are high because target firms can expect to receive an especially
high premium over the pre-announcement stock price.
a.
True
b.
False
15. Most defensive mergers occur as a result of managers' actions to maximize shareholders' wealth.
Ch 22 Mergers and Corporate Control
a.
True
b.
False
16. Post-merger control and the negotiated price paid by the acquirer are two of the most important issues in agreeing on
the terms of a merger.
a.
True
b.
False
Ch 22 Mergers and Corporate Control
17. 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
18. 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
Ch 22 Mergers and Corporate Control
19. Firms use defensive tactics to fight off undesired mergers. These tactics do not include
a.
getting a white squire to purchase stock in the firm.
b.
getting white knights to bid for the firm.
c.
repurchasing their own stock.
d.
changing the bylaws to eliminate supermajority voting requirements.
e.
raising antitrust issues.
20. Which of the following statements is most CORRECT?
a.
A defensive merger is one where the firm's managers decide to merge with another firm to avoid or lessen the
possibility of being acquired through a hostile takeover.
b.
Acquiring firms send a signal that their stock is undervalued if they choose to use stock to pay for the
acquisition.
c.
Cash payments are used in takeovers but never in mergers.
d.
Managers often are fired in takeovers, but never in mergers.
e.
If a company that produces military equipment merges with a company that manages a chain of motels, this is
an example of a horizontal merger.
Ch 22 Mergers and Corporate Control
21. 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 action.
a.
True
b.
False
22. 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
Ch 22 Mergers and Corporate Control
23. 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
24. 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.
Ch 22 Mergers and Corporate Control
a.
True
b.
False
25. Coca-Cola's acquisition of Columbia Pictures and its announcement that it would operate its new subsidiary separately
could be described as primarily a financial merger.
a.
True
b.
False
