Ch20 Full Test Bank Mergers and Acquisitions and Financial

Finance, 5e (Cornett)

Chapter 20 Mergers and Acquisitions and Financial Distress

1) Which of the following is defined as a transaction in which two firms combine to form a single firm?

A) Merger

B) Synergy

C) Acquisition

D) Assignment

2) Which of the following is defined as the purchase of one firm by another firm?

A) Merger

B) Synergy

C) Acquisition

D) Assignment

3) Which of the following is a type of merger in which an entirely new firm is created?

A) Composition

B) Synergy

C) Consolidation

D) Assignment

4) Which of the following is a type of merger in which two firms that sell the same products in different market areas are combined?

A) Vertical

B) Conglomerate

C) Product extension

D) Market extension

5) Which of the following is a combination of a firm with a supplier or distributor?

A) Vertical merger

B) Conglomerate merger

C) Product extension merger

D) Market extension merger

6) Which of the following combines two companies that have no related products or markets?

A) Vertical merger

B) Conglomerate merger

C) Product extension merger

D) Market extension merger

7) Which of the following is a combination of firms that sell different, but somewhat related, products?

A) Vertical merger

B) Conglomerate merger

C) Product extension merger

D) Market extension merger

8) A merger of two companies within the same industry is a ________.

A) Horizontal merger

B) Market extension merger

C) Vertical merger

D) Conglomerate merger

9) A type of horizontal merger that combines two firms that sell the same products in different market areas is a ________.

A) Product extension merger

B) Market extension merger

C) Vertical merger

D) Conglomerate merger

10) Which of these terms is defined as the value of the combined firms being greater than the sum of the value of the two firms individually?

A) Composition

B) Synergy

C) Consolidation

D) Conglomerate

11) Which of the following is NOT one of the sources of value enhancing synergy in a merger?

A) Revenue enhancement

B) Cost reduction

C) Tax considerations

D) Higher cost of capital

12) Which of the following is defined as a merged firm's ability to generate synergistic cost savings through the joint use of inputs in producing multiple products?

A) Economies of scale

B) Economies of scope

C) Economies of synergy

D) X-efficiencies

13) Which of the following is defined as a merged firm's advantage over smaller firms if cuts associated with the merger lower the firm's operating costs of production?

A) Economies of scale

B) Economies of scope

C) Economies of synergy

D) X-efficiencies

14) The cost advantage when fixed costs are spread over a large number of units is ________.

A) Long-term effect

B) Economies of scope

C) Economies of synergy

D) Economies of scale

15) Which of the following is cost savings usually attributed to superior management skills and other difficult-to-measure managerial factors?

A) Economies of scale

B) Economies of scope

C) Economies of synergy

D) X-efficiencies

16) Which of the following is NOT a tax consideration motive for a merger?

A) Tax gains from net operating losses

B) Tax gains from unused debt capacity

C) Tax gains from unused equity capacity

D) Tax gains from surplus funds

17) Which of these makes the following a true statement? Diversification resulting from a merger can:

A) make the debt of the merged firm more risky, thus lowering the cost of capital.

B) make the debt of the merged firm less risky, thus lowering the cost of capital.

C) make the debt of the merged firm less risky, thus raising the cost of capital.

D) None of the options make the statement true.

18) Which of the following is the most extreme type of financial distress for a business?

A) Business failure

B) Economic failure

C) Technical insolvency

D) Business extension

19) Which of the following is the type of financial distress in which the return on a firm's assets is less than the firm's cost of capital?

A) Business failure

B) Economic failure

C) Technical insolvency

D) Business extension

20) Which of the following is the type of financial distress in which a firm's operating cash flows are not sufficient to pay its liabilities as they come due?

A) Business failure

B) Economic failure

C) Technical insolvency

D) Business extension

21) Which of the following is the termination of the firm as a going concern in which assets are sold and any proceeds go to pay off the firm's creditors?

A) Liquidation

B) Assignment

C) Composition

D) Consolidation

22) Which of the following is a voluntary liquidation proceeding that passes the liquidation of the firm's assets to a third party that is designated as the assignee or trustee?

A) Liquidation

B) Assignment

C) Composition

D) Consolidation

23) A voluntary settlement in which a firm's creditors will arrange with the firm to help it recover and re-establish itself as a viable entity is a ________.

A) Extension

B) Composition

C) Workout

D) none of the above

24) An agreement in which creditors voluntarily reduce their claims on the firm, receiving only a partial payment for their claims, by reducing the principal amount or the interest rate on the debt or by taking equity in exchange for debt is a ________.

A) Extension

B) Composition

C) Workout

D) none of the above

25) Which of these is the person who liquidates the firm's assets through a private sale or public auction and then distributes any proceeds from the sale to the firms' creditors and stockholders?

A) Assignor

B) Grantor

C) Trustor

D) Trustee

26) Which of the following is a formal bankruptcy proceeding which outlines the process to be followed for liquidating a failed firm?

A) Chapter 7

B) Chapter 11

C) Chapter 13

D) Chapter 17

27) Which of the following is a formal bankruptcy proceeding involving the reorganization of the corporation with some provision for repayment to the firm's creditors?

A) Chapter 7

B) Chapter 11

C) Chapter 13

D) Chapter 17

28) Which of the following involves a firm and its creditors agreeing to a private reorganization outside the formal bankruptcy process?

A) Consolidation bankruptcy

B) Prepackaged bankruptcy

C) Chapter 13

D) Chapter 7

29) Jan's Bakery is considering a merger with Tina's Cookies. Jan's total operating costs of producing services are $300,000 for a sales volume of $2 million. Tina's total operating costs of producing services are $75,000 for a sales volume of $600,000. If the two firms merge, calculate the total average cost for the merged firm assuming no synergies.

