Name:
Class:
Date:
1. Which of the following terms are NOT associated with mergers and acquisitions?
a.
White knight
b.
Tender offers
c.
Greenmail
d.
Declaration of bankruptcy
d
2. Forms of business combinations include ____.
a.
mergers
b.
consolidations
c.
holding companies and consolidations
d.
mergers, consolidations, and holding companies
d
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
b
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
d
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
c
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
b
Name:
Class:
Date:
7. In general, the greatest economies of scale are possible with ____ mergers.
a.
conglomerate
b.
vertical
c.
horizontal
d.
integrated
c
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
a
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
b
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
d
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
c
12. The major methods typically used to value merger candidates include all except which of the following?
a.
Comparative price-earnings ratio method
b.
Adjusted book value method
c.
Discounted cash flow method
d.
Bottom line comparison method
d
Name:
Class:
Date:
13. The basic methods used in combining financial accounts in a merger include all except which of the following?
a.
Goodwill consolidation method
b.
Purchase method
c.
Pooling of interests method
d.
Book value method
a
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
c
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
c
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
b
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
a
18. Once an unfriendly takeover attempt has been initiated, the target company’s management can employ various other
antitakeover measures to deter a takeover, including when the takeover candidate can attempt to buy back its shares, at a
premium over the shares’ market price, from the company or investor who initiated the unfriendly takeover attempt. The
amount of this premium is called ____.
a.
blackmail
Name:
Class:
Date:
b.
greenmail
c.
white knight
d.
poison pills
b
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
a
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.
stockholders’ equity
a
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
c
22. The accounting method used in most mergers is the ____ method.
a.
pooling of interests
b.
purchase
c.
consolidation
d.
merger
b
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
d
24. Legal bankruptcy proceedings focus on the decision of whether the firm’s value as a going concern is greater than its
____ value.
Name:
Class:
Date:
a.
liquidation
b.
market
c.
equity
d.
historical
a
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
b
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
a
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
b
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
c
29. Technical insolvency occurs when the ____.
a.
firm is unable to meet its current obligations as they come due, even though the value of its assets exceeds its
liabilities
b.
recorded value of the firm’s assets is less than the recorded value of its liabilities
c.
firm files a bankruptcy petition in accordance with the Federal bankruptcy laws
d.
owners of the businesses lack experience
Name:
Class:
Date:
a
30. Legal insolvency occurs when the ____.
a.
firm is unable to meet its current obligations as they come due, even though the value of its assets exceeds its
liabilities
b.
recorded value of the firm’s assets is less than the recorded value of its liabilities
c.
firm files a bankruptcy petition in accordance with the Federal bankruptcy laws
d.
owners of the businesses lack experience
b
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
d
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
d
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
c
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
a
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
Name:
Class:
Date:
c
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
c
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
b
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
d
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
c
41. Essex Industries is considering the acquisition of Twinsburg Company in a stock-for-stock exchange. The following
financial data are available on both companies. (Assume no synergy is expected with this merger.) Calculate answers to
nearest 0.001.
Essex
Twinsburg
Sales
$500 million
$50 million
Name:
Class:
Date:
Net income
$40 million
$3.74 million
Common shares outstanding
5 million
1 million
Earnings per share
$8.00
$3.74
Dividends per share
$3.00
$1.00
Common stock market price
$64
$24
Price/earnings ratio
8
6.42
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
c
42. Essex Industries is considering the acquisition of Twinsburg Company in a stock-for-stock exchange. The following
financial data are available on both companies. (Assume no synergy is expected with this merger.) Calculate answers to
nearest 0.001.
Essex
Twinsburg
Sales
$500 million
$50 million
Net income
$40 million
$3.74 million
Common shares outstanding
5 million
1 million
Earnings per share
$8.00
$3.74
Dividends per share
$3.00
$1.00
Common stock market price
$64
$24
Price/earnings ratio
8
6.42
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
a
43. Essex Industries is considering the acquisition of Twinsburg Company in a stock-for-stock exchange. The following
financial data are available on both companies. (Assume no synergy is expected with this merger.) Calculate answers to
nearest 0.001.
Essex
Twinsburg
Sales
$500 million
$50 million
Net income
$40 million
$3.74 million
Common shares outstanding
5 million
1 million
Earnings per share
$8.00
$3.74
Name:
Class:
Date:
Dividends per share
$3.00
$1.00
Common stock market price
$64
$24
Price/earnings ratio
8
6.42
EPS = $43,740,000/5,400,000 = $8.10
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
a
44. Millicom is acquiring Vikonic’s outstanding common stock for $15 million. Financial information (in $ millions) on
these two firms prior to the acquisition is as follows:
Millicom
Vikonic
Total assets, book value
$90
$40
Liabilities, book value
40
27
Stockholders’ equity, book value
50
13
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
c
45. Millicom is acquiring Vikonic’s outstanding common stock for $15 million. Financial information (in $ millions) on
these two firms prior to the acquisition is as follows:
Millicom
Vikonic
Total assets, book value
$90
$40
Liabilities, book value
40
27
Stockholders’ equity, book value
50
13
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
a
Name:
Class:
Date:
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
b
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%, 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
d
49. Whipple Industries is considering the acquisition of Blanchard Company in a stock-for-stock exchange. Selected
financial data for the two companies is shown below. No synergy is expected in this merger.
