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General Information: This examination consists only of one part for a total of 100 points. Please read carefully before answering the questions. (Encircle the Letter Only ) Good Luck. FINANCIAL MANAGEMENT MIDTERM EXAM Part Part I - Multipl Multiple e Choice Choice (2 point points s each each
1. The complete complete absorpti absorption on of one company company by another another wherein wherein the acquiring acquiring !rm retains its identity and the acquired !rm ceases to exist as a separate entity is called a" a. merger b. cons consol olid idat atio ion n c. tend tender er o#er d. spino# $. % merger merger in which which an entirely entirely new !rm !rm is created created and both both the acquired acquired and and acquiring !rms cease to exist is called a" a. &i'e &i'est stit itur ure. e. b. consolidation c. Tende enderr o#er o#er d. (o (ong nglo lome mera rati tion on . % public public o#er by one !rm !rm to directly directly buy buy the shares shares of another another !rm is called called a" a. merger b. cons consol olid idat atio ion n c. tender o#er d. spino# *. The acquis acquisiti ition on of a !rm in the same industr industry y as the bidder bidder is called called a +++++ +++++ acquisition. a. cong conglo lome mera rate te b. backward c. hori,ontal d. 'ertical -. The acquisi acquisitio tion n of a !rm !rm in'ol' in'ol'ed ed with a di#er di#erent ent product production ion proces process s stage stage than the bidder is called a +++++ acquisition. a. cong conglo lome mera rate te b. forward c. hori hori, ,onta ontall d. 'ertical . The acquisiti acquisition on of a !rm whose whose business business is not related related to to that of the bidde bidderr is called a +++++ acquisition. a. conglomerate b. forward c. hori hori,o ,ont ntal al
d. 'ertical /. %n attemp attemptt to gain gain contr control ol of a !rm !rm by solic solicit itin ing g a su0ci su0cien entt numbe numberr of stockholder 'otes to replace the current board of directors is called a" d) tend tender er o#er o#er e) pro proxy conte contest st f) goin going gpr pri' i'at ate e transa transact ctio ion n g) le'e le'era rage ged d buyo buyout ut
2. % business business deal in which which all public publicly ly owned owned stock in a !rm !rm is repla replaced ced with with complete equity ownership by a pri'ate group is called a" a. tend tender er o#er b. pro proxy con conte test st c. going goingpri pri'at 'ate e transac transactio tion n d. le'e le'era rage ged d buyo buyout ut 3. Goingpri' Goingpri'ate ate transactio transactions ns in which a large large percentag percentage e of the money used used to buy the outstanding stock is borrowed is called a" a. tend tender er o#er b. merger c. le'e le'era rage ged d buyo buyout ut d. cons consol olid idat atio ion n 14.The positi'e incremental net gain associated with the combination of two !rms through a merger or acquisition is called" a. the the a age genc ncy y con5 con5ic ictt b. the the mer merg ger cos costt c. the the conso consoli lida dati tion on e#ec e#ectt d. synergy 11.% change in the corporate charter making it more di0cult for the !rm to be acquired by increasing the percentage of shareholders that must appro'e a merger o#er is called a" a. superm superma6o a6orit rity y amendm amendment ent b. stan stands dsti till ll agree agreeme ment nt c. gree greenm nmai aill pro' pro'is isio ion n d. white white knight knight pro'i pro'isio sion n 1$.% contract wherein the bidding !rm agrees to limit its holdings in the target !rm is called a" a. superm superma6o a6orit rity y amendm amendment ent b. standstill agreement c. gree greenm nmai aill pro' pro'is isio ion n d. pois poison on pill pill ame amend ndme ment nt
1.The payments made by a !rm to repurchase shares of its outstanding stock from an indi'idual in'estor in an attempt to eliminate a potential unfriendly takeo'er attempt are referred to as" a. a gol golde den n par parac achu hute te b. stan stands dsti till ll pay payme ments nts c. greenmail d. a poi poiso son n pil pilll 1*.% !nancial de'ice designed to make unfriendly takeo'er attempts !nancially unappealing if not impossible is called" a. a gol golde den n par parac achu hute te b. a stan standst dstill ill agreem agreement ent c. greenmail d. a poi poiso son n pil pill. l. 1-. Generous compensation packages paid to a !rm7s top management in the e'ent of a takeo'er are referred to as" a. golden gol den par a chutes b. pois poiso on put puts s c. whit hite kni knig ghts hts d. bear hugs ugs 1.Th 1.The e dist distri ribu buti tion on of share shares s in a subsi subsidi diar ary y to exis existi ting ng pare parent nt comp compan any y stockholders is called a8n)" a. lock lockup up tra transa nsact ctio ion n b. bear hug c. spino# d. splitup
1/.9hich of the following statements concerning acquisitions are correct: correct: a ;.
