Suppose That the Market Price of Company X Is $45 Per Share and That of Company Y Is $30

Suppose that the market price of Company X is $45 per share and that of Company Y is $30. If X offers three-fourths a share of common stock for each share of Y, the ratio of exchange of market prices would be: .667 1.0 1.125 1.5 2. The restructuring of a corporation should be undertaken if the restructuring can prevent an unwanted takeover. the restructuring is expected to create value for shareholders. the restructuring is expected to increase the firm's revenue. the interests of bondholders are not negatively affected. 3. The "information effect" refers to the notion that a corporation's actions may convey information about its future prospects. management is reluctant to provide financial information that is not required by law. agents incur costs in trying to obtain information. the financial manager should attempt to manage sensitive information about the firm. 4. In the long run, a successful acquisition is one that: enables the acquirer to make an all-equity purchase, thereby avoiding additional financial leverage. enables the acquirer to diversify its asset base. increases the market price of the acquirer's stock over what it would have been without the acquisition. increases financial leverage. 5. Bidding companies often pay too much for the acquired firm. The hubris hypothesis explains this by suggesting that the bidders have too little information to make an optimal decision. have big egos and this impedes rational decision-making. have difficulty in thinking strategically over the long-term. are overly influenced by the tax consequences of an acquisition. 6. A tender offer is a goodwill gesture by a "white knight." a would-be acquirer's friendly takeover attempt. a would-be acquirer's offer to buy stock directly from shareholders. viewed as sexual harassment when it occurs in the workplace. 7. The public sale of common stock in a subsidiary in which the parent usually retains majority control is called a pure play. a spin-off. a partial sell-off. an equity carve-out. 8. In the United States, goodwill charges arising from a current acquisition are generally deductible for "tax purposes" over 15 years. 20 years. 40 years. no years (i.e., these goodwill charges are not deductible for "tax purposes"). 9. Empirical evidence on acquisitions indicates excess returns on average to the shareholders of the selling company, and e xcess returns on average to those of the buying company. no; no substantial; no no; substantial substantial; substantial 10. One means for a company to "go private" is divestiture. the pure play. the leveraged buyout (LBO). the prepackaged reorganization. 11. Recent accounting changes in the US . eliminated the purchase method, allowing only the pooling-of-interests method for mergers and acquisitions eliminated the pooling-of-interests method, allowing only the purchase method for mergers and acquisitions allow for both the purchase method and the pooling-of-interests method for mergers and acquisitions outlawed the recording of goodwill for any merger or acquisition

1 CORRECT The absorption of one firm by another such that the acquired firm no longer exists as a separate entity is called a(n):

acquisition of stock. A)

merger. B)

shared agreement. C)

consolidation. D)

tender offer. E)

Feedback: You are correct!

2 CORRECT Which one of the following creates a brand new firm by merging existing entities?

acquisition of stock A)

merger B)

shared agreement C)

consolidation D)

tender offer E)

3 CORRECT Which one of the following statements is correct?

With a consolidation, the acquiring firm keeps its legal existence but the acquired firm does not. A)

The acquiring firm acquires the assets, but not the liabilities, of the acquired firm in a merger. B) When Babco acquired Sitco it was most likely a consolidation because the combined firm's name was C) Basit. The key difference between a merger and a consolidation is that a merger creates an entirely new firm D) whereas a consolidation does not.

With a merger, the shareholders of the acquiring firm are granted appraisal rights. E)

4 Appraisal rights: INCORRECT

grant any synergy benefits from a merger to the shareholders of the acquired firm. A) are designed to eliminate the need for legal battles in connection with a merger. B) allow the shareholders of an acquired firm to determine the value that is to be placed on the remaining C) "shell" of their firm after a merger. are granted to all involved shareholders in a merger to ensure both the shareholders of the acquiring D) firm and the acquired firm receive adequate value from a merger.

allow the shareholders of an acquired firm to demand fair value for their shares. E)

Feedback: Appraisal rights allow the shareholders of an acquired firm to demand fair value for their shares. Review section 29.1.

