Foundations of Financial Management, 17e (Block)
Chapter 20 External Growth through Mergers
1) In a merger, two or more companies are combined to form an entirely new entity.
2) One motivation to merge is through tax savings.
3) U.S. is different from other countries in regards to what is considered taxable income. If
income is earned overseas, the company still has to pay tax to the U.S. government regardless if
the income has already been charged tax in another country.
4) Risk-averse investors may discount the future earnings of the merged firm at a higher rate if
they move in different directions during business cycles.
5) One potential advantage of a merger to the acquiring firm is the “portfolio effect,” which
attempts to achieve risk reduction while perhaps maintaining the rate of return for the firm.
6) The potential of a tax loss carryforward has no effect when considering the acquisition of a
company.
7) Too much diversification has led many companies to sell off companies previously acquired
during the merger boom.
8) Mergers often improve the financing flexibility that a larger company has available.
9) A tax loss carryforward of $1,000,000 for company ZZZ is not usually worth $1,000,000 in
today’s dollars to a firm that might acquire company ZZZ.
10) The stock market’s reaction to divestitures may actually be positive if the divestiture is
perceived to rid the company of an unprofitable business, or if it seems to sharpen the company’s
focus.
11) The portfolio effect of a merger is greatest for the stockholders of the firm being acquired.
12) The desire to expand management and marketing capabilities is a direct financial motive for
an acquisition.
13) The 2017 Tax Cuts and Jobs Act created a territorial tax system where taxes are accrued in
the country where the income is earned.
14) The 2017 Tax Cuts and Jobs Act has put US companies on the same footing as foreign
competitors and eliminates the need for inversions, meaning US companies no longer need to
keep foreign earnings abroad to avoid paying US taxes when they bring the cash back to the US.
15) Synergy is said to take place when the merged companies are greater than the individual
companies working separately.
16) Under the 2017 Tax Act, the benefit of net operating losses carried forward is not impacted
by the lower tax rate of 21 percent.
17) Synergy effect is said to happen when the merged companies are able to work together and
eliminate some of the repeated divisional tasks, proving that the company is better off being
merged.
18) Vertical integration usually represents acquisition of a competitor.
19) An example of horizontal integration is if Macy’s and JC Penney were to merge.
20) Antitrust policy can preclude the acquisition of a competitor.
21) Most mergers are horizontal in nature in order to avoid the potential antitrust complications
involved with the elimination of competition.
22) In a horizontal merger, the integration that occurs comes from acquiring companies that
supply resources to the company’s production process.
23) While a horizontal merger may improve profitability, it will not necessarily reduce the
portfolio risk of the acquiring company.
24) Horizontal integration is usually prohibited or severely restricted by government antitrust
regulations.
25) Synergy is the greatest and most easily measured nonfinancial benefit in a merger.
26) Selling stockholders during a merger may receive a price well above current market or book
value.
27) A motive for selling stockholders may be the bias against smaller companies.
28) A cash purchase of one company by another is similar to a capital budgeting decision.
29) Following a merger, the change in the risk profile of the merged companies may influence
the price earnings ratio just as much as the change in the overall growth rate.
30) Stockholders of acquired firms in mergers tend to be more concerned with future earnings
and dividends exchanged than with the market value exchanged.
31) By using cash instead of stock, a company may diminish the perceived dilutive effects of a
merger.
32) If the purchasing firm’s price earnings ratio is greater than the acquired firm’s price earnings,
the surviving firm will automatically get an increase in earnings per share.
33) The earnings-per-share impact of a merger is influenced by relative price-earnings ratios and
the terms of exchange.
34) A “takeover tender offer” describes the attempted purchase of a firm with the consent of that
firm’s management.
35) A “takeover tender offer” lets a company attempt to acquire a target firm against its will.
36) For mergers occurring after 2001, goodwill must be amortized and written off over 40 years
or less.
37) For mergers occurring after 2001, goodwill is valued and placed on the balance sheet as an
asset and impairment is the only way to devalue it.
38) Goodwill is created when the purchasing firm pays more than what the acquired firm is
worth.
39) The existing management of a firm is almost always ready to accept an offer for the purchase
of the firm at a price above the market price.
40) If an acquiring firm’s merger proposal was rejected by a target firm’s management and board
of directors, the acquiring firm could utilize a tender offer to gain control of the target firm.
41) Leveraged takeovers occur to firms that have an unusually large cash to total assets position.
42) “Poison pills” are strategies that reduce the value of a firm if it is taken over by a corporate
raider.
43) Leveraged buyouts are restricted to “outside” tender offers.
44) The “two-step buyout” procedure allows the acquiring firm to pay a lower total price than if a
single offer is made.
45) The “two-step buyout” procedure induces stockholders to delay their reaction to the offer,
since they will receive a higher price later.
46) After a merger has been announced, subsequent cancellation generally causes the potential
acquiree’s stock to decline in value.
47) Although corporate managers have a responsibility to act in the shareholders’ best interest,
management frequently opposes acquisitions due to personal motives.
48) One of the reasons that companies merge with other companies is to secure access to a
competing industry.
49) Multinational mergers provide economic and political diversification, which can lead to a
higher cost of capital for the new firm.
50) Selling stockholders generally receive a price below the current market value of their prior
stock during a merger.