Verified Test Bank Chapter.21 | – Mergers, Acquisitions And

Chapter 21 – Mergers, acquisitions and corporate control

MULTIPLE CHOICE

Use the following information to answer questions1 to 4.

Smart Products plans to acquire Snazzy Snaps, which will create $8 million in incremental cash flows for Smart each year for the first six years. Smart Products plans to divest Snazzy Snaps at the end of the sixth year for $112 500 000. Smart’s beta is 1.2, and it is expected to remain so after the acquisition. The risk-free rate is 5% and the expected return on the market is 15%. Smart Products has a 100% equity capital structure, which will be maintained post-acquisition.

1. What is Smart Products’ cost of equity?

REF: 21.4 Merger and Acquisition Transaction Details NAT: Analytic skills

LOC: acquire knowledge of capital budgeting and the cost of capital

2. If Smart Products’ beta falls to 0.95 post-acquisition, what would its weighted average cost of capital be?

REF: 21.4 Merger and Acquisition Transaction Details NAT: Analytic skills

LOC: acquire knowledge of capital budgeting and the cost of capital

3. What is the maximum price Smart Products can pay for Snazzy Snaps?

REF: 21.4 Merger and Acquisition Transaction Details NAT: Analytic skills

LOC: acquire knowledge of capital budgeting and the cost of capital

4. Suppose Smart Products is $40 per share, and there are 12 000 000 shares outstanding. How many new shares must Smart issue to acquire Snazzy Snaps at the maximum price?

REF: 21.4 Merger and Acquisition Transaction Details NAT: Analytic skills

LOC: acquire knowledge of capital budgeting and the cost of capital

Use the following information to answer questions 5 to 8.

You are analysing the potential acquisition of Nothing Better! Ice Creams, Inc. by your company, Needsalift, Inc. The ice-cream company is a wholly owned subsidiary of Grand Lake Investments, which has set a company selling price of $10 000 000. From your work, you estimate that Nothing Better! will generate the following incremental cash flows for Needsalift:

To fund the $10 million price, Needsalift can use $2 million from internal sources (retained earnings) with a required return of 15%, and the rest would come from a new debt issue yielding 10%. Needsalift’s tax rate is 40%.

5. What is the required return on the acquisition of Nothing Better! for Needsalift?

REF: 21.4 Merger and Acquisition Transaction Details NAT: Analytic skills

LOC: acquire an understanding of risk and return

6. What is the value of the proposed acquisition to Needsalift?

REF: 21.4 Merger and Acquisition Transaction Details NAT: Analytic skills

LOC: acquire knowledge of capital budgeting and the cost of capital

7. If the cost of debt increases to 12%, should Needsalift proceed with the acquisition?

REF: 21.4 Merger and Acquisition Transaction Details NAT: Analytic skills

LOC: acquire knowledge of capital budgeting and the cost of capital

8. If the project were financed completely with equity (retained earnings) and the required return remained unchanged post-acquisition, what is the most Needsalift would be willing to pay for Nothing Better! Ice Creams?

The NPV at time period 0 of CF_1–5 at 15% is $8 500 638.

PTS: 1 DIF: M

REF: 21.4 Merger and Acquisition Transaction Details NAT: Analytic skills

LOC: acquire knowledge of capital budgeting and the cost of capital

Use the following information to answer questions 9 to 11.

Milner Manufacturing plans to acquire Poudre Chemicals by giving Poudre shareholders 1.75 shares of Milner per share of Poudre. There are 2 million shares of Poudre Chemicals outstanding, with a pre-merger offer price of $25 per share. Milner’s pre-offer share price is $16.50.

9. What is the control premium being offered by Milner Manufacturing?

REF: 21.4 Merger and Acquisition Transaction Details NAT: Analytic skills

LOC: understand the investment processes

10. Six months later at the completion of the merger, if Milner’s share price has dropped to $14 per share, what is the completed control premium percentage?