5 CORRECT Which of the following are correct regarding mergers? I. A disadvantage of a merger is that it requires the approval of the shareholders of both the acquiring and the acquired firms. II. A disadvantage of a merger is that it is legally complex. III. An advantage of a merger is that it is relatively inexpensive compared to other forms of acquisitions. IV. An advantage of a merger is the avoidance of the need to transfer title of the individual assets of the acquired firm to the acquiring firm.

I and III only A)

II and IV only B)

III and IV only C)

I, III, and IV only D)

I, II, III, and IV E)

6 A tender offer is: INCORRECT

a public offer to purchase shares of a target firm. A)

the last step in the consolidation of two firms. B) the initial offer made by the acquiring firm to the dissenting shareholders of the acquired firm in a C) merger proceeding. an additional amount of compensation offered to a dissenting shareholder of an acquired firm in a D) merger.

a fair price offer by an acquiring firm's shareholders in accordance with their appraisal rights. E)

Feedback: A tender offer is a public offer to purchase shares of a target firm. Review section 29.1.

7 Which one of the following statements is correct? INCORRECT

In an acquisition of stock, it is board approval rather than shareholder approval that is required. A)

The managers of a target firm rarely get involved in an acquisition of stock. B)

Shareholders are not required to formally vote on an acquisition of stock. C)

Acquisition of a target firm by a tender offer always leads to a complete absorption of the target firm. D)

Acquisitions of stock rarely result in a formal merger. E)

Feedback: Neither formal board nor shareholder approval is required in an acquisition of stock. Review section 29.1.

8 CORRECT Which one of the following is a transaction which must be approved by a formal vote of the shareholders of the selling firm and which, when completed, leaves the selling firm as a corporate shell?

consolidation A)

merger B) acquisition of stock C)

acquisition of assets D)

tender offer E)

9 CORRECT The title for each asset owned by the acquired, or target, firm must be officially transferred in which one of the following?

acquisition of assets A)

tender offer B)

merger C)

acquisition of stock D)

consolidation E)

10 Which of the following correctly depict differences between a merger and an acquisition of stock? INCORRECT

A formal vote by the acquired firm's shareholders is required for an acquisition of stock but not for a A) merger. The acquiring firm can deal directly with the shareholders of the acquired firm when a merger, but not B) an acquisition of stock, is the means of acquisition.

An acquisition of stock results in the total absorption of a firm whereas a merger does not. C) Shareholders of the acquired or target firm vote by their response to a tender offer in an acquisition of D) stock but cast a formal vote in a merger situation. The acquiring firm can bypass the management of an acquired or target firm in a merger but not in an E) acquisition of stock.

Feedback: A merger results in the total absorption of a firm whereas an acquisition of stock may or not have this end result. Review section 29.1.

The correct answer for each question is indicated by a .

1 Which of the following is NOT a potential benefit of merger? CORRECT

Synergy A)

Portfolio Effect B)

Dilution of EPS C)

tax loss carry forward D)

Feedback: The other three answers are all benefits of a merger.

2 A business combination where the two firms who are merging develop a new firm is called: CORRECT

a horizontal merger A)

a vertical merger B)

a business consolidation C)

none of the above D) Feedback: The result of a business consolidation is a new firm.

3 The price that an acquiring company must pay for the acquired company is: CORRECT

book value A)

market value B)

a higher price than market value C)

none of the above D)

Feedback: This is known as the merger premium.

4 The typical merger premium is: CORRECT

20% A)

20-40% B)

40-60% C)

Feedback: The premium is generally 40-60%.

5 Merging with an unrelated company is called a ______merger. CORRECT

conglomerate A)

horizontal B)

vertical C)

Feedback: This is a merger of totally unrelated companies.

