Which of the following actions does NOT help managers defend against a hostile takeover?
Answer Choices:
a. Establishing a poison pill provision.b. Granting lucrative golden parachutes to senior managers.c. Establishing a super-majority provision in the company’s bylaws to raise the percentage of the board of directors that must approve an acquisition from 50% to 75%.d. Retiring long-term debt early to reduce total debt on the balance sheet which will increase the firm’s financial position.e. Finding a “white squire” that will buy enough of the target firm’s shares to block the hostile takeover.
Answer: d
Which of the following statements is most CORRECT?
Answer Choices:
a. A conglomerate merger is one where a firm combines with another firm in the same industry.b. Regulations in the United States prohibit acquiring firms from using common stock to purchase another firm.c. Defensive mergers are designed to make a company less vulnerable to a takeover.d. The equity residual method values a target firm by discounting residual cash flows at the acquiring firm’s overall cost of capital reflecting the combined firm’s post-merger capital structure.e. A financial merger occurs when the operations of the firms involved are integrated in the hope of achieving synergistic benefits.
Answer: c
Which of the following statements is most CORRECT?
Answer Choices:
a. Tax considerations often play a part in mergers. If one firm has excess cash, purchasing another firm exposes the purchasing firm to additional taxes. Thus, firms with excess cash rarely undertake mergers.b. The smaller the synergistic benefits of a particular merger, the greater the scope for striking a bargain in negotiations, and the higher the probability that the merger will be completed.c. Since mergers are frequently financed by debt rather than equity, a lower cost of debt or a greater debt capacity are rarely relevant considerations when considering a merger.d. Managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification, including more stable earnings. However, since shareholders are free to diversify their own holdings, and at what’s probably a lower cost, research of U.S. firms suggests that in most cases, diversification through mergers does not increase the firm’s value.e. Research of U.S. firms suggests that managers’ personal motivations have had little, if any, impact on firms’ decisions to merge.
Answer: d
Which of the following statements is most CORRECT?
Answer Choices:
a. The high value of the U.S. dollar relative to Japanese and European currencies in the 1980s, made U.S. companies comparatively inexpensive to foreign buyers, spurring many mergers.b. During the 1980s, the Reagan and Bush administrations tried to foster greater competition and they were adamant about preventing the loss of competition; thus, most large mergers were disallowed.c. The expansion of the junk bond market made debt more freely available for large acquisitions and LBOs in the 1980s, and thus, it resulted in an increased level of merger activity.d. Increased nationalization of business and a desire to scale down and focus on producing in one’s home country has virtually halted cross-border mergers today.e. Because strategic alliances and joint ventures are easy to form and enable firms to compete better in the global economy than would mergers, merger activity has virtually come to a halt in the 21st century.
Answer: c
Which of the following statements is most CORRECT?
Answer Choices:
a. The acquiring firm’s required rate of return in most horizontal mergers will not be affected, because the two firms will have similar betas.b. The goal of merger valuation is to value the target firm’s total capital at the target firm’s weighted average cost of capital because a firm is acquired from all of its investors—both shareholders and creditors.c. The basic rationale for any financial merger is synergy and, thus, the estimation of pro forma cash flows is the single most important part of the analysis.d. In most mergers, the benefits of synergy and the premium the acquirer pays over the market price are summed and then divided equally between the shareholders of the acquiring and target firms.e. The primary rationale for most operating mergers is synergy.
Answer: e
Which of the following statements is most CORRECT?
Answer Choices:
a. Leveraged buyouts (LBOs) occur when a firm issues equity and uses the proceeds to take a firm public.b. In a typical LBO, bondholders do well but shareholders see their value decline.c. Firms are forbidden by law to sell any assets during the first five years following a leveraged buyout.d. Not all target firms are acquired by publicly traded corporations. In recent years, an increasing number of firms have been acquired by private equity firms. Private equity firms raise capital from wealthy individuals and look for opportunities to make profitable investments.e. In an LBO sometimes the acquiring group plans to run the acquired company for a number of years, boost its sales and profits, and then take it public again as a stronger company. In other instances, the LBO firm plans to sell off divisions to other firms that can gain synergies. In either case, the acquiring group expects to make a substantial profit from the LBO, but the inherent risks are small due to the heavy use of venture capital and very little debt.
Answer: d
Which of the following statements is most CORRECT?
Answer Choices:
a. If a company that produces military equipment merges with a company that manages a chain of motels, this is an example of a horizontal merger.b. Truec. False
Answer: c
The “preferred” feature of preferred stock means that it normally will provide a higher expected return than will common stock.
Answer Choices:
a. Trueb. False
Answer: b
Unlike bonds, the cost of preferred stock to the issuing firm is the same on a before-tax and after-tax basis. This is because dividends on preferred stock are not tax deductible, whereas interest on bonds is deductible.
Answer Choices:
a. Trueb. False
Answer: a
A sale and leaseback arrangement is a type of financial, or capital, lease.
Answer Choices:
a. Trueb. False
Answer: a
Operating leases help to shift the risk of obsolescence from the user to the lessor.
Answer Choices:
a. Trueb. False
Answer: a
Under a sale and leaseback arrangement, the seller of the leased property is the lessee and the buyer is the lessor.
Answer Choices:
a. Trueb. False
Answer: a
The full amount of a lease payment is tax deductible provided the contract qualifies as a true lease under IRS guidelines.
Answer Choices:
a. Trueb. False
Answer: a
Leasing is often referred to as off-balance-sheet financing because lease payments are shown as operating expenses on a firm’s income statement and, under certain conditions, leased assets and associated liabilities do not appear on the firm’s balance sheet.
Answer Choices:
a. Trueb. False
Answer: a
A warrant is an option, and as such it cannot be used as a “sweetener.”
Answer Choices:
a. Trueb. False
Answer: b
A sale and leaseback arrangement is a type of financial, or capital, lease.
Answer Choices:
a. Trueb. False
Answer: a
Operating leases help to shift the risk of obsolescence from the user to the lessor.
Answer Choices:
a. Trueb. False
Answer: a
Under a sale and leaseback arrangement, the seller of the leased property is the lessee and the buyer is the lessor.
Answer Choices:
a. Trueb. False
Answer: a
The full amount of a lease payment is tax deductible provided the contract qualifies as a true lease under IRS guidelines.
Answer Choices:
a. Trueb. False
Answer: a