REF: 21.4 Merger and Acquisition Transaction Details NAT: Analytic skills

LOC: understand the investment processes

11. What is the value of the transaction at the time of the offer for Milner Manufacturing?

REF: 21.4 Merger and Acquisition Transaction Details NAT: Analytic skills

LOC: understand the investment processes

12. If an acquirer wishes to keep the identity of a target after the acquisition, it most likely will seek a:

REF: 21.1 Merger Waves and International Acquisition Activity

LOC: acquire knowledge of financial markets and interest rates

13. A change in corporate control brought about by the creation of new shares with special voting rights is a(n):

REF: 21.1 Merger Waves and International Acquisition Activity

LOC: acquire knowledge of financial markets and interest rates

14. Which of the following anti-takeover measures may actually help align manager and shareholder interests?

REF: 21.1 Merger Waves and International Acquisition Activity

LOC: acquire knowledge of financial markets and interest rates

15. If the board of directors of a target seeks an alternative, friendly acquirer, then it is said to be using which takeover defence?

REF: 21.1 Merger Waves and International Acquisition Activity

LOC: acquire knowledge of financial markets and interest rates

16. A corporate control change such as Pepsi’s divestiture of its restaurant holdings is called a(n):

REF: 21.1 Merger Waves and International Acquisition Activity

LOC: acquire knowledge of financial markets and interest rates

Use the following information to answer questions 17 and 18.

Suppose Smart Products has three divisions that contribute 40%, 35% and 25%, respectively, to its revenues.

17. What is Smart Products’ Herfindahl Index on focus?

REF: 21.6 Regulation of Mergers and Acquisitions NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

18. Suppose Smart Products acquires a competitor of one of its divisions and the new shares of revenues are 60%, 25% and 15%, respectively. Is Smart Products more or less focused?

REF: 21.1 Merger Waves and International Acquisition Activity

LOC: acquire knowledge of financial markets and interest rates

19. Share market evidence reveals that:

REF: 21.4 Merger and Acquisition Transaction Details NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

20. Share market evidence reveals:

REF: 21.4 Merger and Acquisition Transaction Details NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

21. If you were a shareholder in a company that became the target of an acquisition bid, which method of payment would share market evidence suggest signals a better deal?

REF: 21.4 Merger and Acquisition Transaction Details NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

22. Which of the following is not a value-enhancing motive for mergers and acquisitions?

REF: 21.2 Why Do Companies Make Acquisitions? NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

23. A transaction in which two or more business organisations combine into a single entity is called a(n):

REF: 21.1 Merger Waves and International Acquisition Activity

LOC: acquire knowledge of financial markets and interest rates

24. The transformation of a public corporation into a private company by the employees of the corporation itself is called a(n):

REF: 21.1 Merger Waves and International Acquisition Activity

LOC: acquire knowledge of financial markets and interest rates

Use the following information to answer questions 25 to 28.

Bavarian Brew is planning on acquiring Bavarian Sausage in a pure share exchange merger. Bavarian Brew’s share is currently trading at $35, and it set the exchange ratio at 0.75. Bavarian Sausage has 72 million shares outstanding, which are currently trading at $18 a share.

25. How many shares will Bavarian Brew issue in exchange for Bavarian Sausage’s shares?

72 million(0.75) = 54 million

PTS: 1 DIF: E

REF: 21.4 Merger and Acquisition Transaction Details NAT: Analytic skills

LOC: understand shares and bonds

26. What is the transaction value of the merger?

35[(72 million(0.75)] = 1.89 billion

PTS: 1 DIF: E

REF: 21.4 Merger and Acquisition Transaction Details NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

27. If you owned 180 shares of Bavarian Sausage, what would be the value of your share holdings after the merger?

180(0.75)(35) = 4725

PTS: 1 DIF: M

REF: 21.4 Merger and Acquisition Transaction Details NAT: Analytic skills

LOC: understand shares and bonds

28. If you owned 180 shares of Bavarian Sausage, what would be the control premium?

Old = 180(18) = 3240

New = 180(0.75)(35) = 4725

Control premium = (4725 – 3240)/3240 = 0.458

PTS: 1 DIF: M

REF: 21.4 Merger and Acquisition Transaction Details NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

Use the following information to answer questions 29 to 34.

