Chapter 31 Test Bank Docx Mergers

Principles of Corporate Finance, 13e (Brealey)

Chapter 31 Mergers

1) The market for corporate control includes

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 two similar pharmaceutical firms is an example of a

A) horizontal merger.

B) cross-border merger.

C) conglomerate merger.

D) horizontal merger and conglomerate merger.

3) The merger between Amazon and Whole Foods is an example of a

A) horizontal merger.

B) vertical merger.

C) conglomerate merger.

D) None of these options are correct.

4) AT&T and Time Warner is an example of a

A) cross-border merger.

B) horizontal merger.

C) conglomerate merger.

D) vertical merger.

5) The "Bootstrap Game" may mislead investors regarding the prospects for a merged firm. How are investors potentially misled?

A) The firm's management generates cost savings via temporary layoffs of highly paid executives.

B) The firm gains intellectual property in a merger but then divests the operations of the target firm.

C) The firm's management changes the name of an acquired firm to feign diversification.

D) The firm acquires a target with low a P/E ratio, which generates short-term earnings per share growth without any true economic advantage.

6) Merging in order to lower financing costs is likely to fail for the following reason:

A) Costs of issuing larger amounts of debt increase.

B) Tax shields decrease for larger companies.

C) Any gain from lowering the required interest rate is offset by increased guarantees on the debt.

D) It is difficult for bondholders to calculate the postmerger debt outstanding.

7) Firm A plans to acquire Firm B by making a cash offer of $27 a share for all 100,000 shares of B. It estimates that the merger will produce cost savings with a present value of $800,000. Recently, Firm B's stock price increased from $20 to $24 per share, evidently due to its excellent financial performance. Firm A thus estimates Firm B's stand-alone price at $24. However, the CFO suggests a re-evaluation of the offer, pointing out that the true stand-alone value of Firm B may be $20 per share, not $24 per share. If the stand-alone value is $20 per share, will the merger still generate positive NPV for Firm A?

A) No. The cost to acquire Firm B will exceed the postmerger gain of $800,000.

B) No. Firm A will break even, since the costs are $400,000 more than expected.

C) Yes. Firm A will still make a gain, although Firm B captures more of the economic gain than expected.

D) Yes. Since the market is efficient, the true stand-alone value of Firm B is $24 per share and the CFO's fear is unwarranted.

8) Which of the following actions by an acquiring firm signals its belief that postmerger gains will be substantially larger than expected?

A) The acquiring firm makes a stock offer, since its stock value is priced lower than it will be postmerger.

B) The acquiring firm makes a cash offer, since this allows the acquirer to solely benefit from gains not yet reflected in the market.

C) The acquiring firm attempts to gain majority ownership, but not complete ownership.

D) The acquiring firm makes an offer with the condition that management must be replaced.

9) Many mergers that appear to make economic sense fail because managers cannot handle the complex task of integrating two firms with different

A) production processes.

B) production processes and accounting methods.

C) corporate cultures.

D) production processes, accounting methods, and corporate cultures.

10) The following are sensible motives for mergers EXCEPT

A) economies of scale.

B) complementary resources.

C) diversification.

D) eliminating inefficiencies.

11) The following are sensible motives for mergers:

I) prevent target firm from wasting surplus funds;

II) eliminate target firm 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 sensible reasons for mergers:

I) economies of scale;

II) economics of vertical integration;

III) complementary resources;

IV) prevent target firm from wasting surplus funds;

V) eliminate target firm 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

13) The following are dubious reasons for mergers:

I) diversification;

II) increase 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) Firm A has a value of $100 million and Firm B has a value of $70 million. Merging the two would enable cost savings with a present value of $20 million. Firm A purchases Firm B for $75 million. 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 Firm B has a value of $70 million. Merging the two would enable cost savings with a present value of $20 million. Firm A purchases Firm 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 Firm B has a value of $60 million. Merging the two would enable cost savings with a present value of $20 million. Firm A purchases Firm 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

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

A) $20 million

B) $40 million

C) $100 million

D) $80 million

18) Firm A has a value of $200 million and Firm B has a value of $120 million. Merging the two would enable cost savings with a present value of $30 million. Firm A purchases Firm B for $130 million. 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 Firm B has a value of $120 million. Merging the two would enable cost savings with a present value of $30 million. Firm A purchases Firm 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 2,500 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

D) 5

21) 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 2,500 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 are 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

23) The following data on a merger are given:

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

24) The following data on a merger are given:

Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock. What will be the postmerger price per share for Firm A's stock if Firm A pays in cash?

A) $108

B) $110

C) $102

D) $114

25) The following data on a merger are given:

Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B's stock. Calculate the postmerger P/E ratio, assuming that cash is used in the acquisition and the merger has no immediate effect on total firm income.

A) 12.75

B) 6.25

C) 13.75

D) 17.85

26) The following data on a merger are given:

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

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, what is the percentage increase in wealth for B's shareholders? (Assume that the offer has no effect on the value of A's shares.)

A) −20 percent

B) +25 percent

C) −25 percent

D) +20 percent

28) Firm A is planning to acquire Firm B. If Firm A prefers to make a cash offer for the merger, it indicates that

A) firm A's managers are optimistic about the postmerger value of A.

B) firm A's managers are pessimistic about the postmerger value of A.

C) firm A's managers are neutral about the postmerger value of A.

D) firm A's managers are neutral about the postmerger value of B.

