Chap031.pdf

Chapter 31 - Mergers

Chapter 31 Mergers Multiple Choice Questions

1. Market for corporate control includes the following: I) Mergers II) Spin-offs and divestitures III) Leveraged buyouts (LBOs) IV) Privatizations A. I only B. I and II only C. I, II, and III only D. I, II, III, and IV

2. The merger of Pfizer and Wyeth is an example of: I) Horizontal merger II) Cross-border merger III) Conglomerate merger IV) Vertical merger A. I only B. II only C. III only D. I and III only

3. Tele Atlas acquisition of Tom Tom is an example of: I) Horizontal merger II) Vertical merger III) Conglomerate merger A. I only B. II only C. III only D. None of the given ones

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4. Live Nation acquisition of Ticketmaster is an example of: I) Cross-border merger II) Horizontal merger III) Conglomerate merger IV) Vertical merger A. I and II only B. I and III only C. III only D. IV only

5. Roche acquisition of Genentech is an example of: I) Horizontal merger II) Conglomerate merger III) Cross-border merger IV) Vertical merger A. I only B. II only C. I and III only D. IV only

6. Google's acquisition of Double Click is an example of: I) Horizontal merger II) Vertical merger III) Conglomerate merger IV) Cross-border merger A. I only B. II only C. III only D. I and IV only

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7. The BP and Amoco merger is an example of: I) Cross-border merger II) Horizontal merger III) Economies of scale A. I only B. I and II only C. I, II, and III only D. III only

8. Bank of America and Merrill Lynch merger is an example of: I) Horizontal merger II) Vertical merger III) Conglomerate merger IV) Cross-border merger A. I only B. II only C. III only D. III and IV only

9. Many mergers that appear to make economic sense fail because managers are unable to handle the complex task of integrating two firms with different: I) production processes II) accounting methods III) corporate cultures A. I only B. I and II only C. III only D. I, II and III

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10. The following reasons are good motives for mergers except: I) Economies of scale II) Complementary resources III) Diversification IV) Eliminating Inefficiencies A. I only B. II only C. III only D. I, II, and IV only

11. The following are good reasons for mergers: I) Surplus funds II) Eliminating inefficiencies III) Complementary resources IV) Increasing earnings per share (EPS) A. I only B. I and II only C. I, II, and III only D. IV only

12. The following are good reasons for mergers: I) Economies of scale II) Economics of vertical integration III) Complementary resources IV) Surplus funds V) Eliminating inefficiencies VI) Industry consolidation A. I only B. I, II, and III only C. I, III, IV, and V only D. I, II, III, IV, V, and VI

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13. The following are dubious reasons for mergers: I) to diversify II) increasing the earnings per share (EPS) III) lower financing costs IV) industry consolidation A. I only B. II and IV only C. III and IV only D. I, II, and III only

14. Error! Hyperlink reference not valid. What is the gain from this merger? A. $30 million B. $20 million C. $15 million D. $75 million

15. Firm A has a value of $100 million, and B has a value of $70 million. Merging the two would allow a cost savings with a present value of $20 million. Firm A purchases B for $75 million. What is the cost of this merger? A. $30 million B. $20 million C. $5 million D. $10 million

16. Firm A has a value of $100 million, and B has a value of $60 million. Merging the two would allow a cost savings with a present value of $20 million. Firm A purchases B for $65 million. How much do firm A's shareholders gain from this merger? A. $30 million B. $20 million C. $15 million D. $5 million

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17. Firm A has a value of $150 million, and B has a value of $100 million. Merging the two would allow a cost savings with a present value of $40 million. Firm A purchases B for $120 million. What is the gain from this merger? A. $20 million B. $40 million C. $100 million D. $80 million

18. Error! Hyperlink reference not valid. What is the cost of this merger? A. $30 million B. $20 million C. $15 million D. $10 million

19. Firm A has a value of $200 million, and B has a value of $120 million. Merging the two would allow a cost savings with a present value of $30 million. Firm A purchases B for $130 million. How much do firm A's shareholders gain from this merger? A. $30 million B. $20 million C. $15 million D. $10 million

