51) It is possible to merge with a company so that the merger results in the same earnings per
share but still lowers the new firm’s cost of capital.
52) A business combination of two or more companies in which the resulting firm maintains the
identity of the acquiring company is defined as a
A) consolidation.
B) holding company.
C) conglomerate.
D) merger.
53) Which one of the following types of mergers is most likely to lead to diversification
benefits?
A) A horizontal merger
B) A vertical merger
C) A tax-free exchange
D) A conglomerate merger
54) When a tobacco firm merges with a steel company, it would be called
A) a horizontal merger.
B) a vertical merger.
C) a conglomerate merger.
D) a consolidation.
55) Which of the following is NOT a potential benefit of a merger?
A) An improved financing posture
B) A portfolio effect
C) Dilution of earnings per share
D) A tax loss carryforward
56) The rising ratio of divestitures to new acquisitions that occurred in the past suggests that
A) poison pills are no longer effective as a defense against takeovers.
B) too much diversification strained the operating capabilities of many firms.
C) the portfolio effect has been a highly successful method of reducing risk.
D) multinational firms are increasingly considered high risk investments.
57) The direct financial motives for merger activity include all of the following EXCEPT:
A) The portfolio effect
B) An improved financial posture and greater debt
C) The utilization of tax loss carryforwards
D) Vertical integration
58) The Celluloid Collar Corporation has $210,000 in tax loss carryforwards. The Bowstring
Shirt Company, a firm in the 21% tax bracket, would be willing to pay (on a non-discounted
basis) the sum of ________ for Celluloid Collar Corporation’s carryforward alone.
A) $108,000
B) $52,000
C) $44,100
D) $700,000
59) Synergy is said to occur when the whole is
A) equal to the sum of the parts.
B) less than the sum of the parts.
C) greater than the sum of the parts.
D) greater than or equal to the sum of the parts.
60) Synergy is said to occur when the merged company is
A) able to eliminate divisions that were doing the same tasks.
B) able to combine the marketing efforts of all merged companies.
C) able to get the employees from all merged companies to work towards one company goal.
D) all of the answers are correct.
61) Synergy is
A) the 2 + 2 = 3 effect.
B) the 2 + 2 = 4 effect.
C) the 2 + 2 = 5 effect.
D) always present in a merger.
62) In planning mergers, there is a tendency to ________ synergistic benefits.
A) overestimate
B) underestimate
C) correctly estimate
D) not estimate
63) Which of the following is NOT a motive for stockholders of the acquired company to sell?
A) The opportunity to diversify
B) Gaining a tax advantage
C) An attractive price
D) Avoiding bias against smaller businesses
64) Which of the following types of mergers decreases competition?
A) A horizontal merger
B) A vertical merger
C) A cash purchase
D) A stock-for-stock exchange
65) Which of the following types of mergers goes against the antitrust policy?
A) A horizontal merger
B) A vertical merger
C) A cash purchase
D) A stock-for-stock exchange
66) Which of the following is NOT a financial motive, but rather an operating motive for
mergers and consolidations?
A) The portfolio diversification effect
B) Tax loss carryforward
C) Greater financing capability
D) Synergy
67) An example of a horizontal merger would be
A) Pepsi and Sears.
B) McDonald’s and Pillsbury.
C) Pepsi and Frito Lay.
D) Coca-Cola and Dr Pepper.
68) The elimination of overlapping functions and the meshing of two firms’ strong areas or
products creates the managerial incentive for mergers known as
A) horizontal integration.
B) vertical integration.
C) synergy.
D) the portfolio effect.
69) Selling stockholders who are offered cash or another company’s stock in a merger may be
willing to part with the shares because
A) the offered shares may be more marketable.
B) the price they are offered may be above market value.
C) they can attain a greater degree of diversification as a result.
D) all of these options are true.
70) Nonfinancial motives for mergers include
A) synergy.
B) the portfolio effect.
C) vertical integration.
D) synergy and vertical integration.
71) Which of the following terms is not specifically related to an unfriendly buyout?
A) Takeover tender offer
B) White knight
C) Saturday night special
D) Synergy
72) Aardvark Software Inc. can purchase all the stock of Zebra Computer Services for
$1,200,000 in cash. Zebra is expected to generate net after-tax cash flows of $100,000 per year
for each of the next 12 years. Based solely on the facts provided, Aardvark should
A) not purchase Zebra Computer Services.
