Question 1

Which one of the following statements correctly applies to a merger?

Accepted Answer

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.F) A) and E)
G) C) and E)

Question 2

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:

Accepted Answer

A)   the agency effect.
B)   the consolidating value.
C)   the diversification benefit.
D)   the consolidation effect.
E)   synergy.F) A) and B)
G) None of the above

Question 3

The shareholders of Jolie Company have voted in favor of a buyout offer from Pitt Corporation. Jolie has a price-earnings ratio of 6, earnings of $230,000, and 60,000 shares outstanding. Pitt has a price-earnings ratio of 12, earnings of $660,000, and 125,000 shares outstanding. Jolie's shareholders will receive one share of Pitt stock for every three shares they hold in Jolie. Assume the NPV of the acquisition is zero. What will the post-merger PE ratio be for Pitt?

Accepted Answer

A)   10.76
B)   9.20
C)   9.84
D)   10.32
E)   11.21F) B) and D)
G) B) and C)

Question 4

When evaluating an acquisition you should:

Accepted Answer

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.F) C) and D)
G) B) and E)

Question 5

For financial statement purposes, goodwill created by an acquisition:

Accepted Answer

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.F) B) and E)
G) C) and D)

Question 6

Which one of the following statements is correct?

Accepted Answer

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.F) A) and B)
G) None of the above

Question 7

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?

Accepted Answer

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.F) A) and E)
G) B) and C)

Question 8

The bidding firm (Firm B)  has 2,300 premerger shares outstanding at $43 a share. The target firm (Firm T)  has 1,100 premerger shares outstanding at $24 a share. Assume neither firm has any debt outstanding. Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $2,600. What is the NPV of the merger assuming that Firm T is willing to be acquired for $26 per share in cash?

Accepted Answer

A)   $400
B)   $100
C)   $800
D)   $2,200E) A) and C)
F) All of the above

Question 9

In a merger the:

Accepted Answer

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.F) A) and C)
G) None of the above

Question 10

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?

Accepted Answer

A)   Split-up
B)   Equity carve-out
C)   Tender offer
D)   White knight transaction
E)   Lockup transactionF) A) and B)
G) A) and C)

Question 11

Lucas Motors is considering the acquisition of TM Repair. Lucas has 43,000 shares outstanding at a market price of $32 a share. TM has 12,800 shares outstanding priced at $44 a share. The acquisition is expected to create $5,400 of synergy. What is the maximum amount of cash Lucas should pay for this acquisition?

Accepted Answer

A)   $568,600
B)   $1,376,000
C)   $446,073
D)   $563,200
E)   $1,381,400F) A) and E)
G) B) and E)

Question 12

VC is merging with DRW. VC will pay DRW's shareholders the current value of their shares in shares of VC stock. VC currently has 15,200 shares of stock outstanding at a market price of $28 a share. DRW has 2,500 shares outstanding at a price of $20 a share. How many shares of stock will be outstanding in the merged firm?

Accepted Answer

A)   16,840 shares
B)   17,061 shares
C)   17,200 shares
D)   16,986 shares
E)   18,609 sharesF) C) and E)
G) B) and E)

Question 13

If Food Markets were to acquire Meat Processors, the acquisition would be classified as a ________ acquisition.

Accepted Answer

A)   vertical
B)   longitudinal
C)   conglomerate
D)   horizontal
E)   integratedF) C) and E)
G) A) and E)

Question 14

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.

Accepted Answer

A)   scorched earth
B)   shark repellent
C)   bear hug
D)   white knight
E)   lockupF) A) and B)
G) B) and C)

Question 15

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:

Accepted Answer

A)   consolidation.
B)   strategic alliance.
C)   joint venture.
D)   merged alliance.
E)   takeover project.F) A) and B)
G) A) and C)

Question 16

If GE, a highly diversified company, were to acquire Ocean Freight Limited, the acquisition would be classified as a ________ acquisition.

Accepted Answer

A)   horizontal
B)   longitudinal
C)   conglomerate
D)   vertical
E)   integratedF) B) and E)
G) B) and C)

Question 17

Outdoor Living has agreed to be acquired by New Adventures for $100,000 worth of New Adventures stock. New Adventures currently has 12,000 shares of stock outstanding at a price of $27 a share. Outdoor Living has 2,000 shares outstanding at a price of $46 a share. The incremental value of the acquisition is $12,000. What is the value of the merged firm?

Accepted Answer

A)   $285,500
B)   $328,000
C)   $437,000
D)   $320,500
E)   $428,000F) None of the above
G) A) and B)

Question 18

Firm A is acquiring Firm B for $69,000 in cash. Firm A has 4,300 shares of stock outstanding at a market value of $32 a share. Firm B has 2,100 shares of stock outstanding at a market price of $32 a share. Neither firm has any debt. The incremental value of the acquisition is $2,200. What is the price per share of Firm A's stock after the acquisition?

Accepted Answer

A)   $31.98
B)   $31.45
C)   $32.09
D)   $32.16
E)   $32.33F) B) and D)
G) D) and E)

Question 19

Al's is analyzing the possible acquisition of Baker's. Both firms have no debt. Al's believes the acquisition will increase its total aftertax annual cash flows by $2.8 million indefinitely. The current market value of Baker's is $91 million, and that of Al's is $143.6 million. The appropriate discount rate for the incremental cash flows is 11 percent. Al's is trying to decide whether it should offer 40 percent of its stock or $104 million in cash to Baker's shareholders. The cost of the cash alternative is ________, while the cost of the stock alternative is ________.

Accepted Answer

A)   $91,000,000; $90,824,141
B)   $91,000,000; $104,000,000
C)   $91,000,000; $91,338,092
D)   $104,000,000; $104,021,818
E)   $104,000,000; $103,837,209F) D) and E)
G) A) and B)

Question 20

Which one of the following statements is correct?

Accepted Answer

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.F) None of the above
G) A) and E)

Exam 26: Mergers and Acquisitions

For financial statement purposes, goodwill created by an acquisition:

Correct Answer
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Correct Answer
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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?

Correct Answer
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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:

Correct Answer
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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:

Correct Answer
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When evaluating an acquisition you should:

Correct Answer
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In a merger the:

Correct Answer
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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.

Correct Answer
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If GE, a highly diversified company, were to acquire Ocean Freight Limited, the acquisition would be classified as a ________ acquisition.

Correct Answer
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If Food Markets were to acquire Meat Processors, the acquisition would be classified as a ________ acquisition.

Correct Answer
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Which one of the following statements correctly applies to a merger?

Correct Answer
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Correct Answer
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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?

Correct Answer
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Which one of the following statements is correct?

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Which one of the following statements is correct?

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Exam 26: Mergers and Acquisitions

For financial statement purposes, goodwill created by an acquisition:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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:

Correct AnswerverifiedShow Answer

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:

Correct AnswerverifiedShow Answer

When evaluating an acquisition you should:

Correct AnswerverifiedShow Answer

In a merger the:

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

If GE, a highly diversified company, were to acquire Ocean Freight Limited, the acquisition would be classified as a ________ acquisition.

Correct AnswerverifiedShow Answer

If Food Markets were to acquire Meat Processors, the acquisition would be classified as a ________ acquisition.

Correct AnswerverifiedShow Answer

Which one of the following statements correctly applies to a merger?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which one of the following statements is correct?

Correct AnswerverifiedShow Answer

Which one of the following statements is correct?

Correct AnswerverifiedShow Answer

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