41) An acquisition completed simply to diversify a firm will:
A) create excessive synergy in almost all situations.
B) lower systematic risk and increase the value of the firm.
C) benefit the firm by eliminating unsystematic risk.
D) benefit the shareholders by providing otherwise unobtainable diversification.
E) generally not add any value to the firm.
42) Which one of the following statements is correct?
A) An increase in the earnings per share as a result of an acquisition will increase the price per
share of the acquiring firm.
B) The price-earnings ratio must remain constant as a result of an acquisition that fails to create
value.
C) If firm A acquires firm B then the number of shares in AB will equal the number of shares of
A plus the number of shares of B.
D) The price-earnings ratio can decrease even when the net present value of a merger is equal to
zero.
E) Diversification is one of the greatest benefits derived from an acquisition.
43) Which one of these statements is correct regarding acquisitions?
A) The cost of a cash acquisition to the acquiring firm is equal to the cash paid minus the taxes
incurred by the target firm’s shareholders.
B) Neither cash nor share acquisitions affect the control of the acquiring firm.
C) Share financing is generally more common than cash financing for smaller acquisitions.
D) Target firm shareholders share in both the gains and losses resulting from a stock acquisition.
E) Cash acquisitions create a tax liability for the acquiring firm’s shareholders.
44) Roger is a major shareholder in RB Industrial Supply. Currently, Roger is quite unhappy
with the direction the firm is headed and is rumored to be considering an attempt to take over the
firm by soliciting the votes of other shareholders. To head off this potential attempt, the board of
RB Industrial Supply has decided to offer Roger $36 a share for all the shares he owns in the
firm. The current market value per share is $32. This offer to purchase Roger’s shares is
commonly referred to as:
A) a golden parachute.
B) standstill payments.
C) greenmail.
D) a poison pill.
E) a white knight.
45) Which one of the following generally has a flip-in provision that significantly increases the
cost to a shareholder who is attempting to gain control over a firm?
A) Golden parachute
B) Standstill agreement
C) Greenmail
D) Poison pill
E) White knight
46) Melvin was attempting to gain control of Western Wood Products until he realized that the
existing shareholders in the firm had the right to purchase additional shares at a below-market
price given his hostile takeover attempt. Thus, Melvin decided to forgo investing in this firm.
What term applies to the tactic used by Western Wood Products to stave off this takeover
attempt?
A) “Pac-man” defense
B) Bear hug
C) Golden parachute provision
D) Greenmail provision
E) Share rights plan
47) The primary purpose of a flip-in provision is to:
A) increase the number of shares outstanding while also increasing the value per share.
B) dilute a corporate raider’s ownership position.
C) reduce the market value of each share of stock.
D) give the existing corporate directors the sole right to remove a poison pill.
E) provide additional compensation to any senior manager who loses his or her job as a result of
a corporate takeover.
48) If a firm sells its crown jewels when threatened with a takeover attempt, the firm is
employing a strategy commonly referred to as a ________ strategy.
A) scorched earth
B) shark repellent
C) bear hug
D) white knight
E) lockup
49) Which one of the following defensive tactics is designed to prevent a “two-tier” takeover
offer?
A) Bear hug
B) Poison put
C) Shark repellent
D) Dual class capitalization
E) Fair price provision
50) The shareholders in the acquiring firm may not realize any significant gains from an
acquisition. Which one of the following has not been suggested as a reason for this lack of gain?
A) Management may have priorities other than the interests of the stockholders.
B) The price paid for the target firm might equal the target firm’s total value to the acquirer.
C) Any synergy produced was paid to the target firm’s shareholders.
D) Target firm shares were exchanged for an equal value of acquiring firm shares.
E) Anticipated merger gains may not be fully achieved.
51) Studies conducted on mergers and acquisitions have generally concluded that:
A) both acquiring and target firm’s shareholders benefit approximately equally in most situations.
B) all involved shareholders tend to neither gain nor lose much as a result of these transactions.
C) only highly leveraged acquisitions produce any shareholder gains.
D) these transactions are financially beneficial to target shareholders.
E) acquiring firm’s shareholders gain at the expense of the target firm’s shareholders.
52) Global Distributors has decided to sell its manufacturing operations and concentrate solely
on its global distribution operations. This sale is referred to as a(n):
A) liquidation.
B) divestiture.
C) merger.
D) allocation.
E) restructuring.
53) Nationwide Markets is a diversified company with many divisions. It is also the sole
shareholder of a wholly owned subsidiary. Management has decided to implement an IPO
offering for 25 percent of the ownership of the subsidiary. Which one of these terms applies to
this offering?
A) Split-up
B) Equity carve-out
C) Tender offer
D) White knight transaction
E) Lockup transaction
54) Family Travel is the sole shareholder in its subsidiary, FT Insurance. Family Travel has
decided to divest itself of its insurance operations and does so by distributing the shares in the
subsidiary to the shareholders of Family Travel. This distribution of shares is called a(n):
A) lockup transaction.
B) bear hug.
C) equity carve-out.
D) spin-off.
E) split-up.
55) Davidson Global proposed splitting itself into four separate firms and its shareholders
agreed. This split is referred to as a(n):
A) lockup transaction.
B) divestiture.
C) equity carve-out.
D) spin-off.
E) split-up.
