Chap 029
Chap 029
Chap 029
Chapter 29
Mergers and Acquisitions
Multiple Choice Questions
1. The complete absorption of one company by another, wherein the acquiring firm retains its
identity and the acquired firm ceases to exist as a separate entity, is called a:
A. merger.
B. consolidation.
C. tender offer.
D. spinoff.
E. divestiture.
2. A merger in which an entirely new firm is created and both the acquired and acquiring
firms cease to exist is called a:
A. divestiture.
B. consolidation.
C. tender offer.
D. spinoff.
E. conglomeration.
3. A public offer by one firm to directly buy the shares of another firm is called a:
A. merger.
B. consolidation.
C. tender offer.
D. spinoff.
E. divestiture.
4. The acquisition of a firm in the same industry as the bidder is called a _____ acquisition.
A. conglomerate
B. forward
C. backward
D. horizontal
E. vertical
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5. The acquisition of a firm involved with a different production process stage than the bidder
is called a _____ acquisition.
A. conglomerate
B. forward
C. backward
D. horizontal
E. vertical
6. The acquisition of a firm whose business is not related to that of the bidder is called a
_____ acquisition.
A. conglomerate
B. forward
C. backward
D. horizontal
E. vertical
8. A business deal in which all publicly owned stock in a firm is replaced with complete
equity ownership by a private group is called a:
A. tender offer.
B. proxy contest.
C. going-private transaction.
D. acquisition.
E. consolidation.
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9. A going-private transaction in which a large percentage of the money used to buy the
outstanding stock is borrowed is called a:
A. tender offer.
B. proxy contest.
C. merger.
D. leveraged buyout.
E. consolidation.
10. The positive incremental net gain associated with the combination of two firms through a
merger or acquisition is called:
A. the agency conflict.
B. goodwill.
C. the merger cost.
D. the consolidation effect.
E. synergy.
11. A change in the corporate charter making it more difficult for the firm to be acquired by
increasing the percentage of shareholders that must approve a merger offer is called a:
A. supermajority amendment.
B. standstill agreement.
C. greenmail provision.
D. poison pill amendment.
E. white knight provision.
12. A contract wherein the bidding firm agrees to limit its holdings in the target firm is called
a:
A. supermajority amendment.
B. standstill agreement.
C. greenmail provision.
D. poison pill amendment.
E. white knight provision.
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13. The payments made by a firm to repurchase shares of its outstanding stock from an
individual investor in an attempt to eliminate a potential unfriendly takeover attempt are
referred to as:
A. a golden parachute.
B. standstill payments.
C. greenmail.
D. a poison pill.
E. a white knight.
14. A financial device designed to make unfriendly takeover attempts financially unappealing,
if not impossible, is called:
A. a golden parachute.
B. a standstill agreement.
C. greenmail.
D. a poison pill.
E. a white knight.
15. Generous compensation packages paid to a firm's top management in the event of a
takeover are referred to as:
A. golden parachutes.
B. poison puts.
C. white knights.
D. shark repellents.
E. bear hugs.
16. A friendly suitor that a target firm turns to as an alternative to a hostile bidder is called a:
A. golden suitor.
B. poison put.
C. white knight.
D. shark repellent.
E. crown jewel.
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17. The sale of stock in a wholly owned subsidiary via an initial public offering is referred to
as a(n):
A. split-up.
B. equity carve-out.
C. countertender offer.
D. white knight transaction.
E. lockup transaction.
18. The distribution of shares in a subsidiary to existing parent company stockholders is called
a(n):
A. lockup transaction.
B. bear hug.
C. equity carve-out.
D. spin-off.
E. split-up.
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21. When a building supply store acquires a lumber mill it is making a ______ acquisition.
A. horizontal
B. longitudinal
C. conglomerate
D. vertical
E. complementary resources
22. If Microsoft were to acquire U.S. Airways, the acquisition would be classified as a _____
acquisition.
