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Exam 22: Mergers and Corporate Control

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Question 21

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Which of the following are legal and acceptable reasons for the high level of merger activity in the U.S.during the 1980s?

A) A profitable firm acquires a firm with large accumulated tax losses that may be carried forward.
B) Attempts to stabilize earnings by diversifying.
C) Purchase of assets below their replacement costs.
D) Reduction in competition resulting from mergers.
E) Synergistic benefits arising from mergers.

F) B) and C)
G) B) and E)

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Question 22

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The distribution of synergistic gains between the stockholders of two merged firms is almost always based strictly on their respective market values before the announcement of the merger.

A) True
B) False

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Question 23

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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.

A joint venture is one in which two,or sometimes more,independent companies agree to combine resources in order to achieve a specific objective,usually limited in scope.

A congeneric merger is one where the merging firms operate in related businesses but do not necessarily produce the same products or have a producer-supplier relationship.

Merger activity is likely to heat up when interest rates are high because target firms can expect to receive an especially high premium over the pre-announcement stock price.

Currently (2012),mergers can be accounted for using either the purchase method or the pooling method.

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

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

Which of the following statements is most CORRECT?

The rate used to discount projected merger cash flows should be the cost of capital of the new consolidated firm because it incorporates the actual capital structure of the new firm.

If a petrochemical firm that used oil as feedstock merged with an oil producer that had large oil reserves and a drilling subsidiary,this would be a vertical merger.

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.

The present value of the free cash flows discounted at the unlevered cost of equity is the value of the firm's operations if it had no debt.

Post-merger control and the negotiated price paid by the acquirer are two of the most important issues in agreeing on the terms of a merger.

Although goodwill created in a merger may not be amortized for shareholder reporting purposes,it may be amortized for Federal tax purposes.

One of the main reasons why foreign firms are interested in buying U.S.companies is to gain entrance to the U.S.market.A decline in the value of the dollar relative to most foreign currencies makes this competitive strategy especially attractive.

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

Any goodwill created in a merger must be amortized over its expected life,usually 40 years,for shareholder reporting purposes.

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?