A) 12.5 percent

B) 11.54 percent

C) 14.42 percent

D) 13.75 percent

30) Flowers Galore is considering a merger with Balloons N More. Flowers Galore's total operating costs of producing services are $400,000 for a sales volume of $4 million. Balloons' total operating costs of producing services are $30,000 for a sales volume of $700,000. If the two firms merge, calculate the total average cost for the merged firm assuming no synergies.

A) 4.29 percent

B) 9.15 percent

C) 10.00 percent

D) 7.14 percent

31) Building Supplies is considering a merger with Tools and More. Building's total operating costs of producing services are $4 million for a sales volume of $20 million. Tools' total operating costs of producing services are $1 million for a sales volume of $5 million. Suppose that synergies in the production process result in a cost of production for the merged firms totalling $4.8 million with total sales remaining unchanged. Calculate the total average cost for the merged firm.

A) 9.6 percent

B) 40.0 percent

C) 19.2 percent

D) 20.0 percent

32) Consider a market that has three firms with the following market shares:

Firm A 25 percent

Firm B 55 percent

Firm C 20 percent

Suppose Firm A wants to acquire Firm C so that the post-acquisition market would exhibit the following shares:

A + C = 45 percent

B = 55 percent

What is the change in the HHI resulting from the merger?

A) 1,000

B) 4,050

C) 5,050

D) No change

33) Consider a market that has three firms with the following market shares:

Firm A 15 percent

Firm B 25 percent

Firm C 60 percent

Suppose Firm B wants to acquire Firm A so that the post-acquisition market would exhibit the following shares:

B + A = 40 percent

C = 60 percent

What is the change in the HHI resulting from the merger?

A) 750

B) 4,450

C) 5,200

D) No change

34) Suppose that the financial ratios of a potential borrowing firm took the following values: X1 = Net working capital/Total assets = 0.15, X2 = Retained earnings/Total assets = 0.10, X3 = Earnings before interest and taxes/Total assets = 0.15, X4 = Market value of equity/Book value of long-term debt = 0.40, X5 = Sales/Total assets ratio = 0.8. Calculate the Altman's Z-score for this firm.

A) 9.10

B) 1.60

C) 0.371

D) 1.855

35) Suppose that the financial ratios of a potential borrowing firm took the following values: X1 = Net working capital/Total assets = 0.25, X2 = Retained earnings/Total assets = 0.30, X3 = Earnings before interest and taxes/Total assets = 0.35, X4 = Market value of equity/Book value of long-term debt = 0.50, X5 = Sales/Total assets ratio = 0.9. Calculate the Altman's Z-score for this firm.

A) 2.30

B) 3.075

C) 9.8

D) 1.96

36) Suppose that the financial ratios of a potential borrowing firm took the following values: X1 = Net working capital/Total assets = 0.30, X2 = Retained earnings/Total assets = 0.40, X3 = Earnings before interest and taxes/Total assets = 0.43, X4 = Market value of equity/Book value of long-term debt = 0.65, X5 = Sales/Total assets ratio = 0.95. Calculate the Altman's Z-score for this firm.

A) 3.679

B) 2.73

C) 10.23

D) 2.046

37) Suppose that the financial ratios of a potential borrowing firm took the following values: X1 = Net working capital/Total assets = 0.35, X2 = Retained earnings/Total assets = 0.50, X3 = Earnings before interest and taxes/Total assets = 0.60, X4 = Market value of equity/Book value of long-term debt = 1.50, X5 = Sales/Total assets ratio = 3.65. Calculate the Altman's Z-score for this firm.

A) 7.65

B) 1.54

C) 6.60

D) 1.32

38) Suppose a linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as:

PDi = 0.20 (debt ratio) + 0.15 (profit margin)

A firm you are thinking of lending to has a debt ratio of 55 percent and a profit margin of 10 percent. Calculate the firm's expected probability of default, or bankruptcy.

A) 12.5 percent

B) 10.0 percent

C) 1.65 percent

D) 10.25 percent

39) Suppose a linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as:

PDi = 0.15 (debt ratio) + 0.05 (profit margin)

A firm you are thinking of lending to has a debt ratio of 50 percent and a profit margin of 8 percent. Calculate the firm's expected probability of default, or bankruptcy.

A) 7.90 percent

B) 11.6 percent

C) 30.00 percent

D) 7.80 percent

40) Suppose a linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as:

PDi = 0.23 (debt ratio) + 0.08 (profit margin)

A firm you are thinking of lending to has a debt ratio of 60 percent and a profit margin of 12 percent. Calculate the firm's expected probability of default, or bankruptcy.

A) 14.76 percent

B) 22.32 percent

C) 10.30 percent

D) 13.25 percent

41) Suppose a linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as:

PDi = 0.25 (debt ratio) + 0.12 (profit margin)

A firm you are thinking of lending to has a debt ratio of 62 percent and a profit margin of 14 percent. Calculate the firm's expected probability of default, or bankruptcy.

A) 17.18 percent

B) 2.604 percent

C) 14.99 percent

D) 19.09 percent

42) Dee's Dry Cleaning is considering a merger with Larry's Laundry Supply Stores. Dee's total operating costs of producing services are $600,000 for sales volume of $4 million. Larry's total operating costs of producing services are $200,000 for a sales volume (JP) of $1 million. Calculate the average cost of production for Dee's and Larry's firms, respectively.

A) 15 percent, 20 percent

B) 20 percent, 15 percent

C) 16 percent, 16 percent

D) 60 percent, 5 percent

43) Dee's Dry Cleaning is considering a merger with Larry's Laundry Supply Stores. Dee's total operating costs of producing services are $600,000 for sales volume of $4 million. Larry's total operating costs of producing services are $200,000 for a sales volume (JP) of $1 million. For a sales volume of $5 million, calculate the reduction in production costs the merged firms need to experience such that the total average cost (TAC) for the merged firms is equal to 10 percent.