b. acquiring !rm retains its name and legal status. c. acquiring acquiring !rm !rm acquires acquires the assets assets but but not the liabil liabilities ities of the the target target !rm d. stockhold stockholders ers of the target target !rm !rm ha'e little little if any any say as to whether whether or not the merger occurs 13.9hen a building supply store acquires a lumber mill it is making a ++++++ acquisition. a. hori hori, ,onta ontall b. cong conglo lome mera rate te c. 'ertical d. comple complemen mentar tary y reso resourc urces es $4.;f >icrosoft were to acquire ?.@. %irways the acquisition would be classi!ed as a +++++ acquisition. a. hori hori, ,onta ontall b. long longit itud udin inal al c. conglomerate d. 'ertical $1.9hich of ;. ;;. ;;;. ;=. a. b. c. d.
the following acti'ities are commonly associated with takeo'ers: takeo'ers: the acquisition of assets proxy contests management buyouts le'eraged bu buyouts ; and and ;;; ;;; onl only y ;; and and ;= ;= onl only y ; ;; ;; and and ;= only only ; ;; ;;; and ;=
$$.;n a taxfree acquisition the shareholders of the target !rm" a. recei'e recei'e income income that that is consider considered ed to be taxexem taxexempt. pt. b. gift gift their shares shares to a taxexempt taxexempt organi,a organi,ation tion and therefo therefore re ha'e no taxable gain. c. are 'iewed 'iewed as ha'ing ha'ing exchang exchanged ed their their share shares s d. sell their their shares shares to a qualifying qualifying entity entity thereby thereby a'oiding a'oiding both both income income and capital gains taxes. $.% proposed acquisition acquisition may create synergy by" by" ;. inc increa easi sing ng the mark market et pow power of the the comb combiined ned !r !rm. ;;. ;;. impr impro' o'in ing g the the dist distri ribu buti tion on net netwo work rk of of the the acqu acquir irin ing g !rm. !rm. ;;;. ;;;. pro' pro'id idin ing g the the comb combin ined ed !rm !rm wit with h a strat strateg egic ic ad'a ad'ant ntag age. e. ;=. ;=. redu reduci cing ng the the uti utili li,a ,ati tion on of of the the acq acquir uirin ing g !rm7 !rm7s s asse assets ts.. a. ; and and ;;; ;;; onl only y b. ; and and ;= only nly c. ; ;; and ;;; only d. ; ;; ;; ;;; ;;; and and ;=
$*.9hich of ;. ;;. ;;;. ;=. a. b. c. d.
the following represent potential potential tax gains from an acquisition: a reduction in the le'el of debt an increase in surplus funds the us use of of ne net op operating lo losses an inc incrrea eas sed use use of le'erage ; and and ;= only nly ;; and and ;;; ;;; only only ;;; and ;= only ; and and ;;; ;;; onl only y
$-.9hen e'aluating an acquisition you should" a. concentrat concentrate e on book 'alues 'alues and ignore ignore mark market et 'alues 'alues b. focus on the total total cash 5ows 5ows of the merged merged !rm !rm c. appl apply y the the rate rate of retu return rn that is rele rele'a 'ant nt to the the incr increm ement ental al cash 5ows. d. ignore ignore any onetime onetime acquisit acquisition ion fees fees or transaction transaction costs costs $.9hich one of the following combinations of !rms would bene!t the most through the use of complementary resources: a. a funera funerall parlor parlor and and a resta restaura urant nt b. a golf resort and a ski resort c. a hotel hotel and and a home home impr impro'e o'emen mentt center center d. a swimming swimming pool pool distribut distributor or and a kitche kitchen n designer designer e. a fast fast food food restaurant restaurant and a dry dry cleaner cleaner $/.The shareholders of a target !rm bene!t the most when" a. an acquiring acquiring !rm !rm has the better better management management team team and replaces replaces the target !rm7s managers. b. the the mana manage geme ment nt of the the tar target get !rm !rm is mor more e0ci e0cien entt than than the the management of the acquiring !rm which replaces them c. the manag manageme ement nt of both the acqui acquirin ring g !rm and the target target !rm !rm are as equi'alent as possible d. their their current current managem management ent team team is kept in place place e'en e'en though though the managers of the acquiring !rm are more suited to manage the target !rm7s situation $2.9hich of ;. ;;. ;;;. ;;;. ;=. a.
