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. 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.
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 Choices:
a. True
b. False
Answer: False
Question: The value of the target firm is calculated by discounting residual cash flows that belong to the acquiring firm’s shareholders at the target’s cost of equity reflecting any changes to its capital structure as a result of the merger.
Answer Choices:
a. True
b. False
Answer: True
Question: The purchase of assets at below their replacement cost and tax considerations are two factors that motivate mergers.
True
False
Answer Choices:
a. True
b. False
Answer: a. True
Question: 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. The primary rationale for most operating mergers is synergy.
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.
Answer Choices:
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.
Answer Choices:
a. True
b. False
Answer: True
Question: A sale and leaseback arrangement is a type of financial, or capital, lease.
Answer Choices:
a. True
b. False
Answer: a. True
Question: The rate used to discount projected merger cash flows should be the overall cost of capital of the new consolidated firm because it incorporates the actual capital structure of the new firm.
Answer Choices:
a. True
b. False
Answer: False
Question: The text gives a number of valid, acceptable reasons for companies to merge. Which of the following is NOT acceptable?
Answer Choices:
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: 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 Choices:
a. True
b. False
Answer: False
Question: 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. True
b. False
Answer: a. True
Question: Operating leases help to shift the risk of obsolescence from the user to the lessor.
Answer Choices:
a. True
b. False
Answer: a. True
Question: The “preferred” feature of preferred stock means that it normally will provide a higher expected return than will common stock.
Answer Choices:
a. True
b. False
Answer: b. False
Question: The primary reason given by managers for most mergers is the acquisition of more assets so as to increase sales and market share.
True
False
Answer Choices:
a. True
b. False
Answer: b. False
Question: 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. Defensive mergers are designed to make a company less vulnerable to a takeover.
Question: Firms use defensive tactics to fight off undesired mergers. These tactics do NOT include
Answer Choices:
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. Using surplus cash to acquire another firm and prevent unfavorable tax consequences for shareholders.
Question: Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the discount rate can only be determined after the merger is consummated.
Answer Choices:
a. True
b. False
Answer: False
Question: 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. Retiring long-term debt early to reduce total debt on the balance sheet which will increase the firm’s financial position.
Question: 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. 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.