56) Which one of these is the least probable reason why a firm may want to divest itself of some
of its assets?
A) To cash out a profitable operation
B) To raise cash
C) To improve the strategic fit of its various divisions
D) To comply with antitrust regulations
E) To increase market share
57) Which one of the following statements is correct?
A) An equity carve-out frequently follows a spin-off.
B) A split-up frequently follows a spin-off.
C) An equity carve-out is a specific type of acquisition.
D) A spin-off involves an initial public offering.
E) Split-ups may unlock value within a firm.
58) Firm X has total earnings of $49,000, a market value per share of $64, a book value per share
of $38, and has 25,000 shares outstanding. Firm Y has total earnings of $34,000, a market value
per share of $21, a book value per share of $12, and has 22,000 shares outstanding. Assume Firm
X acquires Firm Y by paying cash for all the shares outstanding at a merger premium of $2 per
share. Also assume neither firm has any debt before or after the merger. What is the value of the
total equity of the combined firm, XY, if the purchase method of accounting is used?
A) $1,274,000
B) $1,316,000
C) $1,456,000
D) $1,412,000
E) $1,427,000
59) The balance sheet of MT Co. shows current assets of $14,000, net fixed assets of $21,800,
current liabilities of $4,300, long-term debt of $2,600, and equity of $28,900. The balance sheet
of LF Inc. has current assets of $4,700, net fixed assets of $8,100, current liabilities of $2,200,
long-term debt of $1,200, and equity of $9,400. The market value of LF’s fixed assets is $14,100.
MT purchases LF for $20,000 and raises the funds through an issue of long-term debt. What will
be the value of the equity account on the post- merger balance sheet assuming the purchase
accounting method is used?
A) $29,600
B) $33,600
C) $28,900
D) $39,600
E) $43,000
60) The balance sheet of Meat Co. reflects current assets of $6,000, net fixed assets of $8,400,
current liabilities of $1,800, long-term debt of $1,100, and equity of $11,500. The balance sheet
of Loaf Inc. shows current assets of $2,000, net fixed assets of $3,300, current liabilities of $900,
long-term debt of $500, and equity of $3,900. Suppose the fair market value of Loaf’s fixed
assets is $4,100 versus the $3,300 book value shown. Meat pays $5,200 for Loaf and raises the
needed funds through an issue of long-term debt. Assume the purchase method of accounting is
used. The post-merger balance sheet of Meat Co. will have total debt of ________ and total
equity of ________.
A) $1,600; $11,500
B) $1,600; $15,400
C) $10,200; $15,400
D) $9,500; $11,500
E) $14,500; $15,400
61) Silver Enterprises has acquired All Gold Mining in a merger transaction. The pre-merger
balance sheet for Silver Enterprises has current assets of $1,500, other assets of $400, net fixed
assets of $2,300, current liabilities of $1,000, long-term debt of $500 and owners’ equity of
$,2700. The pre-merger balance sheet for All Gold Mining shows current assets of $600, other
assets of $210, net fixed assets of $1,600, current liabilities of $500, and equity of $1,910.
Assume the merger is treated as a purchase for accounting purposes. The market value of All
Gold Mining’s fixed assets is $2,900; the market values for current and other assets are the same
as the book values. Assume that Silver Enterprises issues $4,000 in new long-term debt to
finance the acquisition. The post-merger balance sheet will reflect goodwill of ________ and
total equity of ________.
A) $640; $2,700
B) $790; $4,610
C) $790; $2,700
D) $890; $4,610
E) $890; $2,700
62) Nadine’s Home Fashions has $2.12 million in net working capital. The firm has fixed assets
with a book value of $31.64 million and a market value of $33.9 million. The firm has no long-
term debt. The Home Centre is buying Nadine’s for $37.5 million in cash. The acquisition will be
recorded using the purchase accounting method. What is the amount of goodwill that The Home
Centre will record on its balance sheet as a result of this acquisition?
A) $1.48 million
B) $3.34 million
C) $3.74 million
D) $4.14 million
E) $5.86 million
63) Rosie’s has 2,200 shares outstanding at a market price per share of $28.15. Sandy’s has 4,500
shares outstanding at a market price of $38 a share. Neither firm has any debt. Sandy’s is
acquiring Rosie’s. The incremental value of the acquisition is $1,800. What is the value of
Rosie’s to Sandy’s?
A) $107,270
B) $48,770
C) $54,300
D) $68,700
E) $63,730
64) Sue’s Bakery is planning on merging with Ted’s Deli. Sue’s will pay Ted’s shareholders the
current value of their stock in shares of Sue’s Bakery. Sue’s currently has 6,500 shares of stock
outstanding at a market price of $26 a share. Ted’s has 2,300 shares outstanding at a price of $18
a share. What is the value of the merged firm if the synergy created by the merger is $3,200?
A) $206,500
B) $210,400
C) $225,400
D) $213,600
E) $231,300
65) News Express has 26,200 shares outstanding at a market price of $33.30 a share. Nu-News
has 15,000 shares outstanding at a price of $54 a share. The News Express is acquiring Nu-
News. Both firms are all-equity financed. The incremental value of the acquisition is $2,500.
What is the value of Nu-News to News Express?
A) $874,960
B) $804,960
C) $869,960
D) $807,500
E) $812,500