the following represent potential potential gains from an acquisition: the re replacement of ine#ecti'e ma manag nagers lower co costs pe per un unit produced an inc incre reas ase e in !rm !rm si, si,e e so tha thatt dise diseco cono nomi mies es of of scal scale e are are rea reali li,e ,ed d spreading of of o' o'erhead co costs ;; and and ;;; ;;; only only
b. ; and and ;= only nly c. ; ;; and ;= only. only. d. ; ;; ;; ;;; ;;; and and ;=
$3.The 'alue of a target !rm to the acquiring !rm is equal to" a. the the 'alu 'alue e of the the targe argett !rm !rm as a sep separa arate enti entitty plus the incremental 'alue deri'ed from the acquisition. b. the purchase cost of the target !rm. c. the 'alue of the merged merged !rm minus the the 'alue of the target target !rm as a separate entity d. the purcha purchase se cost cost plus plus the incre increment mental al 'alue 'alue deri'e deri'ed d from from the acquisition 4.9hich one of the following statements is correct: a. ;f an acquisit acquisition ion is made made with with cash then then the cost cost of that acquis acquisition ition is dependent upon the acquisition gains b. %cqu %cquis isit itio ions ns made made by exch exchan angi ging ng shar shares es of stoc stock k are are norm normal ally ly taxable transactions c. The manageme management nt of an an acquiring acquiring !rm !rm may put itself itself at risk risk of losing losing control of the !rm if they make acquisitions using shares of stock . d. The stockh stockhold olders ers of the acquiri acquiring ng !rm will will be better better o# when an acquisition results in losses if the acquisition was made with cash rather than with stock 1.;f a !rm wants to take o'er another !rm but feels the attempt to do so will be 'iew 'iewed ed as unfr unfrie iend ndly ly it coul could d deci decide de to tak take a ++++ +++++ + appr approa oach ch to the the acquisition. a. cro crown 6ew 6ewel b. shar shark k repe repell llen entt c. bear hug. d. count counter erte tend nder er o#e o#err $.9hich one of the following statements is correct: a. % spino# frequently follows an equity car'eout. b. % splitu splitup p frequent frequently ly follow follows s a spino# c. %n equity equity car'eout car'eout is a speci!c speci!c type of acquisi acquisition tion d. % spino# spino# in'ol'e in'ol'es s an initial initial public public o#ering o#ering .;n a merger or acquisition a !rm should be acquired if it" a. generates generates a positi'e positi'e net present present 'alue 'alue to the sharehold shareholders ers of an acquiring !rm. b. is a !rm !rm in the the same same line line of busin business ess in whic which h the the acqu acquir irer er has expertise c. is a !rm in in a totally totally di#erent di#erent line line of business business which which will will di'ersity di'ersity the the !rm d. pays pays a large large di'iden di'idend d which which will will pro'ide pro'ide cash cash pass pass throug through h to the acquirer e. Aone Aone of of the the abo abo'e 'e *.% reason for acquisitions is synergy. synergy. @ynergy includes" in cludes" a. re'e re'enue nue enha enhanc ncem emen ents ts b. low lower tax taxes es c. %ll %ll of of the the abo' abo'e. e. d. Aone Aone of the the abo abo'e 'e
-.Bdrin -.Bdrina7s a7s compan company y in (ebu (ebu wishes wishes to acquir acquire e Coilo7s oilo7s (ompa (ompany ny in Taguig. aguig. 9hich of the following forms of acquisition does not require a formal 'ote by the shareholders of the acquired !rm: a. >erger. b. %cquisition of stock c. %cqu %cquis isit itio ion n of asse assets ts.. d. (onsolidation. .Dirm
and Dirm %ng 6oin to create Dirm
/.@uppose that @>%CT @>%CT and GLEotors >otors has made made an o#er o#er to acquir acquire e Toyo >illin >illing. g. ;gnoring potential antitrust problems this merger would be classi!ed as a" a. monopo monopolis listic tic merger merger.. b. 'ert 'ertic ical al merg merger er.. c. conglomerate merger d. Aone Aone of the the a abo bo'e 'e.. 3.@uppose 3.@uppose that Bxxon>obi Bxxon>obill acquired acquired @chlumber @chlumberger ger an explorat explorationFdr ionFdrilli illing ng comp compan any y. ;gno ;gnori ring ng pote potenti ntial al anti antitr trus ustt prob proble lems ms this this merg merger er woul would d be classi!ed as a" a. 'ert 'ertic ical al merg merger. er. b. cong conglo lome mera rate te merg merger er c. hori hori,o ,ont ntal al merg merger er d. Aone Aone of the the abo abo'e 'e
*4.% *4.% dissi issid dent ent group oup sol solicit icits s 'ote 'otes s in an attem ttempt pt to management. This is called a" a. tend tender er o#er o#er.. b. shareho shareholde lderr deri'at deri'ati'e i'e actio action. n. c. pro proxy cont contes estt d. managem management ent free, free,eo eout. ut.
repla eplac ce
exist xistiing
*1.;f the @BBE9;L (ompany a chain of gasoline stations acquire the Patron Ce!ning (ompany a re!ner of oil products this would be an example of a" a. .congl .conglome omerat rate e acqu acquisi isitio tion n
b. c. d. e.