A. horizontal
B. longitudinal
C. conglomerate
D. vertical
E. complementary resources
23. Which of the following activities are commonly associated with takeovers?
I. the acquisition of assets
II. proxy contests
III. management buyouts
IV. leveraged buyouts
A. I and III only
B. II and IV only
C. I, III, and IV only
D. I, II, and IV only
E. I, II, III, and IV
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27. Which of the following represent potential tax gains from an acquisition?
I. a reduction in the level of debt
II. an increase in surplus funds
III. the use of net operating losses
IV. an increased use of leverage
A. I and IV only
B. II and III only
C. III and IV only
D. I and III only
E. II, III, and IV only
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30. Which one of the following combinations of firms would benefit the most through the use
of complementary resources?
A. a ski resort and a travel trailer sales outlet
B. a golf resort and a ski resort
C. a hotel and a home improvement center
D. a swimming pool distributor and a kitchen designer
E. a fast food restaurant and a dry cleaner
31. Which one of the following is most likely a good candidate for an acquisition that could
benefit from the use of complementary resources?
A. a sports arena that is home only to an indoor hockey team
B. a hotel in a busy downtown business district of a major city
C. a day care center located near a major route into the main business district of a large city
D. an amusement park located in a centralized Florida location
E. a fast food restaurant located near a major transportation hub
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34. The value of a target firm to the acquiring firm is equal to:
A. the value of the target firm as a separate entity plus the incremental value derived from the
acquisition.
B. the purchase cost of the target firm.
C. the value of the merged firm minus the value of the target firm as a separate entity.
D. the purchase cost plus the incremental value derived from the acquisition.
E. the incremental value derived from the acquisition.
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36. If a firm wants to take over another firm but feels the attempt to do so will be viewed as
unfriendly it could decide to take a _____ approach to the acquisition.
A. crown jewel
B. shark repellent
C. bear hug
D. countertender offer
E. lockup
37. Which of the following are reasons why a firm may want to divest itself of some of its
assets?
I. to raise cash
II. to get rid of unprofitable operations
III. to get rid of some assets received in an acquisition
IV. to cash in on some profitable operations
A. I and II only
B. I, II, and III only
C. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV
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41. One company wishes to acquire another. Which of the following forms of acquisition does
not require a formal vote by the shareholders of the acquired firm?
A. Merger
B. Acquisition of stock
C. Acquisition of assets
D. Consolidation
E. All of the above require a formal vote.
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42. Firm A and Firm B join to create Firm AB. This is an example of:
A. a tender offer.
B. an acquisition of assets.
C. an acquisition of stock.
D. a consolidation.
E. Both B and C.
43. Suppose that Verizon and Sprint were to merge. Ignoring potential antitrust problems, this
merger would be classified as a:
A. horizontal merger.
B. vertical merger.
C. conglomerate merger.
D. monopolistic merger.
E. None of the above.
44. Suppose that General Motors has made an offer to acquire General Mills. Ignoring
potential antitrust problems, this merger would be classified as a:
A. monopolistic merger.
B. horizontal merger.
C. vertical merger.
D. conglomerate merger.
E. None of the above.
45. Suppose that a McDonalds acquired a small potato grower. This merger would be
classified as a:
A. monopolistic merger.
B. vertical merger.
C. conglomerate merger.
D. horizontal merger.
E. None of the above.
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46. A dissident group solicits votes in an attempt to replace existing management. This is
called a:
A. tender offer.
B. shareholder derivative action.
C. proxy contest.
D. management freeze-out.
E. shareholder's revenge.
47. If the All-Star Fuel Filling Company, a chain of gasoline stations, acquires the Mid-States
Refining Company, a refiner of oil products, this would be an example of a:
A. conglomerate acquisition.
B. white knight.
C. vertical acquisition.
D. going-private transaction.
E. horizontal acquisition.
48. Which of the following is not true of an acquisition of stock or tender offer?
A. No stockholder meetings need to be held.
B. No vote is required.
C. The bidding firm deals directly with the stockholders of the target firm.
D. In most cases, 100% of the stock of the target firm is tendered.
E. All of the above are true of tender offers.
49. When the management and/or a small group of investors take over a firm and the shares of
the firm are delisted and no longer publicly available, this action is known as a:
A. consolidation.
B. vertical acquisition.
C. proxy contest.
D. going-private transaction.
E. None of the above.
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51. Cowboy Curtiss' Cowboy Hat Company recently completed a merger. When valuing the
combined firm after the merger, which of the following is an example of the type of common
mistakes that can occur?
