CHAPTER 26—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
True
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
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
False
Spin-off
4. A conglomerate merger occurs when two firms with either a horizontal or a vertical business relationship combine.
a.
True
CHAPTER 26—MERGERS AND CORPORATE CONTROL
b.
False
False
5. 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
False
6. Most defensive mergers occur as a result of managers’ actions to maximize shareholders’ wealth.
a.
True
b.
False
False
7. 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
CHAPTER 26—MERGERS AND CORPORATE CONTROL
True
8. 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
analysis
9. 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
True
10. Currently (2012), mergers can be accounted for using either the purchase method or the pooling method.
a.
True
b.
False
False
CHAPTER 26—MERGERS AND CORPORATE CONTROL
11. Borrowing funds on terms that would require immediate repayment of all funds if the firm is acquired, selling off
valuable assets, and granting huge “golden parachutes” that open if the firm is acquired are three procedures used to
defend against hostile takeovers. These strategies are known as “poison pills.”
a.
True
b.
False
True
analysis
12. 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
13. The two principal advantages of holding companies are (1) the holding company can control a great deal of assets with
limited equity and (2) the dividends received by the parent from the subsidiary are not taxed if the parent holds at least
50% of the subsidiary’s stock.
a.
True
CHAPTER 26—MERGERS AND CORPORATE CONTROL
b.
False
False
14. The purchase of assets at below their replacement cost and tax considerations are two factors that motivate mergers.
a.
True
b.
False
True
analysis
15. 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
False
16. 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
False
CHAPTER 26—MERGERS AND CORPORATE CONTROL
17. 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
analysis
18. 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
19. 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
CHAPTER 26—MERGERS AND CORPORATE CONTROL
True
20. 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
analysis
21. 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
22. 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
CHAPTER 26—MERGERS AND CORPORATE CONTROL
False
23. 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
analysis
24. 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
True
25. A two-tier merger offer is one where the acquiring company offers to purchase the target company in a two-part
transaction. Cash is paid to some stockholders, bonds are issued to others, but the total values of each part of the
transaction are equal.
a.
True
CHAPTER 26—MERGERS AND CORPORATE CONTROL
b.
False
False
26. 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
27. The rate used to discount projected merger cash flows should be the cost of capital of the new consolidated firm
because it incorporates the actual capital structure of the new firm.
a.
True
b.
False
False
analysis
28. Any goodwill created in a merger must be amortized over its expected life, usually 40 years, for shareholder reporting
purposes.
a.
True
CHAPTER 26—MERGERS AND CORPORATE CONTROL
b.
False
False
Difficulty: Moderate
INTE.GENE.16.169 – LO: 26–12
United States – BUSPROG: Reflective Thinking
United States – OH – Default City – TBA
Merger accounting
29. Although goodwill created in a merger may not be amortized for shareholder reporting purposes, it may be amortized
for Federal tax purposes.
a.
True
b.
False
True
Difficulty: Moderate
INTE.GENE.16.169 – LO: 26–12
United States – BUSPROG: Reflective Thinking
Merger accounting
30. The three main advantages of holding companies are (1) control with fractional ownership, (2) taxation benefits, and
(3) isolation of operating risks.
a.
True
b.
False
False
Difficulty: Moderate
INTE.GENE.16.172 – LO: 26–18
United States – BUSPROG: Reflective Thinking
analysis
United States – OH – Default City – TBA
Holding company advantages
31. If the capital structure is stable, and free cash flows are expected to be growing at a constant rate at the horizon date,
then the horizon value is calculated by discounting the free cash flows plus the expected future tax shields at the weighted
average cost of capital.
CHAPTER 26—MERGERS AND CORPORATE CONTROL
a.
True
b.
False
False
Difficulty: Challenging
INTE.GENE.16.173 – LO: 26-8
United States – BUSPROG: Reflective Thinking
United States – OH – Default City – TBA
Merger analysis
32. The present value of the free cash flows discounted at the unlevered cost of equity is the value of the firm’s operations
if it had no debt.
a.
True
b.
False
True
Difficulty: Challenging
INTE.GENE.16.173 – LO: 26-8
United States – BUSPROG: Reflective Thinking
United States – OH – Default City – TBA
Merger analysis
33. 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.
Difficulty: Easy
INTE.GENE.16.164 – LO: 26-1
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Mergers