20. Companies A and B are valued as follows:

Company A now acquires B by offering one (new) share of A for every two shares of B (that is, after the merger, there are 2500 shares of A outstanding). If investors are aware that there are no economic gains from the merger, what is the price-earnings ratio of A's stock after the merger? A. 7.5 B. 8.3 C. 10.0 D. 5.0

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Company A now acquires B by offering one (new) share of A for every two shares of B (that is, after the merger, there are 2500 shares of A outstanding). Suppose that the merger really does increase the value of the combined firms by $20,000. (i.e., PVAB - PVA - PVB = $20,000). What is the cost of the merger? A. Zero B. $2,000 C. $8,000 D. $4,000

22. The following data on a merger is given:

Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock. Calculate the gain from the merger. A. $600 B. $150 C. $550 D. $700


Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock. Calculate the NPV of the merger. A. $200 B. $400 C. $600 D. $150

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Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock. What will be the post-merger price per share for Firm A's stock if Firm A pays in cash? A. $108 B. $110 C. $102 D. $114 E. None of the above


Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock. Calculate the post merger P/E ratio assuming cash is used in the acquisition. A. 12.75 B. 6.25 C. 13.75 D. None of the above


Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock. What will earnings per share be for Firm A after the merger assuming that cash is used in the acquisition? A. $6 B. $7 C. $8 D. $5

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27. Suppose that the market price of Company A is $50 per share and that of Company B is $20. If A offers half a share of common stock for each share of B, the ratio of exchange of market prices would be: A. 0.8 B. 1.25 C. 0.4 D. none of the above

28. Firm A is planning to acquire Firm B. If Firm A prefers to make cash offer for the merger it indicates that: A. Firm A's managers are optimistic about the post merger value of A B. Firm A's managers are pessimistic about the post merger value of A C. Firm A's managers are neutral about the post merger value of A D. None of the above

29. If firms A is acquiring firm B and Bs shareholders are given the fraction "x" of the combined firm, then the cost of this merger is: A. Cost = (PVAB) - (x) PVB B. Cost = (x) PVAB - PVB C. Cost = PVAB - (x) PVA D. Cost = (x) PVAB - (x) PVB

30. Given the following data:

If Firm A intends to pay $7 million cash for B, calculate the cost of this merger: A. $2 million B. $3 million C. $1 million D. none of the above

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If Firm A offers 250,000 shares for B's shareholders, calculate the apparent cost of merger A. $2 million B. $3 million C. $1 million D. none of the above


If Firm A offers 250,000 shares for B's shareholders, calculate the true cost of merger: A. $2 million B. $3 million C. $1 million D. none of the above

33. Which of the following is not a major item of US antitrust legislation? I) Garn-St. Germain Act II) Clayton Act III) Hart-Scott-Rodino Act A. I only B. II only C. III only D. II and III only

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34. Antitrust law can be enforced by the federal government by: I) a civil suit brought by the Justice Department II) a proceedings initiated by the Federal Trade Commission (FTC) III) a proceedings initiated by the Securities and Exchange Commission (SEC) A. I only B. I and II only C. I, II and III D. II only

35. The following are industries in which large mergers have been blocked on antitrust grounds are: I) aerospace II) aluminum III) telecoms IV) supermarkets V) video rentals VI) office equipment A. I, II and III only B. I, II, III and IV only C. I, II, III, IV and V only D. I, II, III, IV, V and VI

36. The following mergers have been blocked on antitrust grounds except: A. Reynolds and Alcoa B. Kroger and WinnDixie C. Office Depot and Staples D. AOL and Time Warner

37. The acquisition of stock has the advantage of: A. No shareholder meeting to vote is necessary B. Minority shareholders may exist C. Opening the bidding to others D. All of the above E. None of the above

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38. When a merger of two firms is achieved by one firm automatically assuming all the assets and all the liabilities of the other firm; such a merger requires: A. no shareholder meeting to vote is necessary. B. the approval of at least 50% of the stockholders (or as specified by corporate charters or state laws) of each firm. C. that the management of the two firms be tossed out. D. none of the above.

