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Fundamentals of Corporate Finance, 12e (Ross)
Chapter 26 Mergers and Acquisitions
1) Last month, Keyser Design acquired all of the assets and liabilities of Tenor Machine Works.
The combined firm is known as Keyser Design. Tenor Machine Works no longer exists as a
separate entity. This acquisition is best described as a:
A) merger.
B) consolidation.
C) tender offer.
D) spinoff.
E) divestiture.
2) The Cat Box acquired The Dog House. As part of this transaction, both firms ceased to exist
in their prior form and combined to create an all-new entity, Animal World. Which one of the
following terms best describes this transaction?
A) Divestiture
B) Consolidation
C) Tender offer
D) Spinoff
E) Conglomeration
3) The Daily News published an ad today wherein it announced its desire to purchase shares of a
competing newspaper, the Oil Town Gossip. Which one of the following terms is best described
by this announcement?
A) Merger request
B) Consolidation
C) Tender offer
D) Spinoff
E) Divestiture
4) Which one of these statements is false?
A) Acquisitions are sometimes unfriendly.
B) Shareholders of the target firm must vote to approve an acquisition by stock.
C) The cost of a stock acquisition can be higher than the cost of a merger if the target firm's
management resists.
D) The complete absorption of one firm by another requires a merger.
E) In stock acquisitions the bidding firm deals directly with the target firm's shareholders.
5) A group of individual investors is in the process of acquiring all of the publicly traded shares
of OM Outfitters. Once the shares are acquired, they will no longer be publicly traded. Which of
the following terms applies to this process?
A) Tender offer
B) Proxy contest
C) Going-private transaction
D) Merger
E) Consolidation
6) The current officers of MTC have decided to form a private investment group for the sole
purpose of purchasing MTC. These individuals will borrow 90 percent of their offer price. The
purchase of this firm is referred to as a:
A) conglomeration.
B) proxy contest.
C) merger.
D) management buyout.
E) consolidation.
7) Johnson Co. and Peabody Enterprises are both manufacturers of plastic products. These two
firms have decided to work together to find a more efficient way to recycle rejected products.
Thus, the two companies are each going to assign two engineers to this project and have agreed
to share any and all costs. This project is an example of a:
A) consolidation.
B) merged alliance.
C) joint venture.
D) takeover project.
E) strategic alliance.
8) Diet Soda and High Caffeine are two firms that compete in the soft drink market. These two
competitors have decided to invest $10 million to form a new company, Fruit Tea, which will
manufacture flavored teas. This new firm is defined as a:
A) consolidation.
B) strategic alliance.
C) joint venture.
D) merged alliance.
E) takeover project.
9) Which one of the following statements correctly applies to a legally defined merger?
A) The acquiring firm retains its identity and absorbs only the assets of the acquired firm.
B) The acquired firm is completely absorbed and ceases to exist as a separate legal entity.
C) A new firm is created that includes all the assets and liabilities of the acquiring firm plus the
assets only of the acquired firm.
D) A new firm is created from the assets and liabilities of both the acquiring and acquired firms.
E) A merger reclassifies the acquired firm into a new entity that becomes a subsidiary of the
acquiring firm.
10) Which one of the following statements correctly applies to a merger?
A) The acquiring firm does not have to seek approval for the merger from its shareholders.
B) The shareholders of the target firm must approve the merger.
C) The acquiring firm will acquire the assets but not the debt of the target firm.
D) The merged firm will have a new company name.
E) The titles to individual assets of the target firm must be transferred into the acquiring firm's
name.
11) In a merger the:
A) legal status of both the acquiring firm and the target firm is terminated.
B) acquiring firm retains its pre-merger legal status.
C) acquiring firm acquires the assets, but not the liabilities, of the target firm.
D) shareholders of the target firm have little, if any, say as to whether or not the merger occurs.
E) target firm continues to exist but will be a wholly owned subsidiary of the acquiring firm.
12) Which one of the following is a disadvantage of a merger?
A) Transferring the title to all the target firm's assets
B) Disbanding the operations of the target firm
C) Hiring an underwriter to distribute the IPO shares
D) Incurring the costs of creating a new legal entity
E) Seeking approval of the shareholders of both firms
13) KN Markets has decided to acquire a controlling interest in BJ's by purchasing shares of BJ
stock in the public markets. Which one of these statements correctly applies to this acquisition?
A) This method of acquisition guarantees a quick and efficient merger.
B) KN Markets is limited by law to obtaining a maximum of 49 percent of the shares prior to
obtaining the approval of BJ management.
C) The purchase of publicly traded shares may be more expensive than an outright merger.