.whi .white te knig knight ht 'ertical acquisition .going .goingpr pri'a i'ate te trans transact action ion .hori, .hori,ont ontal al acquis acquisiti ition on
*$.9hich of a. b. c.
the following is not true of an acquisition of stock or tender o#ers: Ao stockho stockholder lder meetings meetings need need to be be held. held. Ao 'ot 'ote e is req requi uire red. d. The biddin bidding g !rm deals deals direc directly tly with with the stockh stockhold olders ers of the target target !rm. d. ;n most cases 144 144 of the stock of the target !rm is tendered
*.9hen the management andFor a small group of in'estors take o'er a !rm and the shares of the !rm are delisted and no longer publicly a'ailable this action is known as a" a. cons consol olid idat atio ion. n. b. 'ertic 'ertical al acquisi acquisitio tion. n. c. going goingpri pri'at 'ate e transac transactio tion n d. Aone Aone of the the a abo bo'e 'e.. **.Ene of the most basic reasons for a merger is" a. re'enue re'enue enhancing enhancing in in the hopes hopes that net net losses losses may decre decrease. ase. b. increa increased sed compe competit tition ion.. c. empl employ oyee ee bene bene!t !ts. s. d. cost cost redu reduct ctio ions ns e. to keep keep lawye lawyers rs and accountants accountants employed. employed. *-.(&Hey has P*.$ million in net working capital. The !rm has !xed assets with a book 'alue of P*2. million million and a market 'alue of P-.* million. million. Hey&.;. Hey&.;. is buying (&Hey for P4 million in cash. The acquisition will be recorded using the purchase accounting method. 9hat is the amount of goodwill that >artin I @ons will record on its balance sheet as a result of this acquisition: a. P4. b. P$.* million c. P. P. mill millio ion. n. d. P/.$ P/.$ mill millio ion. n. *.(ool *. (ool Jadow Jadow ;nc. and Dun Toon Toon Jall Jall ;nc. are allequity !rms. !rms . Cudy7s has 1-44 shares outstanding at a market price of P$$ a share. Dun Toon Jeal has $-44 shares outstanding at a price of P2 a share. Dun Toon Jeal is acquiring (ool Jadu7s Jadu7s for P444 in cash. cash. 9hat is the merger premium premium per share: a. P$.44 b. P*.$c. P.-4 d. P2.44 */.Pabelonia7s ontales7s >ontales7s has 444 444 shares outstandi outstanding ng at a market market price of P*1 a share. Aeither !rm has any debt. >ontales7s is acquiring Pabelonia7s Pabelonia7s for P-2444 in cash. 9hat is the merger premium per share:
a. P1.* b. P1.$ c. P1.21 d. P$.4* *2.>%L;;T @TECB has $144 shares outstanding at a market price per share of P$. @?L;T @upermarket has 444 shares outstanding at a market price of P*1 a share share.. Aeithe Aeitherr !rm has any debt. debt. @?L;T @?L;T @uperm @upermark arket et is acquir acquiring ing >%L;;T @TECB for P-2444 in cash. The incremental 'alue of the acquisition is P$-44. 9hat is the 'alue of >%L;;T @TECB to @?L;T7s: a. P$444 b. P$/44 c. P-/ P- /104 d. P-2$44 *3.B><% *3.B><%LK% LK%&E &E and >EAT >EAT%LB@ %LB@ are are alle allequi quity ty !rms. !rms. B><%LK B><%LK%& %&E E has 1/-4 1/-4 shares outstanding at a market price of P$4 a share. >EAT%LB@ has $-44 share shares s outs outsta tand ndin ing g at a pric price e of P$2 P$2 a share share.. >E >EAT AT%L %LB@ B@ is acqu acquir iring ing B><%LK%&E for P444 in cash. The incremental 'alue of the acquisition is P4 P444 44.. 9hat 9hat is the the net net pres presen entt 'alu 'alue e of acqu acquir irin ing g B><% B><%LK LK%& %&E E to >EAT%LB@: a. P1444 b. P$444" c. P444 d. P*444 -4.Mackielou7s Dirm is acquiring %l'in7s Dirm for P*4444 in cash. Mackielou7s Dirm has $-44 shares of stock outstanding at a market 'alue of P12 a share. %l'in7s Dirm has 1-44 shares of stock outstanding at a market price of P$- a share. share. Aeither !rm has any debt. debt. The net present present 'alue of the acquisition acquisition is P$-44. 9hat is the 'alue of Mackielou7s Mackielou7s Dirm Dirm after the acquisition: acquisition: a. P*4444 b. P*$-44 c. P*-444 d. P*/-44