39. Following an acquisition, the acquiring firm's balance sheet shows an asset labeled "goodwill." What form of merger accounting is being used? A. Consolidation B. Aggregation C. Purchase D. None of the above

40. Accounting changes by the Financial Accounting Standards Board (FASB) in the US: A. eliminated the "purchase method," allowing only the "pooling-of-interests" method for mergers and acquisitions B. eliminated the "pooling-of-interests" method, allowing only the "purchase method" for mergers and acquisitions C. allow for both the "purchase method" and the "pooling-of-interests" method for mergers and acquisitions D. none of the above

41. The PEN Corporation with a book value of $20 million and a market value of $30 million has merged with the CNC Corporation with a book value of $6 million and a market value of $8 million at a price of $9 million. If the transaction is a purchase then the total assets on the books of the new company will be: A. $38 million B. $39 million C. $29 million D. $26 million

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42. The DOC Corporation with a book value of $20 million and a market value of $30 million has merged with the CIC Corporation with a book value of $6 million and a market value of $8 million at a price of $9 million. If the transaction is a purchase will there be any goodwill, and if so, what is the amount of goodwill? A. No goodwill; 0 B. Yes goodwill; 3 C. Yes goodwill; 1 D. Cannot be calculated with the information given

43. If an acquisition is made using cash payment then the acquisition is: A. taxable B. viewed as exchanging of shares and is not taxed C. a tax-free transaction as no capital gains or losses are recognized D. none of the above

44. The main difference in a tax-free versus taxable acquisition to the shareholders is that: I) In a tax-free acquisition shares are only exchanged, while in a taxable transaction the shares are considered sold and realized capital gains or losses are taxed II) In a tax-free acquisition a capital gain and loss are realized and then new shares issued, while in a taxable transaction the assets are revalued, taxed on any capital gains and losses and then shares exchanged III) In a tax-free acquisition the shareholders simply take the cash and depart, while in a taxable transaction the shareholders must stay with the new entity A. I only B. II only C. III only D. I and III only

45. What are the tax consequences of a taxable merger? A. Selling shareholders can defer any capital gain until they sell their shares in the merged company B. Depreciation tax shield is unchanged by merger C. Selling shareholders must recognize any capital gain D. Depreciable value of assets will remain unchanged

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46. Which of the following factors influence the choice between merger and an acquisition of stock? I) Shareholders are dealt with directly to bypass target management and board of directors II) In a tender offer, usually some minority shareholders do not tender stopping complete firm absorption III) Target management may be unfriendly and resist an offer. Resistance usually makes the stock price higher A. I only B. II only C. III only D. I, II, and III

47. The following are methods available to change the management of a firm I) a successful proxy contest in which a group of shareholders vote in a new board of directors who then pick a new management team. II) a takeover of one firm by another firm. III) a leveraged buyout of the firm by a private group of investors. A. I only B. II and III only C. I, II and III D. I and III only

48. A dissident group solicits votes in an attempt to replace existing management. This is called a: A. Proxy fight B. Shareholder derivative action C. Tender offer D. Management freeze-out

49. A modification of the corporate charter that requires 80% shareholder approval for takeover is called a(n): A. Repurchase standstill provision B. Exclusionary self-tender C. Super majority amendment D. Tender offer

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50. Compensation paid to top management in the event of a takeover is called a: A. Poison pill B. Golden parachute C. Self-tender D. Buyout

51. An example of a shark-repellent charter amendment is: I) Supermajority II) Waiting period III) Restricted voting rights IV) Staggered board A. I only B. II only C. I and II only D. I, II, III, and IV

52. As a defensive maneuver, a firm issues deep-discount bonds that are redeemable at par in the event of an unfriendly takeover. These bonds are an example of: A. Greenmail B. A "scorched earth" policy C. Crown jewels D. A poison put

53. A poison pill defense is implemented by A. Giving stock away B. Selling firm assets C. Issuing rights at a cheap price D. Adding seats to the board of directors

54. Takeover defenses are designed to benefit A. Stockholders B. Workers C. Creditors D. Managers

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True / False Questions

55. The easiest task for the managers is the integration of the two firms. True False

56. A conglomerate merger is one in which a buyer buys a closely related firm. True False

57. A vertical merger is one in which the buyer expands forward in the direction of the ultimate consumer or backward toward the source of raw material. True False