D) Once KN Markets obtains 80 percent of BJ's shares, the remaining BJ shareholders will be
required to sell their shares to KN.
E) KN Markets must obtain the approval of BJ's board of directors before purchasing shares.
14) Biltwell Hotels is acquiring all of the assets of Green Roof Inns. As a result, Green Roof
Inns:
A) will become a fully owned subsidiary of Biltwell Hotels.
B) will remain as a shell corporation unless the shareholders opt to dissolve it.
C) will be fully merged into Biltwell Hotels and will no longer exist as a separate entity.
D) and Biltwell Hotels will both cease to exist and a new firm will be formed.
E) will automatically be dissolved.
15) An automaker recently acquired a windshield manufacturer. Which type of an acquisition
was this?
A) Horizontal
B) Longitudinal
C) Conglomerate
D) Vertical
E) Indirect
16) If GE, a highly diversified company, were to acquire Ocean Freight Limited, the acquisition
would be classified as a ________ acquisition.
A) horizontal
B) longitudinal
C) conglomerate
D) vertical
E) integrated
17) If Food Markets were to acquire Meat Processors, the acquisition would be classified as a
________ acquisition.
A) vertical
B) longitudinal
C) conglomerate
D) horizontal
E) integrated
18) All of the following are related to a takeover except a:
A) tender offer.
B) consolidation.
C) going private transaction.
D) proxy contest.
E) strategic alliance.
19) Firms A and B formally agree to each put up $25 million to create firm C. Firm C will
perform environmental testing on the products produced by both Firm A and Firm B. Which one
of the following terms describes Firm C?
A) Joint venture
B) Going-private transaction
C) Conglomerate
D) Subsidiary
E) Leveraged buyout
20) Dixie and ten of her wealthy friends formed a group and borrowed the funds necessary to
acquire all of the outstanding shares of Southern Fried Chicken. This transaction is known as a:
A) proxy contest.
B) management buyout.
C) vertical acquisition.
D) leveraged buyout.
E) unfriendly takeover.
21) In a tax-free acquisition, the shareholders of the target firm:
A) receive income that is considered to be tax-exempt.
B) gift their shares to a tax-exempt organization and therefore have no taxable gain.
C) are viewed as having exchanged shares on a dollar-for-dollar basis.
D) sell their shares to a qualifying entity thereby avoiding both income and capital gains taxes.
E) sell their shares at cost thereby avoiding the capital gains tax.
22) Which one of the following is not required for an acquisition to be considered tax-free?
A) The continuity of equity interest
B) A business purpose, other than avoiding taxes, for the acquisition
C) The obtainment of equity shares in the acquirer by the target firm's shareholders
D) A cash payment to the target firm's shareholders
E) An exchange that is considered to be of equal value
23) Which one of the following statements is correct?
A) The shareholders of an acquired firm are generally given a choice of accepting either cash or
shares of stock when the acquisition is tax free.
B) To be a tax-free acquisition, the shareholders of an acquired firm must receive shares in the
acquiring firm that are equal to 25 percent or less of the value of the shares held in the acquired
firm.
C) The assets of an acquired firm are recorded on the books of the acquiring firm at their current
book value regardless of the tax status of the acquisition.
D) Target firm shareholders demand a higher selling price when an acquisition is a nontaxable
event.
E) If the assets of a firm are written up as part of the acquisition process, the increase in value is
considered to be a taxable gain.
24) The purchase accounting method requires that:
A) the excess of the purchase price over the fair market value of the target firm be recorded as a
one-time expense on the income statement of the acquiring firm.
B) goodwill be amortized on a yearly basis for financial statement purposes.
C) the equity of the acquiring firm be reduced by the excess of the purchase price over the fair
market value of the target firm.
D) the assets of the target firm be recorded at their fair market value on the balance sheet of the
acquiring firm.
E) the excess amount paid for the target firm be recorded as a tangible asset on the books of the
acquiring firm.
25) For financial statement purposes, goodwill created by an acquisition:
A) must be amortized on a straight-line basis over 10 years.
B) must be reviewed each year and amortized to the extent that it has lost value.
C) is expensed evenly over a 20-year period.
D) never affects the profits of the acquiring firm.
E) is recorded in an amount equal to the fair market value of the assets of the target firm.
26) If a merger creates synergy, then the:
A) merger is classified as a taxable transaction.
B) acquiring firm's shareholders will receive a one-time cash payment.
C) equity of the target firm will be increased by the amount of the synergy.
D) value of the merged firm exceeds the combined value of the separate firms.