B) purchase Zebra Computer Services.
C) purchase Zebra only if Aardvark’s cost of capital is between 5% and 10%.
D) purchase Zebra only if Aardvark’s cost of capital is above 10%.
73) Which of the following is NOT a form of compensation that selling stockholders could
receive?
A) Stock
B) Cash
C) Stock options
D) Fixed income securities
74) The Prada Corporation is considering a merger with the Stone Company, which has 500,000
outstanding shares selling for $30. An investment banker has advised that to succeed in its
merger, Prada Corp. would have to offer $45 per share for Stone’s stock. Currently, Prada Corp.
stock is selling for $25. How many shares of Prada Corp. stock would have to be exchanged to
acquire all of Stone Company’s stock?
A) 266,667
B) 600,000
C) 900,000
D) 20,000
75) Earnings per share of the purchasing firm usually goes in which direction during a merger?
A) EPS will increase immediately if the purchased firm has a lower P/E ratio.
B) EPS will decrease immediately if the purchased firm has a lower P/E ratio.
C) EPS is not affected by the merger.
D) EPS will increase in the future if the purchased firm is less aggressive.
76) In the event that Active Corp., which has a low P/E ratio, acquires Basic Corp., which has a
higher P/E ratio, we could be assured that one of the following would occur, with everything else
being equal. Which one would occur?
A) Active Corp. will have an immediate increase in EPS.
B) Active Corp. will have an immediate decrease in EPS.
C) Active Corp. will have an immediate increase in the growth rate of EPS.
D) Active Corp. will have an immediate decrease in the P/E ratio.
77) The portfolio effect in a merger has to do with
A) increasing EPS.
B) reducing risk.
C) creating tax advantages.
D) writing off goodwill.
78) White knights
A) advise companies on ways to avoid being taken over.
B) offer a higher purchase price and “friendlier offer” in the event of an unsolicited and
unfriendly takeover attempt.
C) attempt to make money in the stock market on stocks that are likely merger candidates.
D) buy depressed stock of quality companies when merger talks are discontinued.
79) The price that a company has to pay to purchase another firm is usually
A) the book value.
B) the market value.
C) some premium over the current market value.
D) some discount of the current market value.
80) The typical merger premium is ________.
A) 0-20%
B) 40%
C) 40-60%
D) 80-100%
81) The two-step buyout is a recent merger ploy that has which of the following characteristics?
A) It is negotiated in a social, rather than a business setting.
B) The acquiring firm offers to pay a very high price for the target company’s stock, and a short
time later announces another price that may be higher or lower.
C) The acquiring firm offers to pay a very high price for the target company’s stock for a limited
time only, after which it will pay a lower price.
D) It forces stockholders to sell out.
82) Under a two-step buyout procedure
A) shareholders receive a higher total price than if a single offer is made.
B) the second offer is at a higher price per share.
C) shareholders are encouraged to react quickly to the offer.
D) two of the options are correct.
83) In regard to two-step buyouts,
A) the SEC highly approves of them.
B) the FTC highly approves of them.
C) the SEC is keeping a close eye on them.
D) the FTC is keeping a close eye on them.
84) Which of the following is NOT a potential challenge to a merger?
A) Anti-trust laws
B) Dilution
C) Firm valuation
D) Synergy
85) Under the Financial Accounting Standards Board’s SFAS 141 and 142, which of the
following occurred?
A) Goodwill is now amortized.
B) At least four times per year, goodwill must be tested to determine if it is impaired.
C) It allowed a one-time write-down of all past goodwill impairment.
D) It created pooling of interests accounting.
86) To qualify for a pooling of interests, which of the following criteria does not need to be met?
A) The acquiring corporation issues only common stock, with rights identical to its old
outstanding voting stock, in exchange for substantially all of the other company’s voting stock.
B) The acquired firm’s stockholders do not maintain an ownership position in the surviving firm.
C) The combined entity does not intend to dispose of a significant portion of the assets of the
combined companies within two years.
D) The combination is effected in a single transaction.
87) Which of the following is NOT a method of avoiding a takeover?
A) Increasing the firm’s cash level
B) Moving corporate offices to advantageous states
C) Staggering the election of boards of directors
D) Buying back shares