29) If Firm A acquires Firm B and Firm B's 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) Assume the following data:

If Firm A intends to pay $7 million cash for Firm B, then calculate the cost of this merger.

A) $2 million

B) $3 million

C) $1 million

D) zero

31) Given the following data,

if Firm A offers 250,000 shares to Firm B's shareholders, calculate the cost of the merger.

A) $2 million

B) $3 million

C) $1 million

D) zero

32) Which of the following is not an important piece of U.S. antitrust legislation?

A) Garn-St. Germain Act

B) Clayton Act

C) Hart-Scott-Rodino Act

D) Clayton Act and Hart-Scott-Rodino Act

33) Antitrust law can be enforced by the U.S. federal government by

I) a civil suit brought by the Justice Department;

II) proceedings initiated by the Federal Trade Commission (FTC);

III) 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

34) Historically, merger activity increases with which market condition?

A) Low stock market prices

B) High stock market prices

C) Moderate market prices

D) Merger activity is relatively constant throughout all market conditions.

35) Which of the following actions is least effective in changing a firm's strategy?

A) Conducting a successful proxy contest

B) Threat of a takeover from a rival firm

C) Organizing a leveraged buyout by well-known wealthy private investors

D) The sale of shares by a minority shareholder

36) What role do hedge funds take when they speculate on merger activity by buying stock of firms that are "in play"?

A) Speculation causes an increased chance of antitrust lawsuits.

B) Hedge funds specialize in taking on the risk that the deal will fall through and allow risk-averse investors to cash out.

C) Hedge funds help reduce the cost of the merger to an acquirer.

D) Hedge funds enable international mergers.

37) 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.

B) the approval of at least 50 percent 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) that the target firm search for alternative suitors.

38) Following an acquisition, the acquiring firm's balance sheet shows an asset labeled "goodwill." What form of merger accounting was used?

A) Consolidation

B) Aggregation

C) Purchase

D) None of these options are correct.

39) Who usually gains the most in a merger?

A) Acquiring firm's shareholders

B) Acquiring firm's management

C) Target firm's shareholders

D) Target firm's management

40) The PEN Corporation with a book value of $20 million and a market value of $30 million has acquired 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.

41) The DOC Corporation with a book value of $20 million and a market value of $30 million has acquired 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) Goodwill cannot be calculated with the information given.

42) If an acquisition is completed using a 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 these options are correct.

43) The main difference to shareholders between a tax-free and a taxable acquisition is that

I) in a tax-free acquisition the 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 or loss is realized and then new shares are issued; in a taxable transaction the assets are revalued, taxed on any capital gains or losses, and then shares are 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

44) 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 shields are unchanged by the merger.

C) Selling shareholders must recognize any capital gain.

D) All goodwill must be written off immediately.

45) Which of the following factor(s) influence(s) the acquiring firm's 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 often increases the acquisition price.

A) I only

B) II only

C) III only

D) I, II, and III

46) 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

47) 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.

48) A modification of the corporate charter that requires 80 percent shareholder approval for a takeover is called a(n)

A) repurchase standstill provision.

B) exclusionary self-tender.

C) supermajority amendment.

D) tender offer.

49) Compensation paid to top management who lose their jobs in the event of a takeover is called a

A) poison pill.

B) golden parachute.

C) self-tender.

D) buyout.

50) Examples of shark-repellent charter amendments include

A) supermajority.

B) waiting period.

C) supermajority and waiting period.

D) supermajority, waiting period, restricted voting rights, and staggered board.

51) As a pre-offer defensive maneuver, existing bondholders can demand repayment if there is a change of control as a result of a hostile takeover. These bonds are an example of:

A) greenmail.

B) a "scorched earth" policy.

C) crown jewels.

D) a poison put.

52) A poison pill defense may be implemented by

A) giving stock away.

B) selling firm assets.

C) issuing rights that allow existing shareholders to buy stock at a bargain price.

D) adding seats to the board of directors.

53) Takeover defenses appear to favor

A) stockholders.

B) workers.

C) creditors.

D) managers.

54) The easiest task for the managers of an acquiring firm is the integration of the target firm.

55) A conglomerate merger is one in which an acquiring firm buys a closely related firm.

56) 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.

57) Two companies can sensibly be considered for a merger if they have complementary resources.

58) Diversification is a very sensible reason for two companies to merge.

59) The gain from a merger is computed as Gain = PVAB − (PVA + PVB).

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

61) In the purchase method of merger accounting, a new asset category called goodwill is created.

62) A would-be acquirer making a tender offer directly to shareholders is called a proxy fight.

63) The following are pre-offer defenses: litigation, asset restructuring, and liability restructuring.

64) It appears that target companies capture most of the gains in hostile takeovers.

65) A poison pill protects the rights of shareholders.

66) Supermajorities give shareholders more control over the firm.

67) Briefly describe the different types of mergers.

68) Discuss the difficulties associated with a typical merger.

69) Briefly explain the term economies of scale.

70) Briefly describe some of the good motives for mergers.

71) Briefly explain what is meant by "the cost of acquisition" in the context of a merger.

72) Briefly explain what is meant by the economic gain from a merger.

73) Explain the central tenet of the Clayton Act of 1914.

74) Name the agencies that have successfully blocked mergers on antitrust (antimonopoly) grounds.

75) Briefly discuss the different forms of acquisition.

76) Briefly discuss takeover defenses.

77) Who gains the most in mergers?

78) Who are antitakeover defenses designed to protect?