E) price paid by the acquiring firm will be reduced by the amount of that synergy.
27) All of the following are examples of cost reductions that can result from an acquisition
except:
A) reducing the number of management personnel required.
B) lowering office costs by combining job functions.
C) allocating fixed overhead across a wider range of products.
D) benefiting from economies of scale when purchasing raw materials.
E) increasing the firm's market share.
28) A potential merger that produces synergy:
A) should be rejected due to the projected negative cash flows.
B) should be rejected because the synergy will dilute the benefits of the merger.
C) has a net present value of zero.
D) creates value and therefore should be pursued.
E) reduces the anticipated net income from the target firm.
29) A proposed acquisition is most apt to create synergy by:
A) decreasing the market power of the combined firm.
B) disbanding the distribution network of the combined firm.
C) eliminating any strategic advantages of the target firm.
D) increasing the utilization of the acquiring firm's assets.
E) increasing the overhead costs.
30) All of the following represent potential tax benefits that can directly result from an
acquisition except:
A) increasing the depreciation expense.
B) using tax losses.
C) increasing surplus funds.
D) increasing the use of leverage.
E) increasing interest expense.
31) When evaluating an acquisition you should:
A) concentrate on book values and ignore market values.
B) focus on the total cash flows of the merged firm but ignore incremental cash flows.
C) apply the rate of return that is relevant to the incremental cash flows.
D) ignore any one-time acquisition fees or transaction costs.
E) ignore any potential changes in management.
32) Which one of the following best defines synergy given the following?
VA = Value of Firm A
VB = Value of Firm B
VAB = Value of merged Firm AB
A) (VA + VB) − VAB
B) VAB − (VA + VB)
C) Max[(VA + VB) − VAB, 0]
D) Max[VAB − (VA + VB, 0]
E) Max[VAB − VB, 0]
33) Which one of the following statements is correct?
A) The IRS automatically approves acquisitions that are primarily designed to lower federal
taxes.
B) The leverage associated with an acquisition increases the tax liability of the acquiring firm.
C) A firm may benefit from an acquisition if it can lower its capital requirements.
D) Firms can always benefit from economies of scale if they increase the size of their firm
through acquisitions.
E) If a firm uses its surplus cash to acquire another firm, then the shareholders of the acquiring
firm immediately incur a tax liability related to the transaction.
34) Which one of the following pairs of businesses could probably benefit the most by sharing
complementary resources?
A) Roofer and architect
B) Tennis court and pharmacy
C) Ski resort and golf course
D) Dry cleaner and insurance office
E) Trucking company and lawn service
35) Assume the shareholders of a target firm benefit from being acquired in a stock transaction.
Given this, these shareholders are most apt to realize the largest benefit if the:
A) acquiring firm has the better management team and replaces the target firm's managers.
B) management of the target firm is more efficient than the management of the acquiring firm
which replaces them.
C) management of both the acquiring firm and the target firm are as equivalent as possible.
D) current management team of the target firm is kept in place even though the managers of the
acquiring firm are more suited to manage the target firm's situation.
E) new management team is technologically knowledgeable but yet ineffective.
36) All of the following represent potential gains from an acquisition except the:
A) tax loss carryforwards acquired in the acquisition.
B) lower costs per unit realized.
C) diseconomies of scale related to increased labor demand.
D) use of surplus funds.
E) obtainment of a beachhead.
37) The value of a target firm to the acquiring firm is equal to the:
A) value of the target firm as a separate entity plus the incremental value derived from the
acquisition.
B) purchase cost of the target firm.
C) value of the merged firm minus the value of the target firm as a separate entity.
D) purchase cost plus the incremental value derived from the acquisition.
E) incremental value derived from the acquisition.
38) Black Teas recently acquired Green Teas in a transaction that had a net present value of
$1.23 million. The $1.23 million is referred to as:
A) the agency effect.
B) the consolidating value.
C) the diversification benefit.
D) the consolidation effect.
E) synergy.
39) Which one of the following does not represent a potential tax gain from an acquisition?
A) The use of surplus funds
B) The use of tax loss carryforwards
C) The write-up of depreciable assets
D) The use of unused debt capacity
E) The increase in taxable income
40) If an acquisition does not create value and the market is smart, then the:
A) earnings per share of the acquiring firm must be the same both before and after the
acquisition.
B) earnings per share can change but the stock price of the acquiring firm should remain
constant.
C) price per share of the acquiring firm should increase because of the growth of the firm.
D) earnings per share will most likely increase while the price-earnings ratio remains constant.
E) price-earnings ratio should remain constant regardless of any changes in the earnings per
share.