6 A business combination where the resulting firm maintains the identity of the acquiring firm is called a: CORRECT

conglomerate A)

merger B)

consolidation C)

Feedback: A merger occurs when the acquiring firm's original identity is kept with the new firm.

7 Which of the following is a tender offer that uses debt to buy the firm? CORRECT

hostile takeover A)

negotiated merger B)

two-step buyout C)

leveraged buyout D)

Feedback: A leveraged buyout involves bonds or debt. 8 The financial motives for merger include all of the following except: CORRECT

the portfolio effect A)

improved access to the capital markets B)

tax loss carry forwards C)

synergy D)

Feedback: All of these are financial motives for a merger.

9 The elimination of overlapping functions and the meshing of two firms' strong areas creates the managerial incentive for CORRECT merger that is called:

pooling of interest A)

purchase of assets B)

synergy C)

None of the above D)

Feedback: Synergy also occurs when the whole is greater than the sum of its parts.

10 Which of the following kinds of mergers lead to diversification benefits? CORRECT

vertical A)

conglomerate B)

horizontal C)

Feedback: A conglomerate merger involves unrelated companies.

The correct answer for each question is indicated by a .

1 CORRECT The following are examples of changes in corporate control except: A)Mergers and acquisition

B)LBOs

C)Proxy fights

D)Spin-offs and carve-outs

2 CORRECT Leveraged buyouts (LBOs) almost always involve: A)AAA grade debt

B)Issuance of new shares of stock to many investors

C)The existing management team as new shareholders

D)Junk grade debt

E)All of the above

3 CORRECT Which of the following tactics completely eliminates the possibility of a takeover via tender offer? A)Leveraged buyout (LBO) B)Exclusionary self-tender

C)Targeted repurchase

D)Super majority amendment

E)None of the above

4 CORRECT Big gainers from LBOs were: A)Junk bond holders B)Raiders

C)Selling stockholders

D)Investment banking firms

5 INCORRECT Junk bonds are bonds with: A)AAA or Aaa ratings

B)BBB or Baa ratings

C)BB or Ba ratings or lower

D)D rated bonds

6 CORRECT In case of spin-offs: A)Shares of the new company are given to shareholders of the parent company B)Shares of the new company are sold as a public offering

C)Shares of the new company are bought by borrowing or issuing junk bonds

D)None of the above

7 CORRECT In case of carve-outs: A)Shares of the new company are given to the shareholders of the parent company B)Shares of the new company are sold in a public offering

C)Shares of the new company are bought by borrowing or issuing junk bonds

D)None of the above

8 CORRECT Which of the following statements regarding spin-offs and carve-outs is not true? A)Spin-offs are not taxed if the shareholders of the parent company are given a majority of shares in the new company B)Spin-offs are not taxed if the shareholders of the parent company are given at least 80% of the shares in the new company C)Gains or losses from carve-outs are taxed at the corporate tax rate

D)None of the above

9 CORRECT A privatization is a: A)Sale of a government-owned company to private investors

B)Sale of private companies to the government

C)Sale of a publicly traded company to private investors D)None of the above 10 CORRECT The following are important motives for privatization except: A)Revenue for the government B)Increased efficiency

C)Share ownership

D)Economies of scale

11 CORRECT Mergers and acquisitions in unrelated industries are called: A)Horizontal mergers

B)Vertical mergers

C)Conglomerate mergers

D)Privatization

12 CORRECT The costs of resolving the conflicts of interest among the stakeholders in a firm are called: A)Agency costs

B)Legal costs

C)Bankruptcy costs

D)Administrative costs

13 CORRECT "Effective" control of a firm requires approximately: A)100% ownership

B)51% ownership

C)50% ownership

D)20% ownership

Spin-offs are not taxed as long as shareholders of the parent company are given at least 80% of the shares in the new CORRECT 14 company. A)True

B)False

15 CORRECT A keiretsu is a network of companies organized around a major bank. A)True

B)False