A. The use of market values in valuing the new firm.
B. The inclusion of cash flows that are incremental to the decision.
C. The use of Curtiss' discount rate when valuing the cash flows of the entire company.
D. The inclusion of all relevant transaction costs associated with the acquisition.
E. None of the above.
52. Turner, Inc. has $4.2 million in net working capital. The firm has fixed assets with a book
value of $48.6 million and a market value of $53.4 million. Martin & Sons is buying Turner,
Inc. for $60 million in cash. The acquisition will be recorded using the purchase accounting
method. What is the amount of goodwill that Martin & Sons will record on its balance sheet
as a result of this acquisition?
A. $0
B. $2.4 million
C. $6.6 million
D. $7.2 million
E. $11.4 million
53. Rudy's, Inc. and Blackstone, Inc. are all-equity firms. Rudy's has 1,500 shares outstanding
at a market price of $22 a share. Blackstone has 2,500 shares outstanding at a price of $38 a
share. Blackstone is acquiring Rudy's for $36,000 in cash. What is the merger premium per
share?
A. $2.00
B. $4.25
C. $6.50
D. $8.00
E. $14.00
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54. Jennifer's Boutique has 2,100 shares outstanding at a market price per share of $26. Sally's
has 3,000 shares outstanding at a market price of $41 a share. Neither firm has any debt.
Sally's is acquiring Jennifer's for $58,000 in cash. What is the merger premium per share?
A. $1.43
B. $1.62
C. $1.81
D. $2.04
E. $2.07
55. Jennifer's Boutique has 2,100 shares outstanding at a market price per share of $26. Sally's
has 3,000 shares outstanding at a market price of $41 a share. Neither firm has any debt.
Sally's is acquiring Jennifer's for $58,000 in cash. The incremental value of the acquisition is
$2,500. What is the value of Jennifer's Boutique to Sally's?
A. $26,000
B. $27,600
C. $57,100
D. $58,200
E. $60,500
56. Rudy's, Inc. and Blackstone, Inc. are all-equity firms. Rudy's has 1,500 shares outstanding
at a market price of $22 a share. Blackstone has 2,500 shares outstanding at a price of $38 a
share. Blackstone is acquiring Rudy's for $36,000 in cash. The incremental value of the
acquisition is $3,500. What is the value of Rudy's Inc. to Blackstone?
A. $30,000
B. $32,500
C. $33,000
D. $36,500
E. $39,500
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57. ABC and XYZ are all-equity firms. ABC has 1,750 shares outstanding at a market price of
$20 a share. XYZ has 2,500 shares outstanding at a price of $28 a share. XYZ is acquiring
ABC for $36,000 in cash. The incremental value of the acquisition is $3,000. What is the net
present value of acquiring ABC to XYZ?
A. $1,000
B. $2,000
C. $3,000
D. $4,000
E. $5,000
58. Firm A is acquiring Firm B for $40,000 in cash. Firm A has 2,500 shares of stock
outstanding at a market value of $18 a share. Firm B has 1,500 shares of stock outstanding at
a market price of $25 a share. Neither firm has any debt. The net present value of the
acquisition is $2,500. What is the value of Firm A after the acquisition?
A. $40,000
B. $42,500
C. $45,000
D. $47,500
E. $50,000
59. Firm A is acquiring Firm B for $25,000 in cash. Firm A has 2,000 shares of stock
outstanding at a market value of $21 a share. Firm B has 1,200 shares of stock outstanding at
a market price of $17 a share. Neither firm has any debt. The net present value of the
acquisition is $1,500. What is the price per share of Firm A after the acquisition?