A) Decrease of $500,000

B) Decrease of $300,000

C) Decrease of $100,000

D) Decrease of $200,000

44) Blinds N Such is considering a merger with Window Supply Stores. Blinds' total operating costs of producing services are $750,000 for sales volume of $6 million. Window's total operating costs of producing services are $100,000 for a sales volume (JP) of $1 million. Calculate the average cost of production for the Blinds and Window firms, respectively.

A) 10 percent, 12.5 percent

B) 12.5 percent, 10 percent

C) 75 percent, 1.67 percent

D) 13.93 percent, 13.93 percent

45) Blinds N Such is considering a merger with Window Supply Stores. Blinds' total operating costs of producing services are $750,000 for sales volume of $6 million. Window's total operating costs of producing services are $100,000 for a sales volume (JP) of $1 million. For a sales volume of $7 million, calculate the reduction in production costs the merged firms need to experience such that the total average cost (TAC) for the merged firms is equal to 12 percent.

A) Decrease of $840,000

B) Decrease of $10,000

C) Decrease of $40,000

D) Decrease of $90,000

46) Jewelry Designs is considering a merger with Beads Supply Stores. Jewelry's total operating costs of producing services are $300,000 for sales volume of $2 million. Beads' total operating costs of producing services are $125,000 for a sales volume (JP) of $2.25 million. Calculate the average cost of production for the Jewelry and Beads firms, respectively.

A) 15 percent, 5.56 percent

B) 5.56 percent, 15 percent

C) 15 percent, 55.56 percent

D) 13.33 percent, 6.25 percent

47) Jewelry Designs is considering a merger with Beads Supply Stores. Jewelry's total operating costs of producing services are $300,000 for sales volume of $2 million. Beads' total operating costs of producing services are $125,000 for a sales volume (JP) of $2.25 million. For a sales volume of $4.25 million, calculate the reduction in production costs the merged firms need to experience such that the total average cost (TAC) for the merged firms is equal to 8 percent.

A) Decrease of $340,000

B) Decrease of $85,000

C) Decrease of $40,000

D) Decrease of $25,000

48) Crib World is considering a merger with Tots Supply Stores. Crib's total operating costs of producing services are $250,000 for sales volume of $1.25 million. Tots' total operating costs of producing services are $210,000 for a sales volume (JP) of $900,000. Calculate the average cost of production for the Crib and Tots firms, respectively.

A) 20 percent, 23.33 percent

B) 23.33 percent, 20 percent

C) 27.78 percent, 16.8 percent

D) 21.4 percent, 21.4 percent

49) Crib World is considering a merger with Tots Supply Stores. Crib's total operating costs of producing services are $250,000 for sales volume of $1.25 million. Tots' total operating costs of producing services are $210,000 for a sales volume (JP) of $900,000. For a sales volume of $2.15 million, calculate the reduction in production costs the merged firms need to experience such that the total average cost (TAC) for the merged firms is equal to 17.5 percent.

A) Decrease of $376,250

B) Decrease of $83,750

C) Decrease of $127,500

D) Decrease of $87,500

50) Baby Supplies is considering a merger with Tot Toy Stores. Baby's total operating costs of producing services are $450,000 for sales volume of $2.15 million. Tot's total operating costs of producing services are $250,000 for a sales volume (JP) of $975,000. Calculate the average cost of production for the Baby and Tot Toy firms, respectively.

A) 11.63 percent, 20.93 percent

B) 20.93 percent, 25.64 percent

C) 46.15 percent, 11.63 percent

D) 22.4 percent, 22.4 percent

51) Baby Supplies is considering a merger with Tot Toy Stores. Baby's total operating costs of producing services are $450,000 for sales volume of $2.15 million. Tot's total operating costs of producing services are $250,000 for a sales volume (JP) of $975,000. For a sales volume of $3.125 million, calculate the reduction in production costs the merged firms need to experience such that the total average cost (TAC) for the merged firms is equal to 19.5 percent.

A) Decrease of $609,375

B) Decrease of $90,625

C) Decrease of $9,375

D) Decrease of $159,375

52) The Justice Department has been asked to review a merger request for a market with the following four firms.

If Firm A acquires Firm D, what is the HHI for the new market?

A) 100

B) 625

C) 3,906.25

D) 4,687.50

53) The Justice Department has been asked to review a merger request for a market with the following four firms.

If Firm C acquires Firm D, what is the HHI for the new market?

A) 100

B) 160

C) 6,796.875

D) 17,400.00

54) Tim's Fix It Shop, Inc., is asking a price of $50 million to be purchased by Taylor's Tire Hut Corp. The two firms currently have cumulative total cash flows of $4 million which are growing at 2 percent annually. Managers estimate that because of synergies the merged firm's cash flows will increase to 5 percent for the first four years following the merger. After the first four years cash flows will grow at a rate of 3 percent. The WACC for the merged firms is 12 percent. Calculate the NPV of the merger. Should Taylor's Tire Hut Corporation agree to acquire Tim's Fix It Shop, Inc., for the asking price of $50 million?

A. Yes, the NPV is ≥ $0

B. Yes, the NPV is ≤ $0

C. No, the NPV is ≥ $0

D. No, the NPV is ≤ $0

A) Option A

B) Option B

C) Option C

D) Option D

55) Windows N Such, Inc., is asking a price of $195 million to be purchased by Curtain Rods Corp. The two firms currently have cumulative total cash flows of $15 million which are growing at 1 percent annually. Managers estimate that because of synergies the merged firm's cash flows will increase to 3 percent for the first four years following the merger. After the first four years cash flows will grow at a rate of 2 percent. The WACC for the merged firms is 10 percent. Calculate the NPV of the merger. Should Curtain Rods Corporation agree to acquire Windows N Such, Inc., for the asking price of $195 million?