Whipple
Blanchard
Sales (millions)
$150
$30
Net income (millions)
$25
$3.5
Common shares outstanding (millions)
8
2
Earnings per share
$3.125
$1.75
Dividends per share
$1.50
$0.75
Common stock price per share
$40
$19.50
Determine the post-merger earnings per share if the Blanchard company shareholders accept an offer of $22 per share in a
stock-for-stock exchange.
a.
$2.85
Name:
Class:
Date:
b.
$3.175
c.
$3.13
d.
$1.75
c
50. Sunlite is considering a merger with Velo Blind by offering the equivalent of $21 a share in a stock-for-stock
transaction. Sunlite’s current common stock price is $30 a share and Velo’s is $17. Other financial data on the two firms is
as follows:
Sunlite
Velo Blind
Sales (millions)
$100
$20
Net income (millions)
$10
$3
No. of shares outstanding (millions)
8
1.2
Earnings per share
$1.25
$2.50
Assuming no economies of scale or synergistic benefits, what will be the post-merger earnings per share?
a.
$1.47
b.
$1.41
c.
$1.50
d.
$1.25
a
51. Quarter Staff is being liquidated under Chapter 7 of the bankruptcy code. When it filed for bankruptcy, its balance
sheet (in millions) was as follows:
Assets
Liabilities & Capital
Current assets
$14.9
Accounts payable
$ 4.6
Land & buildings
10
Accrued wages
0.1
Equipment
6
Accrued taxes
0.4
Total assets
$30.9
Notes payable
5.0
Mortgage bonds
5.2
Stockholders’ equity
15.6
Total liabilities & equity
$30.9
The notes payable are an unsecured bank loan, and the mortgage bond is secured by the land and building. The proceeds
from the liquidation of the company’s assets are as follows:
Current assets
$ 7.2
Land & building
4.5
Equipment
2.1
Total
$13.8
If the bankruptcy administration charges were $500,000, what dollar amount will the trade creditors (accounts payable)
receive in the liquidation?
a.
$1.65 million
b.
$3.71 million
c.
$4.60 million
d.
$2.55 million
b
Name:
Class:
Date:
52. Buggy Whip Industries is being liquidated under Chapter 7 of the bankruptcy code. When it filed for bankruptcy, its
balance sheet was as follows:
Assets
Liabilities and Equity
Current assets
$22,000,000
Accounts payable
$18,000,000
Fixed assets
Accrued taxes
3,000,000
Land and buildings
9,000,000
Notes payable (bank)*
3,000,000
Equipment
11,500,000
Total current liabilities
$24,000,000
Total assets
$42,500,000
Mortgage bonds**
8,000,000
Debentures
4,000,000
Stockholders’ equity
6,500,000
Total liabilities
and equity
$42,500,000
*Bank loan is unsecured
**Mortgage bonds are secured by land and buildings
Assume that the liquidation is a voluntary petition, that no unpaid contributions to employee benefit plans exist, and that
no customer layaway deposits are involved. The proceeds from the liquidation of the company’s assets are as follows:
Current assets
$12,000,000
Land and buildings
5,000,000
Equipment
7,500,000
Total
$24,500,000
Bankruptcy administration charges are $2,500,000. Determine the amount that the mortgage bondholders will receive in
this liquidation.
a.
$5,000,000
b.
$6,500,000
c.
$8,000,000
d.
$10,500,000
b
53. Endevco is considering the acquisition of Geothermal Resources in a stock-for-stock exchange. Assume no immediate
synergistic benefits are expected. Selected financial data on the two companies are shown below:
Endevco
Geothermal
Sales (millions)
$720
$140
Net income (millions)
$58
$16
Common shares outstanding (millions)
10
3
Earnings per share
$5.80
$5.33
Common stock (price per share)
$70.00
$48
If Endevco is not willing to incur an initial dilution in its EPS, and if Endevco also feels that it must offer Geothermal
shareholders a minimum of 20% over Geothermal’s current market price, what is the maximum price per share that
Endevco must pay for Geothermal’s stock?
a.
$57.60
b.
$64.33
c.
$52.23
d.
$60.00
b
Name:
Class:
Date:
54. Linpro Industries is considering the acquisition of Odetics Inc. in a stock-for-stock exchange. Assume no immediate
synergistic benefits are expected. Selected financial data on the two companies are shown below:
Linpro
Odetics
Sales (millions)
$480
$90
Net income (millions)
$38
$10.4
Common shares outstanding (millions)
10
2.1
Earnings per share
$3.80
$4.95
Common stock (price per share)
$45.60
$74.25
Calculate Linpro’s postmerger EPS if the Odetics shareholders accept an offer of $90 a share in a stock-for-stock
exchange.
a.
$4.38
b.
$4.29
c.
$3.42
d.