A. $21.00
B. $21.25
C. $21.75
D. $22.00
E. $22.50
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60. Alto and Solo are all-equity firms. Alto has 2,400 shares outstanding at a market price of
$24 a share. Solo has 4,000 shares outstanding at a price of $17 a share. Solo is acquiring Alto
for $63,000 in cash. The incremental value of the acquisition is $5,500. What is the net
present value of acquiring Alto to Solo?
A. $100
B. $400
C. $1,200
D. $2,400
E. $5,500
61. Principal, Inc. is acquiring Secondary Companies for $29,000 in cash. Principal has 2,500
shares of stock outstanding at a market price of $30 a share. Secondary has 1,600 shares of
stock outstanding at a market price of $15 a share. Neither firm has any debt. The net present
value of the acquisition is $4,500. What is the price per share of Principal after the
acquisition?
A. $30.00
B. $30.70
C. $31.80
D. $32.10
E. $32.50
62. Winslow Co. has agreed to be acquired by Ferrier, Inc. for $25,000 worth of Ferrier stock.
Ferrier currently has 1,500 shares of stock outstanding at a price of $21 a share. Winslow has
1,000 shares outstanding at a price of $22. The incremental value of the acquisition is $4,000.
What is the merger premium per share?
A. $1
B. $2
C. $3
D. $4
E. $5
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63. Brite Industries has agreed to merge with Nu-Day, Inc. for $20,000 worth of Nu-Day
stock. Brite has 1,200 shares of stock outstanding at a price of $15 a share. Nu-Day has 2,000
shares outstanding with a market value of $19 a share. The incremental value of the
acquisition is $3,500. What is the value of Nu-Day after the merger?
A. $53,000
B. $54,250
C. $56,000
D. $57,750
E. $59,500
64. Goodday & Sons is being acquired by Baker, Inc. for $19,000 worth of Baker stock.
Baker has 1,500 shares of stock outstanding at a price of $25 a share. Goodday has 1,000
shares outstanding with a market value of $16 a share. The incremental value of the
acquisition is $2,000. How many new shares of stock will be issued to complete this
acquisition?
A. 760.0 shares
B. 840.0 shares
C. 960.0 shares
D. 1,187.5 shares
E. 1,312.5 shares
65. Holiday & Sons is being acquired by Miller's, Inc. for $20,000 worth of Miller's stock.
Miller has 1,300 shares of stock outstanding at a price of $20 a share. Holiday has 1,000
shares outstanding with a market value of $18 a share. The incremental value of the
acquisition is $2,000. What is the total number of shares in the new firm?
A. 1,000 shares
B. 1,300 shares
C. 1,500 shares
D. 2,000 shares
E. 2,300 shares
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66. Firm A is being acquired by Firm B for $24,000 worth of Firm B stock. The incremental
value of the acquisition is $3,500. Firm A has 1,500 shares of stock outstanding at a price of
$15 a share. Firm B has 1,200 shares of stock outstanding at a price of $30 a share. What is
the value per share of Firm B after the acquisition?
A. $17.50
B. $24.00
C. $30.00
D. $31.00
E. $35.00
67. Firm X is being acquired by Firm Y for $35,000 worth of Firm Y stock. The incremental
value of the acquisition is $2,500. Firm X has 2,000 shares of stock outstanding at a price of
$16 a share. Firm Y has 1,200 shares of stock outstanding at a price of $40 a share. What is
the actual cost of the acquisition using company stock?
A. $34,750
B. $34,789
C. $35,000
D. $35,289
E. $35,500
68. Firm Q is being acquired by Firm S for $30,000 worth of Firm S stock. The incremental
value of the acquisition is $2,000. Firm Q has 1,900 shares of stock outstanding at a price of
$15 a share. Firm S has 1,500 shares of stock outstanding at a price of $40 a share. What is
the net present value of the acquisition given that the actual cost of the acquisition using
company stock is $30,167?