A. Yes, the NPV is ≥ $0

B. Yes, the NPV is ≤ $0

C. No, the NPV is ≥ $0

D. No, the NPV is ≤ $0

A) Option A

B) Option B

C) Option C

D) Option D

56) Department Stores, Inc., is asking a price of $25 million to be purchased by Discount Stores Corp. The two firms currently have cumulative total cash flows of $2 million which are growing at 2.5 percent annually. Managers estimate that because of synergies the merged firm's cash flows will increase to 5 percent for the first four years following the merger. After the first four years cash flows will grow at a rate of 4.5 percent. The WACC for the merged firms is 13 percent. Calculate the NPV of the merger. Should Discount Stores Corporation agree to acquire Department Stores, Inc., for the asking price of $25 million?

A. Yes, the NPV is ≥ $0

B. Yes, the NPV is ≤ $0

C. No, the NPV is ≥ $0

D. No, the NPV is ≤ $0

A) Option A

B) Option B

C) Option C

D) Option D

57) You own stock in Carpet City, Inc., which has just made a bid of $165 million to purchase Tile Corporation. The two firms currently have cumulative total cash flows of $25 million which are growing at 2 percent annually. Managers estimate that because of synergies the merged firm's cash flows will increase to 4 percent for the first three years following the merger. After the first three years cash flows will grow at a rate of 3 percent. The merged firms are expected to have a beta = 1.75, the risk-free rate is 5.5 percent, and the market risk premium is currently 7.5 percent. Calculate the NPV of the merger. Will you vote in favor of the merger?

A. Yes, the NPV is ≥ $0

B. Yes, the NPV is ≤ $0

C. No, the NPV is ≥ $0

D. No, the NPV is ≤ $0

A) Option A

B) Option B

C) Option C

D) Option D

58) Suppose a linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as:

PDi = 0.18 (debt ratio) + 0.35 (profit margin)

You know a particular firm has a debt ratio of 35 percent and a probability of default of 8 percent. Calculate the firm's profit margin.

A) 4.857 percent

B) 8.163 percent

C) 6.53 percent

D) 8.00 percent

59) Suppose a linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as:

PDi = 0.20 (debt ratio) + 0.50 (profit margin)

You know a particular firm has a debt ratio of 60 percent and a probability of default of 15 percent. Calculate the firm's profit margin.

A) 6.00 percent

B) 12.00 percent

C) 19.50 percent

D) 15.00 percent

60) A linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the equity multiplier and the total asset turnover ratio. Based on past bankruptcy experience, the linear probability model is estimated as:

PDi = 0.04 (equity multiplier) + 0.01 (total asset turnover)

A firm has an equity multiplier of 1.5 times and a probability of default of 7 percent. Calculate the firm's total asset turnover ratio.

A) 1.0

B) 4.5

C) 0.01

D) 2.0

61) A linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the equity multiplier and the total asset turnover ratio. Based on past bankruptcy experience, the linear probability model is estimated as:

PDi = 0.05 (equity multiplier) + 0.02 (total asset turnover)

A firm has an equity multiplier of 1.9 times and a probability of default of 10 percent. Calculate the firm's total asset turnover ratio.

A) 0.25

B) 25

C) 2.5

D) 0.75

62) A survey of a local market provided the following average cost data: Johnson Construction Corp. (JCC) has assets of $4 million and an average cost of 10 percent; Anderson Architects (AA) has assets of $5 million and an average cost of 20 percent; Cole Home Builders (CHB) has assets of $5 million and an average cost of 15 percent. For each firm, average costs are measured as a proportion of assets. JCC is planning to acquire AA and CHB with the expectation of reducing overall average costs by eliminating the duplication of services. What should be the average cost after the acquisition for JCC to justify this merger?

A) 15.357 percent or lower

B) 15.357 percent or higher

C) 15.000 percent or lower

D) 10.000 percent or lower

63) A survey of a local market provided the following average cost data: Johnson Construction Corp. (JCC) has assets of $5 million and an average cost of 15 percent; Anderson Architects (AA) has assets of $8 million and an average cost of 20 percent; Cole Home Builders (CHB) has assets of $8 million and an average cost of 17 percent. For each firm, average costs are measured as a proportion of assets. JCC is planning to acquire AA and CHB with the expectation of reducing overall average costs by eliminating the duplication of services. What should be the average cost after the acquisition for JCC to justify this merger?

A) 17.667 percent or lower

B) 17.667 percent or higher

C) 17.333 percent or lower

D) 15.00 percent or lower

64) A survey of a local market provided the following average cost data: Johnson Construction Corp. (JCC) has assets of $5 million and an average cost of 15 percent; Anderson Architects (AA) has assets of $8 million and an average cost of 20 percent; Cole Home Builders (CHB) has assets of $8 million and an average cost of 17 percent. For each firm, average costs are measured as a proportion of assets. JCC is planning to acquire AA and CHB with the expectation of reducing overall average costs by eliminating the duplication of services. If JCC plans to reduce operating costs by $300,000 after the merger, what will the average cost be for the new firm?

A) 16.238 percent

B) 15.00 percent

C) 17.33 percent

D) 17.667 percent

65) A survey of a national market provided the following average cost data: Jackson County Construction (JCC) has assets of $2 million and an average cost of 30 percent; Arkansas Architects (AA) has assets of $1.5 million and an average cost of 20 percent; Colorado Home Builders (CHB) has assets of $500,000 and an average cost of 10 percent. For each firm, average costs are measured as a proportion of assets. JCC is planning to acquire AA and CHB with the expectation of reducing overall average costs by eliminating the duplication of services. If JCC plans to reduce operating costs by $200,000 after the merger, what will the average cost be for the new firm?