58. Two companies should consider a merger if they have complementary resources. True False

59. Diversification is a very sensible reason for two companies to merge. True False

60. Gain from mergers is defined as: Gain = PVAB - (PVA + PVB). True False

61. If Firm A acquires Firm B for cash, then the cost of the merger is equal to the cash payment minus B's value as a separate entity. True False

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62. In the purchase method of merger accounting a new asset category called goodwill is created. True False

63. The would-be acquirer making a tender offer directly to shareholders is another form of proxy fight. True False

64. The following are pre-offer defenses: litigation, asset structuring and liability structuring. True False

65. It appears that target companies capture most of the gains in hostile takeovers. True False

66. A poison pill protects the rights of shareholders. True False

67. Supermajorities give shareholders more control over the firm. True False

Short Answer Questions

68. Briefly explain the different types of mergers.

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69. Discuss the difficulties associated with a typical merger.

70. Briefly explain the term "economies of scale."

71. Briefly explain some of the good motives for mergers.

72. Briefly explain what is meant by "the Cost of acquiring" in the context of a merger?

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73. Briefly explain what is meant by economic gain from merger?

74. Explain the central tenet of the Clayton Act of 1914.

75. Name the agencies that have successfully blocked mergers on antitrust (anti-monopoly) grounds.

76. Briefly discuss different forms of acquisition.

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77. Briefly discuss takeover defenses.

78. Who gains most in mergers?

79. Who are anti-takeover defenses designed to protect?

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Chapter 31 Mergers Answer Key

Multiple Choice Questions

1. Market for corporate control includes the following: I) Mergers II) Spin-offs and divestitures III) Leveraged buyouts (LBOs) IV) Privatizations A. I only B. I and II only C. I, II, and III only D. I, II, III, and IV

Type: Medium

2. The merger of Pfizer and Wyeth is an example of: I) Horizontal merger II) Cross-border merger III) Conglomerate merger IV) Vertical merger A. I only B. II only C. III only D. I and III only

Type: Easy

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3. Tele Atlas acquisition of Tom Tom is an example of: I) Horizontal merger II) Vertical merger III) Conglomerate merger A. I only B. II only C. III only D. None of the given ones

Type: Easy

4. Live Nation acquisition of Ticketmaster is an example of: I) Cross-border merger II) Horizontal merger III) Conglomerate merger IV) Vertical merger A. I and II only B. I and III only C. III only D. IV only

Type: Easy

5. Roche acquisition of Genentech is an example of: I) Horizontal merger II) Conglomerate merger III) Cross-border merger IV) Vertical merger A. I only B. II only C. I and III only D. IV only

Type: Easy

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6. Google's acquisition of Double Click is an example of: I) Horizontal merger II) Vertical merger III) Conglomerate merger IV) Cross-border merger A. I only B. II only C. III only D. I and IV only

Type: Easy

7. The BP and Amoco merger is an example of: I) Cross-border merger II) Horizontal merger III) Economies of scale A. I only B. I and II only C. I, II, and III only D. III only

Type: Medium

8. Bank of America and Merrill Lynch merger is an example of: I) Horizontal merger II) Vertical merger III) Conglomerate merger IV) Cross-border merger A. I only B. II only C. III only D. III and IV only

Type: Easy

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9. Many mergers that appear to make economic sense fail because managers are unable to handle the complex task of integrating two firms with different: I) production processes II) accounting methods III) corporate cultures A. I only B. I and II only C. III only D. I, II and III

Type: Medium

10. The following reasons are good motives for mergers except: I) Economies of scale II) Complementary resources III) Diversification IV) Eliminating Inefficiencies A. I only B. II only C. III only D. I, II, and IV only

Type: Medium

11. The following are good reasons for mergers: I) Surplus funds II) Eliminating inefficiencies III) Complementary resources IV) Increasing earnings per share (EPS) A. I only B. I and II only C. I, II, and III only D. IV only

Type: Medium

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12. The following are good reasons for mergers: I) Economies of scale II) Economics of vertical integration III) Complementary resources IV) Surplus funds V) Eliminating inefficiencies VI) Industry consolidation A. I only B. I, II, and III only C. I, III, IV, and V only D. I, II, III, IV, V, and VI