Smith Enterprises can acquire Miller, Inc for $250 000 in either cash or shares. Both companies are 100% equity financed. The synergy value of the acquisition for Smith is $38 000. Currently, Smith has 25 000 shares outstanding that trade at $30 a share, whereas Miller has 17 000 shares outstanding that trade at $14 a share.

29. What is the value of Miller to Smith?

38 000 + 17 000(14) = 276 000

PTS: 1 DIF: M

REF: 21.4 Merger and Acquisition Transaction Details NAT: Analytic skills

LOC: understand the investment processes

30. How many shares would be given to Miller’s shareholders in a share-financed deal?

250 000/30 = 8333

PTS: 1 DIF: M

REF: 21.4 Merger and Acquisition Transaction Details NAT: Analytic skills

LOC: understand the investment processes

31. For Smith and Miller, what would be the exchange ratio in a pure share exchange merger?

250 000/30 = 8333

8333/17 000 = 0.4902

PTS: 1 DIF: M

REF: 21.4 Merger and Acquisition Transaction Details NAT: Analytic skills

LOC: acquire knowledge of financial analysis and cash flows

32. What is the net value of the acquisition to Smith if cash is used?

17 000(14) + 35 000 – 250 000 = 23 000

PTS: 1 DIF: M

REF: 21.4 Merger and Acquisition Transaction Details NAT: Analytic skills

LOC: understand the investment processes

33. For Smith and Miller, what is the value of the post-merger company if cash is used?

Net value of merger = 17 000(14) + 35 000 – 250 000 = 23 000

Value of new company = 23 000 + 25 000(30) = 773 000

PTS: 1 DIF: M

REF: 21.4 Merger and Acquisition Transaction Details NAT: Analytic skills

LOC: understand the investment processes

34. For Smith and Miller, what is the share price of the new company after a cash acquisition?

New value = 25 000(30) + 17 000(14) + 35 000 – 250 000 = 773 000

Share price = 773 000/25 000 = 30.92

PTS: 1 DIF: M

REF: 21.4 Merger and Acquisition Transaction Details NAT: Analytic skills

LOC: understand the investment processes

Exhibit 21-1

35. Refer to Exhibit 21-1. What is the HHI of this industry?

(0.35)² + (0.2)² + (0.15)² + (0.10)² + (0.08)² + (0.07)² + (0.05)² = 0.2088 × 10 000 = 2088

PTS: 1 DIF: M

REF: 21.6 Regulation of Mergers and Acquisitions NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

36. Refer to Exhibit 21-1. If companies 1 and 2 were to merge, what would be the HHI of the industry?

(0.55)² + (0.15)² + (0.10)² + (0.08)² + (0.07)² + (0.05)² = 0.3488 × 10 000 = 3488

PTS: 1 DIF: M

REF: 21.6 Regulation of Mergers and Acquisitions NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

37. Refer to Exhibit 21-1. If companies 6 and 7 were to merge, what would be the HHI of the industry?

(0.35)² + (0.20)² + (0.15)² + (0.10)² + (0.08)² + (0.12)² = 0.2158 × 10 000 = 2158

PTS: 1 DIF: M

REF: 21.6 Regulation of Mergers and Acquisitions NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

38. Refer to Exhibit 21-1. If companies 1 and 7 were to merge, what is the HHI of the industry?

0.4² + 0.2² + 0.15² + 0.10² + 0.08² + 0.07² = 0.2438(10 000) = 2438

PTS: 1 DIF: M

REF: 21.6 Regulation of Mergers and Acquisitions NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

Use the following information to answer questions 39 to 43.

Bavarian Brew is planning on acquiring Bavarian Sausage in a pure share exchange merger. Bavarian Brew’s share is currently trading at $45, and it set the exchange ratio at 2.00. Bavarian Sausage has 76 million shares outstanding, which are currently trading at $23 a share.