A) 18.75 percent

B) 19.74 percent

C) 20.00 percent

D) 16.67 percent

66) The managers of BSW Inc. have been approached by EAG Corp. for a possible merger. EAG Corp. is asking a price of $20.5 million to be purchased by BSW Inc. The two firms currently have cumulative total cash flows of $1 million that are growing at 3 percent annually. Managers of EAG estimate that because of synergies the merged firm's cash flows will increase to 4 percent for the first three years following the merger. After the first three years, managers of EAG have estimated that cash flows will grow at a rate of 2 percent. The WACC for the merged firms is 8 percent. Managers of BSW Inc. agree that cash flows should grow at an additional 4 percent for the first three years, but are unsure of the long-term growth rate in cash flows estimated by EAG. Calculate the minimum growth rate needed after the first three years such that BSW Inc. would see this merger as a positive NPV project.

A) 3.00 percent

B) 2.82 percent

C) 4.05 percent

D) 8.00 percent

67) The managers of BSW Inc. have been approached by EAG Corp. for a possible merger. EAG Corp. is asking a price of $50 million to be purchased by BSW Inc. The two firms currently have cumulative total cash flows of $2.5 million that are growing at 2 percent annually. Managers of EAG estimate that because of synergies the merged firm's cash flows will increase to 5 percent for the first three years following the merger. After the first three years, managers of EAG have estimated that cash flows will grow at a rate of 2 percent. The WACC for the merged firms is 12 percent. Managers of BSW Inc. agree that cash flows should grow at an additional 5 percent for the first three years, but are unsure of the long-term growth rate in cash flows estimated by EAG. Calculate the minimum growth rate needed after the first three years such that BSW Inc. would see this merger as a positive NPV project.

A) 5.00 percent

B) 6.925 percent

C) 1.728 percent

D) 12.00 percent

68) A linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt-to-equity ratio and the sales-to-total assets ratio. Based on past bankruptcy experience, the linear probability model is estimated as:

PDi = 0.45 (debt/equity) + 0.01 (sales/total assets)

A firm you are thinking of lending to has a sales-to-assets ratio of 1.9 and its expected probability of default, or bankruptcy, is estimated to be 7 percent. Calculate the firm's debt-to-assets ratio.

A) 11.33 percent

B) 10.18 percent

C) 89.82 percent

D) 7.00 percent

69) A linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt-to-equity ratio and the sales-to-total assets ratio. Based on past bankruptcy experience, the linear probability model is estimated as:

PDi = 0.60 (debt/equity) + 0.02 (sales/total assets)

A firm you are thinking of lending to has a sales-to-assets ratio of 1.75 and its expected probability of default, or bankruptcy, is estimated to be 8.1 percent. Calculate the firm's debt-to-assets ratio.

A) 7.667 percent

B) 7.12 percent

C) 92.88 percent

D) 8.1 percent

70) A linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt-to-equity ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as:

PDi = 0.02 (debt/equity) + 0.80 (profit margin)

A firm you are thinking of lending to has a debt-to-equity ratio of 110 percent and its expected probability of default, or bankruptcy, is estimated to be 8 percent. If sales are $2 million, calculate the firm's net income.

A) $145,000

B) $165,000

C) $160,000

D) $200,000

71) A linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt-to-equity ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as:

PDi = 0.03 (debt/equity) + 0.65 (profit margin)

A firm you are thinking of lending to has a debt-to-equity ratio of 105 percent and its expected probability of default, or bankruptcy, is estimated to be 7 percent. If sales are $3 million, calculate the firm's net income.

A) $177,692

B) $210,000

C) $193,846

D) $300,000

72) Peter's TV Supplies is considering a merger with Jan's Radio Supply Stores. Peter's total operating costs of producing services are $330,000 for a sales volume (SP) of $4.5 million. Jan's total operating costs of producing services are $60,000 for a sales volume (SJ) of $550,000. Suppose that synergies in the production process result in a cost of production for the merged firms totalling $360,000 for a sales volume of $5,050,000. Calculate the total average cost (TAC) for the merged firm.

A) 7.61 percent

B) 7.43 percent

C) 7.13 percent

D) 7.52 percent

73) Cindy's Computer Corp. is considering a merger with Bobby's Computer, Inc. Cindy's total operating costs of producing services are $2.1 million for a sales volume (SC) of $13 million. Bobby's total operating costs of producing services are $2.5 million for a sales volume (SB) of $7 million. If the two firms merge, calculate the total average cost (TAC) for the merged firm assuming no synergies.

A) 23 percent

B) 17 percent

C) 19 percent

D) 21 percent

74) Suppose that the financial ratios of a potential borrowing firm took the following values: X1 = Net working capital/Total assets = 0.15, X2 = Retained earnings/Total assets = 0.27, X3 = Earnings before interest and taxes/Total assets = 0.28, X4 = Market value of equity/Book value of long-term debt = 0.68, X5 = Sales/Total assets ratio = 0.9. Calculate and interpret the Altman's Z-score for this firm.

A) 1.92; Low risk

B) 2.01; Indeterminate

C) 2.79; Low risk

D) 2.79; Indeterminate

75) Suppose that the financial ratios of a potential borrowing firm took the following values: X1 = Net working capital/Total assets = 0.05, X2 = Retained earnings/Total assets = 0.12, X3 = Earnings before interest and taxes/Total assets = 0.17, X4 = Market value of equity/Book value of long-term debt = 0.42, X5 = Sales/Total assets ratio = 0.6. Calculate and interpret the Altman's Z-score for this firm.

