FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 22: Mergers and Corporate Control

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 1

True/False

Review LaterAdd Note

Review Later

Coca-Cola's acquisition of Columbia Pictures and its announcement that it would operate its new subsidiary separately could be described as primarily a financial merger.

A) True
B) False

Correct Answer

verified

Show Answer

Question 2

Multiple Choice

Review LaterAdd Note

Review Later

Which of the following statements is most CORRECT?

A) Financial theory says that the choice of how to pay for a merger is really irrelevant because, although it may affect the firm's capital structure, it will not affect its overall required rate of return.
B) The basic rationale for any financial merger is synergy and, thus, the estimation of pro forma cash flows is the single most important part of the analysis.
C) In most mergers, the benefits of synergy and the premium the acquirer pays over the market price are summed and then divided equally between the shareholders of the acquiring and target firms.
D) The primary rationale for most operating mergers is synergy.
E) The acquiring firm's required rate of return in most horizontal mergers will not be affected, because the 2 firms will have similar betas.

F) A) and D)
G) A) and E)

Correct Answer

verified

Show Answer

Question 3

Multiple Choice

Review LaterAdd Note

Firms use defensive tactics to fight off undesired mergers.These tactics do not include

Only if a target firm's value is greater to the acquiring firm than its market value as a separate entity will a merger be financially justified.

Borrowing funds on terms that would require immediate repayment of all funds if the firm is acquired, selling off valuable assets, and granting huge "golden parachutes" that open if the firm is acquired are three procedures used to defend against hostile takeovers.These strategies are known as "poison pills."

In a financial merger, the relevant post-merger cash flows are simply the sum of the expected cash flows of the two companies, measured as if they were operated independently.

The purchase of assets at below their replacement cost and tax considerations are two factors that motivate mergers.

The two principal advantages of holding companies are (1) the holding company can control a great deal of assets with limited equity and (2) the dividends received by the parent from the subsidiary are not taxed if the parent holds at least 50% of the subsidiary's stock.

A spin-off is a type of divestiture in which the assets of a division are sold to another firm.

A parent holding company sells shares in its subsidiary such that the parent now owns only 65% of the subsidiary and, thus, the tax returns of the parent and its subsidiary can't be consolidated.The parent receives annual dividends from the subsidiary of $2,500,000.If the parent's marginal tax rate is 25% and if the exclusion on intercompany dividends is 50%, what is the effective tax rate on the intercompany dividends, and how much net dividends are received?

Most defensive mergers occur as a result of managers' actions to maximize shareholders' wealth.

Which of the following statements is most CORRECT?

The primary reason managers give for most mergers is to acquire more assets so as to increase sales and market share.

Synergistic benefits can arise from a number of different sources, including operating economies of scale, financial economies, and increased managerial efficiency.

Which of the following statements is most CORRECT?

A two-tier merger offer is one where the acquiring company offers to purchase the target company in a two-part transaction.Cash is paid to some stockholders, bonds are issued to others, but the total values of each part of the transaction are equal.

If the capital structure is stable, and free cash flows are expected to be growing at a constant rate at the horizon date, then the horizon value is calculated by discounting the free cash flows plus the expected future tax shields at the weighted average cost of capital.

The owners of Arthouse Inc., a national artist supplies chain, are contemplating purchasing Craftworks Inc, a smaller chain.Arthouse's analysts project that the merger will result in incremental free flows and interest tax savings with a combined present value of $72.52 million, and they have determined that the appropriate discount rate for valuing Craftworks is 16%.Craftworks has 4 million shares outstanding and no debt.Craftworks' current price is $16.25.What is the maximum price per share that Arthouse should offer?

Since managers' central goal is to maximize stock price, managerial control issues do not interfere with mergers that would benefit the target firm's stockholders.

In a merger with true synergies, the post-merger value exceeds the sum of the separate companies' pre-merger values.