Type: Difficult

13. The following are dubious reasons for mergers: I) to diversify II) increasing the earnings per share (EPS) III) lower financing costs IV) industry consolidation A. I only B. II and IV only C. III and IV only D. I, II, and III only

Type: Medium

14. Error! Hyperlink reference not valid. What is the gain from this merger? A. $30 million B. $20 million C. $15 million D. $75 million

Type: Medium

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15. Firm A has a value of $100 million, and B has a value of $70 million. Merging the two would allow a cost savings with a present value of $20 million. Firm A purchases B for $75 million. What is the cost of this merger? A. $30 million B. $20 million C. $5 million D. $10 million Cost = 75 - 70 = 5

Type: Medium

16. Firm A has a value of $100 million, and B has a value of $60 million. Merging the two would allow a cost savings with a present value of $20 million. Firm A purchases B for $65 million. How much do firm A's shareholders gain from this merger? A. $30 million B. $20 million C. $15 million D. $5 million NPV = 20 - 5 = 15

Type: Medium

17. Firm A has a value of $150 million, and B has a value of $100 million. Merging the two would allow a cost savings with a present value of $40 million. Firm A purchases B for $120 million. What is the gain from this merger? A. $20 million B. $40 million C. $100 million D. $80 million 290 - 150 - 100 = 40

Type: Medium

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18. Error! Hyperlink reference not valid. What is the cost of this merger? A. $30 million B. $20 million C. $15 million D. $10 million Cost = 130 - 120 = 10

Type: Medium

19. Firm A has a value of $200 million, and B has a value of $120 million. Merging the two would allow a cost savings with a present value of $30 million. Firm A purchases B for $130 million. How much do firm A's shareholders gain from this merger? A. $30 million B. $20 million C. $15 million D. $10 million NPV = 30 - 10 = 20

Type: Medium

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Company A now acquires B by offering one (new) share of A for every two shares of B (that is, after the merger, there are 2500 shares of A outstanding). If investors are aware that there are no economic gains from the merger, what is the price-earnings ratio of A's stock after the merger? A. 7.5 B. 8.3 C. 10.0 D. 5.0 After merger: EPS = [(2000)(10) + (1000)(10)]/2500 = 12; Price = [(2000)(10) + (1000)(50)]/2500 = 100; P/E ratio = 8.3

Type: Difficult


Company A now acquires B by offering one (new) share of A for every two shares of B (that is, after the merger, there are 2500 shares of A outstanding). Suppose that the merger really does increase the value of the combined firms by $20,000. (i.e., PVAB - PVA - PVB = $20,000). What is the cost of the merger? A. Zero B. $2,000 C. $8,000 D. $4,000 PVAB = 200,000 + 50,000 + 20,000 = 270,000; Price per share = 270,000/2,500 = 108; Cost = (108)(500) 50,000 = 4,000

Type: Difficult

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Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock. Calculate the gain from the merger. A. $600 B. $150 C. $550 D. $700 11,000 - 10,000 - 400 = 600

Type: Difficult


Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock. Calculate the NPV of the merger. A. $200 B. $400 C. $600 D. $150 NPV = Gain - cost; (11000 - 10400) - ((20)(40) - 400) = 200

Type: Difficult

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Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock. What will be the post-merger price per share for Firm A's stock if Firm A pays in cash? A. $108 B. $110 C. $102 D. $114 E. None of the above P = (10,000 + 200)/100 = 102

Type: Difficult


Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock. Calculate the post merger P/E ratio assuming cash is used in the acquisition. A. 12.75 B. 6.25 C. 13.75 D. None of the above P/E ratio = 102/8 = 12.75

Type: Difficult

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Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock. What will earnings per share be for Firm A after the merger assuming that cash is used in the acquisition? A. $6 B. $7 C. $8 D. $5 EPS = (500 + 300)/100 = $8.00

Type: Difficult

27. Suppose that the market price of Company A is $50 per share and that of Company B is $20. If A offers half a share of common stock for each share of B, the ratio of exchange of market prices would be: A. 0.8 B. 1.25 C. 0.4 D. none of the above ratio = 25/20 = 1.25