A) 1.64; High risk

B) 1.64; Indeterminate

C) 1.99; Low risk

D) 2.79; Indeterminate

76) Suppose a linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as:

PDi = 0.15 (debt ratio) + 0.1 (profit margin)

A firm you are thinking of lending to has a debt ratio of 57 percent and a profit margin of 7.15 percent. Calculate the firm's expected probability of default, or bankruptcy.

A) 9.27 percent

B) 8.49 percent

C) 7.83 percent

D) 6.91 percent

77) A linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the equity multiplier and the total asset turnover ratio. Based on past bankruptcy experience, the linear probability model is estimated as:

PDi = 0.02 (equity multiplier) + 0.01 (total asset turnover)

A firm you are thinking of lending to has an equity multiplier of 3.2 times and a total asset turnover ratio of 1.95. Calculate the firm's expected probability of default, or bankruptcy.

A) 7.06 percent

B) 7.92 percent

C) 8.35 percent

D) 9.12 percent

78) George's Dry Cleaning is considering a merger with Weezzie's Laundry Supply Stores. George's total operating costs of producing services are $790,000 for sales volume (SG) of $4.7 million. Weezzie's total operating costs of producing services are $202,000 for a sales volume (SW) of $2.3 million. For a sales volume of $7 million, calculate the reduction in production costs the merged firms need to experience such that the total average cost (TAC) for the merged firms is equal to 12 percent.

A) $840,000

B) $710,000

C) $175,000

D) $152,000

79) George's Dry Cleaning is considering a merger with Weezzie's Laundry Supply Stores. George's total operating costs of producing services are $590,000 for sales volume (SG) of $4.7 million. Weezzie's total operating costs of producing services are $152,000 for a sales volume (SW) of $2.3 million. For a sales volume of $7 million, calculate the reduction in production costs the merged firms need to experience such that the total average cost (TAC) for the merged firms is equal to 9 percent.

A) $97,000

B) $101,000

C) $112,000

D) $128,000

80) Jenny's Day Care is considering a merger with Lionel's Diaper Manufacturers. Jenny's total operating costs of producing services are $350,000 for sales volume of $1.4 million. Lionel's total operating costs of producing services are $300,000 for a sales volume of $1.3 million. For a sales volume of $2.7 million, calculate the reduction in production costs the merged firms need to experience such that the total average cost (TAC) for the merged firms is equal to 20 percent.

A) $129,000

B) $110,000

C) $540,000

D) $103,000

81) Stubborn Motors, Inc., is asking a price of $10.5 million to be purchased by Rubber Tire Motor Corp. Rubber Tire currently has total cash flows of $6 million which are growing at 1 percent annually. Managers estimate that because of synergies the merged firm's cash flows will increase by 4 percent for the first four years following the merger. After the first four years, incremental cash flows will grow at a rate of 3 percent annually. The WACC for the merged firms is 9.75 percent. Calculate the NPV of the merger. Should Rubber Tire Motor Corporation agree to acquire Stubborn Motors for the asking price of $10.5 million?

A) Agree to the merger because the NPV = −$2.32 million.

B) Agree to the merger because the NPV = $1.03 million.

C) Disagree to the merger because the NPV = −$0.96 million.

D) Agree to the merger because the NPV = $2.48 million.

82) Suppose a linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as:

PDi = 0.28 (debt ratio) + 0.51 (profit margin)

You know a particular firm has a debt ratio of 46 percent and a probability of default of 18 percent. Calculate the firm's profit margin.

A) 11.93 percent

B) 13.27 percent

C) 10.04 percent

D) 12.81 percent

83) A linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the equity multiplier and the total asset turnover ratio. Based on past bankruptcy experience, the linear probability model is estimated as:

PDi = 0.02 (equity multiplier) + 0.06 (total asset turnover)

A firm has an equity multiplier of 1.1 times and a probability of default of 6.2 percent. Calculate the firm's total asset turnover ratio.

A) 0.53 times

B) 0.67 times

C) 1.2 times

D) 0.84 times

84) A survey of a local market has provided the following average cost data: Johnson Construction Corp. (JCC) has assets of $3 million and an average cost of 22 percent. Anderson Architects (AA) has assets of $4 million and an average cost of 31 percent. Cole Home Builders (CHB) has assets of $5 million and an average cost of 28 percent. For each firm, average costs are measured as a proportion of assets. JCC is planning to acquire AA and CHB with the expectation of reducing overall average costs by eliminating the duplication of services. If JCC plans to reduce operating costs by $500,000 after the merger, what will the average cost be for the new firm?

A) 23.33 percent

B) 23.87 percent

C) 24.12 percent

D) 22.50 percent

85) The managers of State Bank have been approached by City Bank about a possible merger. State Bank is asking a price of $171.78 million to be purchased by City Bank. City Bank currently has total cash flows of $30 million that are growing at 2 percent annually. Managers of State Bank estimate that because of synergies the merged firm's cash flows will increase by 6 percent for the first four years following the merger. After the first four years, managers of State Bank have estimated that incremental cash flows will grow at a rate of 3 percent. The WACC for the merged firms is 11 percent. Managers of City Bank agree that cash flows should grow at an additional 6 percent for the first four years, but are unsure of the long-term growth rate in incremental cash flows estimated by City Bank. Calculate the minimum growth rate needed after the first four years such that City Bank would see this merger as a positive NPV project.

A) 7.26 percent

B) 7.73 percent

C) 8.01 percent

D) 8.29 percent

86) A linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt-to-equity ratio and the sales-to-total assets ratio. Based on past bankruptcy experience, the linear probability model is estimated as:

PDi = 0.52 (debt/equity) + 0.01 (sales/total assets)

A firm you are thinking of lending to has a sales-to-assets ratio of 2.0 and its expected probability of default, or bankruptcy, is estimated to be 12 percent. Calculate the firm's debt ratio.

