Question 1

The DAB Corp. has unfortunately accumulated net operating losses of $70 million and is likely to go bankrupt. The CLC Corp. has earnings of $200 million and is in the 36% marginal tax bracket. CLC is considering buying DAB and liquidating the company and retaining a few of the assets. What is the minimum value of DAB to CLC?

Accepted Answer

A)   $25.2 million
B)   $70.0 million
C)   $72.0 million
D)   There is insufficient information provided.E) B) and C)
F) All of the above

Question 2

Firms use defensive tactics to fight off undesired mergers. These tactics include which of the following?

Accepted Answer

A)   developing poison pills
B)   getting white knights to bid for the firm
C)   repurchasing their own stock
D)   developing poison pills, getting white knights to bid for the firm, and repurchasing their own stockE) A) and D)
F) A) and C)

Question 3

Which of the following statements best describes accounting for mergers?

Accepted Answer

A)   Goodwill is amortized for shareholder reporting.
B)   Goodwill is subject to impairment test for tax purposes.
C)   Goodwill is no longer created in a merger.D) B) and C)
E) A) and C)

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Since the primary rationale for any operating merger is synergy, in planning such mergers, the development of accurate pro forma cash flows is the single most important action.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following factors influences the consideration of a merger and an acquisition of stocks?

Accepted Answer

A)   Shareholders are dealt with directly to bypass the target management and board of directors.
B)   In a tender offer, usually some minority shareholders do not tender stopping complete firm absorption.
C)   Target management may be unfriendly and resist an offer. Resistance usually makes the stock price higher.
D)   Shareholders are dealt with directly to bypass the target management and board of directors; in a tender offer, usually some minority shareholders do not tender stopping complete firm absorption; and target management may be unfriendly and resist an offer. Resistance usually makes the stock price higher.E) C) and D)
F) A) and B)

Question 7

Since a manager's central goal is to maximize the firm's common share price, any merger offer that provides shareholders with significant gains over the current share price will be approved by the current management team.

Accepted Answer

A) True 
 B)False

Question 8

A company seeking to fight off a hostile takeover might employ the services of an investment banking firm to develop a defensive strategy.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements best describes a merger concept?

Accepted Answer

A)   A conglomerate merger is one where a firm combines with another firm in the same industry.
B)   Regulations in Canada prohibit acquiring firms from using common share to purchase another firm.
C)   Defensive mergers are designed to make a company less vulnerable to a takeover.
D)   The corporate valuation method and the equity residual method, even properly applied, produce different results.E) A) and C)
F) C) and D)

Question 10

Which of the following statements best describes mergers?

Accepted Answer

A)   The acquiring firm's required rate of return in most horizontal mergers will not be affected, because the two firms will have similar betas.
B)   Financial theory says that the choice of how to pay for a merger is irrelevant because, although it may affect the firm's capital structure, it will not affect its overall required rate of return.
C)   The basic rationale for any consolidation is financial synergy and, thus, the estimation of pro forma cash flows is the single most important part of the analysis.
D)   The primary rationale for most operating mergers is synergy.E) A) and D)
F) A) and C)

Question 11

The income statement of the post-merger firm will be the same regardless of the accounting method used.

Accepted Answer

A) True 
 B)False

Question 12

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."

Accepted Answer

A) True 
 B)False

Question 13

What discount rate should you use to discount Dustvac's free cash flows and interest tax savings?

Accepted Answer

A)   10.01%
B)   10.06%
C)   11.29%
D)   11.44%E) C) and D)
F) B) and D)

Question 14

Which of the following statements best describes mergers?

Accepted Answer

A)   The high Canadian dollar relative to foreign currencies makes Canadian companies comparatively inexpensive to foreign buyers, spurring many mergers.
B)   The expansion of the junk bond market makes debt more freely available for large acquisitions and LBOs, resulting in an increased level of merger activity.
C)   Increased nationalization of business and a desire to scale down and focus on producing in one's home country may virtually halt international mergers.D) A) and C)
E) B) and C)

Question 15

Great Subs Inc., a regional sandwich chain, is considering purchasing a smaller chain, Eastern Pizza, which is currently financed using 20% debt at a cost of 8%. Great Subs' analysts project that the merger will result in incremental free cash flows and interest tax savings of $2 million in Year 1, $4 million in Year 2, $5 million in Year 3, and $117 million in Year 4. (The Year 4 cash flow includes a horizon value of $107 million.)  The acquisition would be made immediately, if it is to be undertaken. Eastern's pre-merger beta is 2.0, and its post-merger tax rate would be 34%. The risk-free rate is 8%, and the market risk premium is 4%. What is the appropriate rate for use in discounting the free cash flows and the interest tax savings?