Type: Easy

28. Firm A is planning to acquire Firm B. If Firm A prefers to make cash offer for the merger it indicates that: A. Firm A's managers are optimistic about the post merger value of A B. Firm A's managers are pessimistic about the post merger value of A C. Firm A's managers are neutral about the post merger value of A D. None of the above

Type: Difficult

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29. If firms A is acquiring firm B and Bs shareholders are given the fraction "x" of the combined firm, then the cost of this merger is: A. Cost = (PVAB) - (x) PVB B. Cost = (x) PVAB - PVB C. Cost = PVAB - (x) PVA D. Cost = (x) PVAB - (x) PVB

Type: Difficult


If Firm A intends to pay $7 million cash for B, calculate the cost of this merger: A. $2 million B. $3 million C. $1 million D. none of the above cost = 7 - 5 = 2

Type: Medium


If Firm A offers 250,000 shares for B's shareholders, calculate the apparent cost of merger A. $2 million B. $3 million C. $1 million D. none of the above apparent cost = (250,000)(20) - 5,000,000 = 0

Type: Medium

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If Firm A offers 250,000 shares for B's shareholders, calculate the true cost of merger: A. $2 million B. $3 million C. $1 million D. none of the above total # of shares = 1,250,000; share price of Firm AB = 30,000,000/1,250,000 = $24 True cost = (250,000)(24) - 5,000,000 = $1,000,000 = $1 million

Type: Medium

33. Which of the following is not a major item of US antitrust legislation? I) Garn-St. Germain Act II) Clayton Act III) Hart-Scott-Rodino Act A. I only B. II only C. III only D. II and III only

Type: Medium

34. Antitrust law can be enforced by the federal government by: I) a civil suit brought by the Justice Department II) a proceedings initiated by the Federal Trade Commission (FTC) III) a proceedings initiated by the Securities and Exchange Commission (SEC) A. I only B. I and II only C. I, II and III D. II only

Type: Difficult

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35. The following are industries in which large mergers have been blocked on antitrust grounds are: I) aerospace II) aluminum III) telecoms IV) supermarkets V) video rentals VI) office equipment A. I, II and III only B. I, II, III and IV only C. I, II, III, IV and V only D. I, II, III, IV, V and VI

Type: Medium

36. The following mergers have been blocked on antitrust grounds except: A. Reynolds and Alcoa B. Kroger and WinnDixie C. Office Depot and Staples D. AOL and Time Warner

Type: Medium

37. The acquisition of stock has the advantage of: A. No shareholder meeting to vote is necessary B. Minority shareholders may exist C. Opening the bidding to others D. All of the above E. None of the above

Type: Medium

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38. When a merger of two firms is achieved by one firm automatically assuming all the assets and all the liabilities of the other firm; such a merger requires: A. no shareholder meeting to vote is necessary. B. the approval of at least 50% of the stockholders (or as specified by corporate charters or state laws) of each firm. C. that the management of the two firms be tossed out. D. none of the above.

Type: Difficult

39. Following an acquisition, the acquiring firm's balance sheet shows an asset labeled "goodwill." What form of merger accounting is being used? A. Consolidation B. Aggregation C. Purchase D. None of the above

Type: Easy

40. Accounting changes by the Financial Accounting Standards Board (FASB) in the US: A. eliminated the "purchase method," allowing only the "pooling-of-interests" method for mergers and acquisitions B. eliminated the "pooling-of-interests" method, allowing only the "purchase method" for mergers and acquisitions C. allow for both the "purchase method" and the "pooling-of-interests" method for mergers and acquisitions D. none of the above

Type: Medium

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41. The PEN Corporation with a book value of $20 million and a market value of $30 million has merged with the CNC Corporation with a book value of $6 million and a market value of $8 million at a price of $9 million. If the transaction is a purchase then the total assets on the books of the new company will be: A. $38 million B. $39 million C. $29 million D. $26 million Purchase method: 30 + 8 + 1 = 39

Type: Difficult

42. The DOC Corporation with a book value of $20 million and a market value of $30 million has merged with the CIC Corporation with a book value of $6 million and a market value of $8 million at a price of $9 million. If the transaction is a purchase will there be any goodwill, and if so, what is the amount of goodwill? A. No goodwill; 0 B. Yes goodwill; 3 C. Yes goodwill; 1 D. Cannot be calculated with the information given Purchase method: MV(DOC) + MV(CEC) + Goodwill = 30 + 8 + 1 = 39