A) 14.03 percent

B) 14.92 percent

C) 15.49 percent

D) 15.97 percent

87) A linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt-to-equity ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as:

PDi = 0.01 (debt/equity) + 0.76 (profit margin)

A firm you are thinking of lending to has a debt-to-equity ratio of 121 percent and its expected probability of default, or bankruptcy, is estimated to be 8.125 percent. If sales are $1 million, calculate the firm's net income.

A) $81,600

B) $87,700

C) $91,000

D) $97,400

88) A linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt-to-equity ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as:

PDi = 0.013 (debt/equity) + 0.78 (profit margin)

A firm you are thinking of lending to has a debt-to-equity ratio of 112 percent and its expected probability of default, or bankruptcy, is estimated to be 15.35 percent. If sales are $1.55 million, calculate the firm's net income.

A) $276,100

B) $290,700

C) $196,200

D) $299,400

89) A merger between Bank of America and JP Morgan Chase is an example of a:

A) vertical merger.

B) horizontal merger.

C) conglomerate merger.

D) none of the options.

90) The main motive for a merger is:

A) product extension.

B) manager's personal incentives.

C) synergies.

D) none of the options.

91) Which of the following is NOT a source of value-enhancing synergy in a merger?

A) Cost reduction

B) Revenue enhancement

C) Increased marketing presence

D) Tax considerations

92) If Walt Disney and American Airlines merged, it would be an example of a:

A) consolidation merger.

B) conglomerate merger.

C) vertical merger.

D) horizontal merger.

93) Which of the following is NOT an example of a revenue enhancement that is a result of a merger?

A) The revenue stream of the acquired firm becomes more stable because the target firm has different risk characteristics.

B) The merger may expand the target firm's operations into areas that are not fully competitive.

C) The merger may create cost synergies.

D) All of the options are examples of a revenue enhancement that is a result of a merger.

94) The merged firm's ability to generate synergistic cost savings through the joint use of inputs in producing multiple products is referred to as:

A) economies of scale.

B) economies of scope.

C) x-efficiencies.

D) none of the options.

95) Cost savings not directly due to economies of scope or economies of scale are referred to as:

A) economies of scale.

B) economies of scope.

C) x-efficiencies.

D) none of the options.

96) Which of the following refers to a firm that is still allowed to continue to operate while the creditors' claims are settled using a collective procedure?

A) Chapter 7 bankruptcy

B) Chapter 11 bankruptcy

C) Technical insolvency

D) Prepackaged bankruptcy

97) Which of the following is an incorrect priority of claims in the event of liquidation? (Note: The first item would be paid first.)

A) Secured creditors, wages due employees, unsecured creditor claims, common shareholders

B) Secured creditors, unsecured creditor claims, preferred shareholders, common shareholders

C) Secured creditors, administration expenses, common shareholders, preferred shareholders

D) Secured creditors, wages due employees, taxes due federal government, preferred shareholders

98) All of the following are an advantage of prepackaged bankruptcy EXCEPT:

A) there is less disruption to the firm's business and less damage to its goodwill.

B) reduced legal expenses and other fees, which leave more funds available for the creditors.

C) it is a shorter and simpler bankruptcy process.

D) All of the options are advantages.

99) All of the following are problems associated with using the Z-score model to make credit risk evaluations EXCEPT:

A) the model does not benchmark firms to the average in the industry.

B) the model does not use important data that is difficult to quantify such as the phase of the business cycle.

C) the model categorizes firms as either high risk or low risk.

D) All of the options are problems associated with using the Z-score model.

100) Which of the following statements is incorrect?

A) While linear probability models divide firms into high or low bankruptcy risk classes, logit models and linear discriminant models produce a value for the expected probability of bankruptcy.

B) The logit model overcomes a weakness of the linear probability model by restricting the estimated range of bankruptcy probabilities to lie between 0 and 1.

C) All three credit scoring models use past data, such as financial ratios, as inputs to explain repayment experiences on old debt.

D) All of the statements are correct.

101) If Walmart acquires Target, this would be an example of a:

A) horizontal merger.

B) vertical merger.

C) market extension merger.

D) conglomerate merger.

102) If Verizon buys the Green Bay Packers, this would be an example of a:

A) horizontal merger.

B) vertical merger.

C) market extension merger.

D) conglomerate merger.

103) If Whole Foods grocery store buys Whole Wheat Bread, this would be an example of a:

A) horizontal merger.

B) vertical merger.

C) market extension merger.

D) conglomerate merger.

104) Which of the following is a poor justification for a merger?

A) Tax considerations

B) Lowering cost of capital

C) Reducing costs

D) Increasing the size of the firm

105) LD Inc. declared bankruptcy through a Chapter 7 filing. Consider the following data in millions of dollars and determine the funds available for secured creditors.

• Proceeds from the liquidation of assets = $395
• First mortgage = $100
• Administration expenses associated with the bankruptcy = $2
• Notes payable to the banks = $205
• Subordinated debentures = $350
• Taxes due to federal, state, and other governmental agencies = $12
• Wages due employees (1,000 employees) = $3

A) $379

B) $378

C) $278

D) $279

106) LD Inc. declared bankruptcy through a Chapter 7 filing. Consider the following data in millions of dollars and determine the funds available for secured creditors.

• Proceeds from the liquidation of assets = $395
• First mortgage = $102
• Administration expenses associated with the bankruptcy = $5
• Notes payable to the banks = $205
• Subordinated debentures = $350
• Taxes due to federal, state, and other governmental agencies = $17
• Wages due employees (2,000 employees) = $6

A) $265

B) $367

C) $267

D) $369

107) LD Inc. declared bankruptcy through a Chapter 7 filing. Consider the following data in millions of dollars and determine the funds available for secured creditors.