$3.81
c
55. Morgan Foods is considering the acquisition of Old Spaghetti Warehouse Inc. in a stock-for-stock exchange. Selected
financial data for the two companies is shown below. An immediate synergistic earnings benefit of $1.5 million is
expected in this merger, due to cost savings.
Morgan
Old Spaghetti
Sales (millions)
$360
$80
Net income (millions)
$30
$8
Common stock outstanding (millions)
10
2
Earnings per share
$3.00
$4.00
Common stock (price per share)
$36.00
$44.00
Calculate the postmerger EPS if the Old Spaghetti shareholders accept an offer of $54 per share in a stock-for-stock
exchange.
a.
$3.04
b.
$2.92
c.
$3.29
d.
$3.17
a
56. Koala Technologies is considering the acquisition of Laser Industries in a stock-for-stock exchange. Selected financial
data for the two companies is shown below. An immediate synergistic earnings benefit of $2.5 million is expected in this
merger.
Koala
Laser
Sales (millions)
$90
$10
Net income (millions)
$9.4
$1.2
Common shares outstanding (millions)
4.0
0.8
Earnings per share
$2.35
$1.50
Common stock (price per share)
$35.00
$27.00
Calculate the postmerger EPS if the Laser shareholders accept an offer of $33.25 a share in a stock-for-stock exchange.
a.
$2.21
Name:
Class:
Date:
b.
$2.25
c.
$2.75
d.
$2.23
c
57. The most correct method of valuing a merger candidate is ____.
a.
adjusted book value method
b.
discounted cash flow method
c.
pooling of interests method
d.
comparative price-earnings ratio method
b
58. The ____ is the number of acquiring company shares received per share of acquiring company stock owned.
a.
stock equity ratio
b.
exchange ratio
c.
dividend exchange ratio
d.
interest parity ratio
b
59. A firm is technically insolvent when it is unable to meet it current obligations, and ____.
a.
the value of its assets exceeds the value of its liabilities
b.
the value of its assets is less than the value of its liabilities
c.
it files a bankruptcy petition
d.
it merges with another firm
a
60. A plan of reorganization must be all of the following EXCEPT ____.
a.
feasible
b.
fair
c.
a plan that allows the firm a chance to reestablish successful business operations
d.
a plan whereby the creditors that are due the most money are paid first
d
61. Which of the following about an asset purchase merger transaction is (are) correct?
I. Only the assets are purchased.
II. The buying firm receives 100% of the assets and incurs only 50% of the liabilities.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements I and II are correct.
d.
Neither statement I nor II is correct.
a
62. One reason for a company to spin-off a division is to ____.
a.
consolidate expenses
Name:
Class:
Date:
b.
remove an underperforming unit
c.
create a better distribution unit
d.
achieve synergy
b
63. An alternative to a spin-off is a(n) ____, which allows a large company to capture the value of a high-growth business
buried within the organization.
a.
equity carve-out
b.
holding company
c.
tracking stock
d.
stock synergy
64. An example of a passive institutional investor is a ____.
a.
pension fund
b.
private equity investor
c.
parent company
d.
third-party administrator
65. Which of the following would be considered a reason for corporate restructuring?
I. Availability of credit
II. Low cost of credit
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements I and II are correct.
d.
Neither statement I nor II is correct.
66. An anti-takeover measure that is inserted in the corporate charter stating that 80% of the stock shares must approve the
takeover proposal is a(n) ____.
a.
golden parachute
b.
supermajority voting rules
c.
poison puts
d.
standstill agreement
b
67. An antitakeover measure that is employed after the takeover has been initiated is ____.
a.
golden parachute
b.
staggered board
c.
white knight
d.
poison put
Name:
Class:
Date:
68. An antitakeover measure where a company attempts to buy back its shares of stock at a premium from the company or
investor who initiated the unfriendly takeover is ____.
a.
pacman defense
b.
boardmail
c.
white squire
d.
greenmail
d
69. Explain the motivation for a company to divest through a spin-off or equity carve-out.
among the underperforming units.
70. What are some informal alternatives for salvaging a failing business?
2.
The company can go to its bankers and request additional working capital loans.
percentage of the total amount due).
4.
Large companies can sell off real estate and/or various operating divisions.
5.
The failing company can do a sale and leaseback of its land and buildings.
cut various expenditures and the creditors agree to accept deferred payments.
7.
The company can liquidate through the process of “assignment.”
71. Explain the difference between a stock purchase and an asset purchase in a merger transaction. Which is preferred and
why?
acquire small companies only on the asset purchase basis.
72. In response to the merger and acquisitions boom of the late 1980s, many companies adopted various measures
designed to discourage unfriendly takeover attempts. One of these antitakeover measures, sometimes referred to as shark
repellents, is called a staggered board. Describe how this works.
have difficulty electing its own board of directors to gain control.
73. There are three methods for valuing merger candidates. Briefly explain each of them.
The methods for valuing merger candidates are:
Name:
Class:
Date:
74. Explain a form of business combination called a holding company and how the combination is achieved.
75. How does a joint venture differ from a holding company?