Accepted Answer

A)   12.0%
B)   13.9%
C)   14.4%
D)   16.0%E) A) and B)
F) None of the above

Question 16

What is a divestiture?

Accepted Answer

A)   a firm's need for cash
B)   the poor performance of a business unit
C)   a change in a firm's strategic thinking
D)   a firm's need for cash; the poor performance of a business unit; and a change in a firm's strategic thinkingE) B) and C)
F) All of the above

Question 17

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.

Accepted Answer

A) True 
 B)False

Question 18

Under purchase accounting, the acquired assets must be written up or written down if the purchase price does not equal net asset value.

Accepted Answer

A) True 
 B)False

Question 19

Using the purchase accounting method to report mergers, goodwill is not amortized, rather it is subject to an annual impairment test.

Accepted Answer

A) True 
 B)False

Question 20

The value of synergy can be estimated by the equation

Accepted Answer

A)   VAB - VA - VB
B)   VAB - VB - taxes
C)   VA - VB - ?costs
D)   VA + VB - ?revenuesE) B) and C)
F) None of the above

Exam 24: Mergers, Acquisitions, and Restructuring

Which of the following statements best describes a merger concept?

Correct Answer
verified

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.

Correct Answer
verified

Using the purchase accounting method to report mergers, goodwill is not amortized, rather it is subject to an annual impairment test.

Correct Answer
verified

Which of the following statements best describes accounting for mergers?

Correct Answer
verified

Which of the following statements best describes mergers?

Correct Answer
verified

Correct Answer
verified

Since a manager's central goal is to maximize the firm's common share price, any merger offer that provides shareholders with significant gains over the current share price will be approved by the current management team.

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified

Under purchase accounting, the acquired assets must be written up or written down if the purchase price does not equal net asset value.

Correct Answer
verified

What is a divestiture?

Correct Answer
verified

Which of the following statements best describes mergers?

Correct Answer
verified

Correct Answer
verified

The value of synergy can be estimated by the equation

Correct Answer
verified

A company seeking to fight off a hostile takeover might employ the services of an investment banking firm to develop a defensive strategy.

Correct Answer
verified

What discount rate should you use to discount Dustvac's free cash flows and interest tax savings?

Correct Answer
verified

Since the primary rationale for any operating merger is synergy, in planning such mergers, the development of accurate pro forma cash flows is the single most important action.

Correct Answer
verified

Firms use defensive tactics to fight off undesired mergers. These tactics include which of the following?

Correct Answer
verified

Which of the following factors influences the consideration of a merger and an acquisition of stocks?

Correct Answer
verified

The income statement of the post-merger firm will be the same regardless of the accounting method used.

Correct Answer
verified

Exam 24: Mergers, Acquisitions, and Restructuring

Which of the following statements best describes a merger concept?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Using the purchase accounting method to report mergers, goodwill is not amortized, rather it is subject to an annual impairment test.

Correct AnswerverifiedShow Answer

Which of the following statements best describes accounting for mergers?

Correct AnswerverifiedShow Answer

Which of the following statements best describes mergers?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Since a manager's central goal is to maximize the firm's common share price, any merger offer that provides shareholders with significant gains over the current share price will be approved by the current management team.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Under purchase accounting, the acquired assets must be written up or written down if the purchase price does not equal net asset value.

Correct AnswerverifiedShow Answer

What is a divestiture?

Correct AnswerverifiedShow Answer

Which of the following statements best describes mergers?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The value of synergy can be estimated by the equation

Correct AnswerverifiedShow Answer

A company seeking to fight off a hostile takeover might employ the services of an investment banking firm to develop a defensive strategy.

Correct AnswerverifiedShow Answer

What discount rate should you use to discount Dustvac's free cash flows and interest tax savings?

Correct AnswerverifiedShow Answer

Since the primary rationale for any operating merger is synergy, in planning such mergers, the development of accurate pro forma cash flows is the single most important action.

Correct AnswerverifiedShow Answer

Firms use defensive tactics to fight off undesired mergers. These tactics include which of the following?

Correct AnswerverifiedShow Answer

Which of the following factors influences the consideration of a merger and an acquisition of stocks?

Correct AnswerverifiedShow Answer

The income statement of the post-merger firm will be the same regardless of the accounting method used.

Correct AnswerverifiedShow Answer

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verified

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