Answer Options:
a. True
b. False
Answer:
a. True
Question: Most defensive mergers occur as a result of managers’ actions to maximize shareholders’ wealth. a. True b. False
Answer:
False
Question: A spin-off is a type of divestiture in which the assets of a division are sold to another firm. a. True b. False
Answer:
True
Question: One of the main reasons why foreign firms are interested in buying U.S. companies is to gain entrance to the U.S. market. A decline in the value of the dollar relative to most foreign currencies makes this competitive strategy especially attractive. a. True b. False
Answer:
True
Question: Which of the following statements is most CORRECT?
Answer Options:
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. The primary rationale for most operating mergers is synergy.
Question: A congeneric merger is one where the merging firms operate in related businesses but do not necessarily produce the same products or have a producer-supplier relationship. a. True b. False
Answer:
True
Question: Leveraged buyouts (LBOs) occur when a firm’s managers, generally backed by private equity groups, try to gain control of a publicly owned company by buying shares in the company using large amounts of borrowed money. a. True b. False
Answer:
True
Question: Since managers’ central goal is to maximize stock price, managers’ personal incentives do not interfere with mergers that would benefit the target firm’s stockholders. a. True b. False
Answer:
False
Question: Junk bonds are high-risk, high-yield debt instruments. They are often used to finance leveraged buyouts and mergers, and to provide financing to companies of questionable financial strength. True False
Answer:
True
Question: The text gives a number of valid, acceptable reasons for companies to merge. Which of the following is NOT acceptable?
Answer Options:
a. Synergistic benefits arising from mergers.
b. Reduction in competition resulting from mergers.
c. Acquisition of assets at below replacement value.
d. Attempts to minimize taxes by acquiring a firm with large accumulated losses that can be used immediately.
e. Using surplus cash to acquire another firm and prevent unfavorable tax consequences for shareholders.
Answer:
b. Reduction in competition resulting from mergers.
Question: Post-merger control and the negotiated price paid by the acquirer are two of the most important issues in the terms to merger agreements. a. True b. False
Answer:
True
Question: Some people–including the former chairman of the Federal Reserve Board of Governors (Ben Bernanke)–have argued that one advantage of corporate debt from the stockholders’ standpoint is that the existence of debt forces managers to focus on cash flow and to refrain from spending too much of the firm’s money on private plane and other “perks.” This is one of the factors that led to the rise of LBOs and private equity firms.
Answer Options:
a. True
b. False
Answer:
True
Question: Which of the following statements is most CORRECT?
Answer Options:
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 leverage 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. 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.
Question: The distribution of synergistic gains between the stockholders of two merged firms is almost always based strictly on their respective market values before the announcement of the merger.
Answer Options:
a. True
b. False
Answer:
b. False
Question: Since a manager’s central goal is to maximize the firm’s stock price, any merger offer that provides stockholders with significant gains over the current stock price will be approved by the current management team. a. True b. False
Answer:
False
Question: Merger activity is likely to heat up when interest rates are high because target firms can expect to receive an especially favorable premium. a. True b. False
Answer:
False
Question: A joint venture is one in which two, or sometimes more, independent companies agree to combine resources in order to achieve a specific objective, usually limited in scope. a. True b. False
Answer:
True
Question: In a merger with true synergies, the post-merger value exceeds the sum of the separate companies’ pre-merger values. a. True b. False
Answer:
True
Question: Firms use defensive tactics to fight off undesired mergers. These tactics do NOT include
Answer Options:
a. raising antitrust issues.
b. developing poison pills.
c. getting white knights to bid for the firm.
d. repurchasing their own stock.
e. engaging in risk arbitrage.
Answer:
e. engaging in risk arbitrage.
Question: A conglomerate merger occurs when two firms with either a horizontal or a vertical business relationship combine. a. True b. False
Answer:
False
Question: Only if a target firm’s value is greater to the acquiring firm than its market value as a separate entity will a merger be financially justified. a. True b. False
Answer:
True
Question: In a financial merger, the relevant post-merger cash flows are simply the sum of the expected cash flows of the two companies, measured as if they were operated independently.
Answer Options:
a. True
b. False
Answer:
b. False
Question: Synergistic benefits can arise from a number of different sources, including operating economies of scale, financial economies, and increased managerial efficiency. a. True b. False
Answer:
True