Type: Difficult

43. If an acquisition is made using cash payment then the acquisition is: A. taxable B. viewed as exchanging of shares and is not taxed C. a tax-free transaction as no capital gains or losses are recognized D. none of the above

Type: Medium

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44. The main difference in a tax-free versus taxable acquisition to the shareholders is that: I) In a tax-free acquisition shares are only exchanged, while in a taxable transaction the shares are considered sold and realized capital gains or losses are taxed II) In a tax-free acquisition a capital gain and loss are realized and then new shares issued, while in a taxable transaction the assets are revalued, taxed on any capital gains and losses and then shares exchanged III) In a tax-free acquisition the shareholders simply take the cash and depart, while in a taxable transaction the shareholders must stay with the new entity A. I only B. II only C. III only D. I and III only

Type: Difficult

45. What are the tax consequences of a taxable merger? A. Selling shareholders can defer any capital gain until they sell their shares in the merged company B. Depreciation tax shield is unchanged by merger C. Selling shareholders must recognize any capital gain D. Depreciable value of assets will remain unchanged

Type: Medium

46. Which of the following factors influence the choice between merger and an acquisition of stock? I) Shareholders are dealt with directly to bypass target management and board of directors II) In a tender offer, usually some minority shareholders do not tender stopping complete firm absorption III) Target management may be unfriendly and resist an offer. Resistance usually makes the stock price higher A. I only B. II only C. III only D. I, II, and III

Type: Difficult

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47. The following are methods available to change the management of a firm I) a successful proxy contest in which a group of shareholders vote in a new board of directors who then pick a new management team. II) a takeover of one firm by another firm. III) a leveraged buyout of the firm by a private group of investors. A. I only B. II and III only C. I, II and III D. I and III only

Type: Medium

48. A dissident group solicits votes in an attempt to replace existing management. This is called a: A. Proxy fight B. Shareholder derivative action C. Tender offer D. Management freeze-out

Type: Medium

49. A modification of the corporate charter that requires 80% shareholder approval for takeover is called a(n): A. Repurchase standstill provision B. Exclusionary self-tender C. Super majority amendment D. Tender offer

Type: Medium

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50. Compensation paid to top management in the event of a takeover is called a: A. Poison pill B. Golden parachute C. Self-tender D. Buyout

Type: Easy

51. An example of a shark-repellent charter amendment is: I) Supermajority II) Waiting period III) Restricted voting rights IV) Staggered board A. I only B. II only C. I and II only D. I, II, III, and IV

Type: Medium

52. As a defensive maneuver, a firm issues deep-discount bonds that are redeemable at par in the event of an unfriendly takeover. These bonds are an example of: A. Greenmail B. A "scorched earth" policy C. Crown jewels D. A poison put

Type: Medium

53. A poison pill defense is implemented by A. Giving stock away B. Selling firm assets C. Issuing rights at a cheap price D. Adding seats to the board of directors

Type: Medium

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54. Takeover defenses are designed to benefit A. Stockholders B. Workers C. Creditors D. Managers

Type: Medium

True / False Questions

55. The easiest task for the managers is the integration of the two firms. FALSE

Type: Medium

56. A conglomerate merger is one in which a buyer buys a closely related firm. FALSE

Type: Medium

57. A vertical merger is one in which the buyer expands forward in the direction of the ultimate consumer or backward toward the source of raw material. TRUE

Type: Medium

58. Two companies should consider a merger if they have complementary resources. TRUE

Type: Easy

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59. Diversification is a very sensible reason for two companies to merge. FALSE

Type: Medium

60. Gain from mergers is defined as: Gain = PVAB - (PVA + PVB). TRUE

Type: Medium

61. If Firm A acquires Firm B for cash, then the cost of the merger is equal to the cash payment minus B's value as a separate entity. TRUE