Twelve months after the merger Bavarian Brew’s share price drops to $37.

39. How many shares will Bavarian Brew issue in the exchange offer?

76(2.00) = 152 million

PTS: 1 DIF: E

REF: 21.4 Merger and Acquisition Transaction Details NAT: Analytic skills

LOC: understand the investment processes

40. What is the transaction value of the merger for Bavarian Brew?

76 million(2.00)45 = 6.840 billion

PTS: 1 DIF: M

REF: 21.4 Merger and Acquisition Transaction Details NAT: Analytic skills

LOC: understand the investment processes

41. If you owned 200 shares of Bavarian Sausage, what would be the control premium?

Old = 200(23) = 4600

New = 200(2.00)45 = 18 000

Control premium = (18 000 – 4600)/4600 = 2.91

PTS: 1 DIF: M

REF: 21.4 Merger and Acquisition Transaction Details NAT: Analytic skills

LOC: understand the investment processes

42. After the drop in the share price for Bavarian Brew, what is the control premium?

Old = 200(23) = 4600

New = 200(2.00)37 = 14 800

Control premium = (14 800 – 4600)/4600 = 2.217

PTS: 1 DIF: M

REF: 21.4 Merger and Acquisition Transaction Details NAT: Analytic skills

LOC: understand the investment processes

43. After the drop in the share price for Bavarian Brew, what is the transaction value of the merger?

76 million(2.00)(37) = 5.624 billion

PTS: 1 DIF: M

REF: 21.4 Merger and Acquisition Transaction Details NAT: Analytic skills

LOC: understand the investment processes

44. A transaction in which two or more business organisations combine into a single entity is called:

REF: 21.1 Merger Waves and International Acquisition Activity

LOC: acquire knowledge of financial markets and interest rates

45. Company B’s resources were completely absorbed by Company A after their merger. The merger between the two companies was a:

REF: 21.1 Merger Waves and International Acquisition Activity

LOC: acquire knowledge of financial markets and interest rates

46. A structured purchase of the target’s shares in which the acquirer announces a public offer to buy a minimum number of shares at a specific price is called:

REF: 21.1 Merger Waves and International Acquisition Activity

LOC: acquire knowledge of financial markets and interest rates

47. The percentage of shares owned that triggers a legal requirement to identify one as a significant shareholder of a company is

REF: 21.1 Merger Waves and International Acquisition Activity

LOC: acquire knowledge of financial markets and interest rates

48. When a company sells the assets and/or resources of a subsidiary or division to another organisation, it is called:

REF: 21.1 Merger Waves and International Acquisition Activity

LOC: acquire knowledge of financial markets and interest rates

49. When a parent company creates a new company with its own shares by issuing shares of the new company, which used to be a division or subsidiary of the parent company, the transaction is called:

REF: 21.1 Merger Waves and International Acquisition Activity

LOC: acquire knowledge of financial markets and interest rates

50. 3D Company generates 50%, 40% and 10% of its revenues from unrelated product lines A, B and C, respectively. What is 3D’s Herfindahl Index?

0.5² + 0.4^2 + 0.1² = 0.42

PTS: 1 DIF: M

REF: 21.6 Regulation of Mergers and Acquisitions NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

51. The greater the number of unrelated divisions that a conglomerate company operates creates:

REF: 21.6 Regulation of Mergers and Acquisitions NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

52. TargetCorp. shareholders will be receiving 6 shares of Acquire Inc. for every 10 shares of TargetCorp. that they own. TargetCorp.’s shares are currently priced at $15 per share, and shares of Acquire are (and will remain) worth $30 per share. What is the dollar premium that Acquire is paying for every 100 shares of TargetCorp?

If we own 100 shares of Target, the value of 100 shares is $1500.

