Borrowing funds on terms that would require immediate repayment of all loans if the firm is acquired, selling off at bargain prices the assets that originally made the firm a desirable target, and granting huge “golden parachutes” that open if the firm is acquired are 3 procedures used to defend against hostile takeovers. These strategies are known as “poison pills.”
Answer Choices:
a. Trueb. False
Answer: a
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.
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a. Trueb. False
Answer: a
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.
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a. Trueb. False
Answer: a
A spin-off is a type of divestiture in which the assets of a division are sold to another firm.
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a. Trueb. False
Answer: b
The purchase of assets at below their replacement cost and tax considerations are two factors that motivate mergers.
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a. Trueb. False
Answer: a
The primary reason given by managers for most mergers is the acquisition of more assets so as to increase sales and market share.
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a. Trueb. False
Answer: a
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.
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a. Trueb. False
Answer: b
If a petrochemical firm that used oil as feedstock merged with an oil producer that had large oil reserves and a drilling subsidiary, this would be a vertical merger.
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a. Trueb. False
Answer: a
A conglomerate 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.
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a. Trueb. False
Answer: b
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.
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a. Trueb. False
Answer: a
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.
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a. Trueb. False
Answer: b
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.
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a. Trueb. False
Answer: a
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.
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a. Trueb. False
Answer: b
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.
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a. Trueb. False
Answer: b
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.
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a. Trueb. False
Answer: b
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.
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a. Trueb. False
Answer: b
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.
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a. Trueb. False
Answer: a
The text gives a number of valid, acceptable reasons for companies to merge. Which of the following is NOT acceptable?
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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: e
Firms use defensive tactics to fight off undesired mergers. These tactics do NOT include
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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: d