• Proceeds from the liquidation of assets = $225
• First mortgage = $50
• Administration expenses associated with the bankruptcy = $5
• Notes payable to the banks = $205
• Subordinated debentures = $350
• Taxes due to federal, state, and other governmental agencies = $17
• Wages due employees (2,000 employees) = $6

A) $197

B) $147

C) $199

D) $149

108) The main reason for a vertical merger is:

A) avoidance of fixed costs.

B) elimination of costs of searching for input prices.

C) control over input prices.

D) All of the options.

109) Firm-specific reasons for financial distress include all of the following EXCEPT:

A) large amounts of financial leverage.

B) poor management.

C) economic recession.

D) volatility in earnings.

110) Market-specific reasons for financial distress include all of the following EXCEPT:

A) high interest rates.

B) high unemployment.

C) economic recession.

D) volatility in earnings.

111) HiHo Inc. is evaluating a merger with the following cash flows:

• Years 1 and 2 Incremental Cash Flows: $10 million each year
• Year 3 incremental cash flow: $40 million
• Discount rate = 10 percent

What is the most HiHo should pay for this merger?

A) $38.53 million

B) $41.09 million

C) $47.41 million

D) $51.27 million

112) Kasha Inc. is evaluating a merger with the following cash flows:

• Years 1 and 2  Incremental Cash Flows: $60 million each year
• Year 3 incremental cash flow: $70 million
• Discount rate = 9 percent

What is the most Kasha should pay for this merger?

A) $113.96 million

B) $158.96 million

C) $159.60 million

D) $190.00 million

113) J&J Inc. declared bankruptcy through a Chapter 7 filing. Consider the following data in millions of dollars and determine the funds available for secured creditors.

• Proceeds from the liquidation of assets = $130
• First mortgage = $100
• Administration expenses associated with the bankruptcy = $3
• Notes payable to the banks = $25
• Subordinated debentures = $5
• Taxes due to federal, state, and other governmental agencies = $1
• Wages due employees (8,500 employees) = $18

A) $79

B) $84

C) $109

D) $0

114) A linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt-to-equity ratio and the sales-to-total assets ratio. Based on past bankruptcy experience, the linear probability model is estimated as:

PDi = 0.65 (debt/equity) + 0.10 (sales/total assets)

A firm you are thinking of lending to has a sales-to-assets ratio of 0.9 and its expected probability of default, or bankruptcy, is estimated to be 11 percent. Calculate the firm's debt ratio.

A) 1.03 percent

B) 2.99 percent

C) 3.08 percent

D) 9.70 percent

115) One Day Dry Cleaning is considering a merger with Speedy's Laundry Supply Stores. One Day's total operating costs of producing services are $450,000 for sales volume (SG) of $3.75 million. Speedy's total operating costs of producing services are $200,000 for a sales volume (SW) of $1.70 million. For a sales volume of $5 million, calculate the reduction in production costs the merged firms need to experience such that the total average cost (TAC) for the merged firms is equal to 11 percent.

A) $100,000

B) $200,000

C) $450,000

D) $550,000

116) Cathy Corp. is considering a merger with Russell, Inc. Cathy's total operating costs of producing services are $200,000 for a sales volume (SC) of $700,000. Russell's total operating costs of producing services are $400,000 for a sales volume (SB) of $1 million. If the two firms merge, calculate the total average cost (TAC) for the merged firm assuming no synergies.

A) 28.57 percent

B) 35.29 percent

C) 40.00 percent

D) 68.57 percent

117) Suppose that the financial ratios of a potential borrowing firm took the following values: X1 = Net working capital/Total assets = 0.36, X2 = Retained earnings/Total assets = 0.08, X3 = Earnings before interest and taxes/Total assets = 0.25, X4 = Market value of equity/Book value of long-term debt = 0.80, X5 = Sales/Total assets ratio = 0.75. Calculate and interpret the Altman's Z-score for this firm.

A) 2.24; High risk

B) 2.24; Indeterminate

C) 2.60; Low risk

D) 2.60; Indeterminate

118) Suppose that the financial ratios of a potential borrowing firm took the following values: X1 = Net working capital/Total assets = 0.65, X2 = Retained earnings/Total assets = 1.10, X3 = Earnings before interest and taxes/Total assets = 0.10, X4 = Market value of equity/Book value of long-term debt = 2.05, X5 = Sales/Total assets ratio = 0.45. Calculate the Altman's Z-score for this firm.

A) 8.70

B) 4.35

C) 4.33

D) 2.33

119) Suppose a linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as:

PDi = 0.20 (debt ratio) + 0.15 (profit margin)

A firm you are thinking of lending to has a debt ratio of 75 percent and a profit margin of 6 percent. Calculate the firm's expected probability of default, or bankruptcy.

A) 15.0 percent

B) 15.9 percent

C) 20.3 percent

D) 40.5 percent

120) Jan's Bakery is considering a merger with Tina's Cookies. Jan's total operating costs of producing services are $100,000 for a sales volume of $250,000. Tina's total operating costs of producing services are $75,000 for a sales volume of $300,000. If the two firms merge, calculate the total average cost for the merged firm assuming no synergies.

A) 25.0 percent

B) 31.8 percent

C) 32.5 percent

D) 40.0 percent

121) Flowers Galore is considering a merger with Balloons N More. Flowers Galore's total operating costs of producing services are $800,000 for a sales volume of $3 million. Balloons' total operating costs of producing services are $60,000 for a sales volume of $100,000. If the two firms merge, calculate the total average cost for the merged firm assuming no synergies.

A) 26.67 percent

B) 27.74 percent

C) 43.34 percent

D) 60.00 percent