Number of shares of Acquire to be distributed = 0.6 × 100 = 60 shares

Value of 60 new Acquire shares = 60 × 30 = 1800

Premium = 1800 – 1500 = 300

PTS: 1 DIF: M

REF: 21.4 Merger and Acquisition Transaction Details NAT: Analytic skills

LOC: understand the investment processes

53. Generally speaking, the return associated with acquisitions is highest for:

REF: 21.4 Merger and Acquisition Transaction Details NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

54. Economies of scale, economies of scope and resource complementarities are all:

REF: 21.2 Why Do Companies Make Acquisitions? NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

55. Financial synergies are largely the anticipated result of:

REF: 21.2 Why Do Companies Make Acquisitions? NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

56. The merger wave of the 1980s was different from other merger waves because of:

REF: 21.6 Regulation of Mergers and Acquisitions NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

57. The purchase of additional resources by a business enterprise is known as a(n):

REF: 21.1 Merger Waves and International Acquisition Activity

NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

58. A merger in which both the acquirer and target disappear as separate corporations, combining to form an entirely new corporation with new ordinary shares, is known as a(n):

REF: 21.1 Merger Waves and International Acquisition Activity

NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

59. Which of the following statements is false?

REF: 21.1 Merger Waves and International Acquisition Activity

NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

60. Legislation intended to prevent mergers that are deemed to have anticompetitive effects on the business environment is termed:

REF: 21.6 Regulation of Mergers and Acquisitions NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

61. Antitrust all-or-none rules that disallow a partial tender offer/acquisition of a company and the ability to control that company with less than 100% ownership are known as:

REF: 21.6 Regulation of Mergers and Acquisitions NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

62. Antitrust rules that ensure that all target shareholders receive the same offer price in any tender offers initiated by the same acquirer, limiting the ability of acquirers to buy minority shares cheaply with a two-tiered offer, is known as:

REF: 21.6 Regulation of Mergers and Acquisitions NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

63. ________________ are relative operating costs that are reduced for merged companies because of an increase in size that allows for the reduction or elimination of overlapping resources.

REF: 21.2 Why Do Companies Make Acquisitions? NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

64. ________________ are value-creating benefits that provide increased breadth of operations for merged companies.

REF: 21.2 Why Do Companies Make Acquisitions? NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

65. A company with a particular operating expertise merges with a company with another operating strength to create a company that has expertise in multiple areas. The merger is employing:

REF: 21.2 Why Do Companies Make Acquisitions? NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

66. A target integration in which the acquirer can absorb the target’s resources directly with no remaining trace of the target as a separate entity is a:

REF: 21.4 Merger and Acquisition Transaction Details NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

67. A merger in which the acquirer maintains the identity of the target as a separate subsidiary or division is a:

REF: 21.4 Merger and Acquisition Transaction Details NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

68. When a subsidiary of the bidder merges with the target company, this is called a:

REF: 21.4 Merger and Acquisition Transaction Details NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

69. In a _______________, both the acquirer and target disappear as separate corporations, combining to form an entirely new corporation with new ordinary shares.

REF: 21.4 Merger and Acquisition Transaction Details NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

SHORT ANSWER

1. Distinguish between a vertical and horizontal merger.

PTS: 1 DIF: E

REF: 21 Mergers, Acquisitions and Corporate Control

2. What is a conglomerate merger?

PTS: 1 DIF: E

REF: 21 Mergers, Acquisitions and Corporate Control

3. What is synergy?

PTS: 1 DIF: E

REF: 21.2 Why Do Companies Make Acquisitions?

4. Distinguish between economies of scale and economies of scope.

Economies of scope result when merged companies create value because of increased size. This occurs when a company produces several different goods or internally houses several aspects of the supply chain.

PTS: 1 DIF: E

REF: 21.2 Why Do Companies Make Acquisitions?

5. What is the hubris hypothesis of corporate takeover?

PTS: 1 DIF: E

REF: 21.2 Why Do Companies Make Acquisitions?

6. Briefly explain the concept of corporate control.

PTS: 1 DIF: E

REF: 21 Mergers, Acquisitions and Corporate Control