Type: Medium

62. In the purchase method of merger accounting a new asset category called goodwill is created. TRUE

Type: Difficult

63. The would-be acquirer making a tender offer directly to shareholders is another form of proxy fight. FALSE

Type: Difficult

64. The following are pre-offer defenses: litigation, asset structuring and liability structuring. FALSE

Type: Medium

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65. It appears that target companies capture most of the gains in hostile takeovers. TRUE

Type: Medium

66. A poison pill protects the rights of shareholders. FALSE

Type: Medium

67. Supermajorities give shareholders more control over the firm. FALSE

Type: Medium

Short Answer Questions

68. Briefly explain the different types of mergers. There are essentially three types of mergers: horizontal, vertical, and conglomerate. We can also add a new type that is the cross-border merger. A horizontal merger is one where two firms in the same line of business merge. A vertical merger is one where companies at different stages of production merge. A conglomerate merger involves companies in unrelated lines of business. A cross-border merger involves companies from different countries.

Type: Medium

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69. Discuss the difficulties associated with a typical merger. The difficulties are numerous and easily overlooked. They include integration of product lines, processes, training, R and D etc. The biggest hurdle is the merging of two corporate cultures. Many mergers have failed because of this.

Type: Difficult

70. Briefly explain the term "economies of scale." The natural goal of horizontal mergers is achieving economies of scale. Economies of scale are achieved when the average unit cost of production decreases as production increases. One way to achieve economies of scale is to spread fixed costs over a larger volume of production. Economies of scale are also claimed even in other types of mergers. For example, in vertical mergers economies of scale are achieved through better coordination and administration, and through elimination of redundant costs.

Type: Medium

71. Briefly explain some of the good motives for mergers. There are several good motives for mergers. They are: Economies of scale; economies of vertical integration; complementary resources; unused tax shields; surplus funds; eliminating inefficiencies. Of these economies of scale and complementary resources are the two widely known motives for mergers.

Type: Medium

72. Briefly explain what is meant by "the Cost of acquiring" in the context of a merger? The cost of acquiring is the cash paid minus the value of the acquired firm as a separate entity. Cost = Cash paid - PVB. This calculation becomes more complicated if the payment made is in the form of acquiring firm's stock.

Type: Medium

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73. Briefly explain what is meant by economic gain from merger? There is an economic gain only if the two firms that are merging are worth more together than apart. Gain = PVAB - (PVA + PVB) > 0

Type: Medium

74. Explain the central tenet of the Clayton Act of 1914. The Clayton Act of 1914 forbids an acquisition whenever " in any line of commerce or in any section of the country" the effect " may be substantially to lessen competition or to tend to create a monopoly." This is enforced either by a civil suit brought by the Justice Department or by a proceeding initiated by the Federal Trade Commission (FTC).

Type: Medium

75. Name the agencies that have successfully blocked mergers on antitrust (anti-monopoly) grounds. The US Justice Department and the Federal trade commission (FTC) have, in the past, successfully blocked several large mergers. For example Reynolds and Alcoa, WorldCom and Sprint, Hollywood Entertainment and Blockbuster, and office Depot and Staples mergers were blocked on antitrust grounds. Recently, European Commission blocked the merger between GE and Honeywell.

Type: Medium

76. Briefly discuss different forms of acquisition. Basically an acquisition can take three forms. First approach is for one company to automatically assume all the assets and all the liabilities of the other company. Second, is to buy the seller's stock in exchange for cash, shares, or other securities. The third approach is to buy some or all of the seller's assets.

Type: Difficult

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77. Briefly discuss takeover defenses. The main purpose of takeover defenses is to raise the price an acquiring firm must pay to take over a firm. Examples of defensive tactics include the staggered board, supermajority amendment, restricted voting rights, poison pill, litigation, asset restructuring, and liability restructuring among others.

Type: Difficult

78. Who gains most in mergers? Generally, sellers do better than buyers in mergers. According to empirical studies, selling shareholders receive a healthy gain averaging 16%. The overall value of the merging firms increases by about 2%.

Type: Medium

79. Who are anti-takeover defenses designed to protect? Firms institute anti-takeover measures to protect managers and senior executives. The dominant research shows that shareholders of selling firms benefit from an acquisition. Thus, the only real beneficiary is management, at the expense of shareholders.

Type: Medium

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Chap031.pdf

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