A. $167
B. $225
C. $333
D. $425
E. $433
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69. The Sligo Co. is planning on merging with the Thorton Co. Sligo will pay Thorton's
stockholders the current value of their stock in shares of Sligo. Sligo currently has 2,300
shares of stock outstanding at a market price of $20 a share. Thorton has 1,800 shares
outstanding at a price of $15 a share. How many shares of stock will be outstanding in the
merged firm?
A. 1,800 shares
B. 2,300 shares
C. 2,750 shares
D. 3,650 shares
E. 4,100 shares
70. Firm A is planning on merging with Firm B. Firm A will pay Firm B's stockholders the
current value of their stock in shares of Firm A. Firm A currently has 2,300 shares of stock
outstanding at a market price of $20 a share. Firm B has 1,800 shares outstanding at a price of
$15 a share. The after-merger earnings will be $6,500. What will the earnings per share be
after the merger?
A. $1.67
B. $1.78
C. $1.83
D. $1.87
E. $1.92
71. Firm A is planning on merging with Firm B. Firm A will pay Firm B's stockholders the
current value of their stock in shares of Firm A. Firm A currently has 2,300 shares of stock
outstanding at a market price of $20 a share. Firm B has 1,800 shares outstanding at a price of
$15 a share. What is the value of the merged firm?
A. $73,000
B. $75,000
C. $76,667
D. $77,778
E. $78,000
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72. Firm A is planning on merging with Firm B. Firm A will pay Firm B's stockholders the
current value of their stock in shares of Firm A. Firm A currently has 2,300 shares of stock
outstanding at a market price of $20 a share. Firm B has 1,800 shares outstanding at a price of
$15 a share. What is the value per share of the merged firm?
A. $19.00
B. $19.18
C. $19.44
D. $20.00
E. $20.33
73. Firm V was worth $450 and Firm A had a market value of $375. Firm V acquired Firm A
for $425 because they thought the combination of the new Firm VA was worth $925. What is
the synergy from the merger of Firm V and Firm A?
A. $50
B. $100
C. $475
D. $500
E. None of the above.
74. Firm V was worth $450 and Firm A had a market value of $375. Firm V acquired Firm A
for $425 because they thought the combination of the new Firm VA was worth $925. What is
the NPV from the merger of Firm V and Firm A?
A. $0
B. $50
C. $425
D. $450
E. None of the above.
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75. Firm A is planning on merging with Firm B. Firm A will pay Firm B's stockholders the
current value of their stock in shares of Firm A. Firm A currently has 3,000 shares of stock
outstanding at a market price of $15 a share. Firm B has 1,000 shares outstanding at a price of
$10 a share. What is the value of the merged firm?
A. $25,000
B. $45,000
C. $55,000
D. $60,000
E. None of the above
76. Firm A is planning on merging with Firm B. Firm A will pay Firm B's stockholders the
current value of their stock in shares of Firm A. Firm A currently has 3,000 shares of stock
outstanding at a market price of $15 a share. Firm B has 1,000 shares outstanding at a price of
$10 a share. What is the value per share of the merged firm?
A. $10.00
B. $15.00
C. $16.25
D. $20.00
E. $20.50
77. Firm V was worth $500 and Firm A had a market value of $400. Firm V acquired Firm A
for $450 because they thought the combination of the new Firm VA was worth $1,000. What
is the synergy from the merger of Firm V and Firm A?
A. $50
B. $100
C. $450
D. $1,000
E. None of the above.
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78. Firm V was worth $500 and Firm A had a market value of $400. Firm V acquired Firm A
for $450 because they thought the combination of the new Firm VA was worth $1,000. What
is the NPV from the merger of Firm V and Firm A?
A. $0
B. $50
C. $400
D. $450
E. None of the above.
Essay Questions
79. The empirical evidence strongly indicates that the stockholders of the target firm realize
large wealth gains as a result of a takeover bid but the stockholders in the acquiring firm gain
little, if anything. Although there exists no definitive answer as to why this is the case, several
possible explanations have been proposed. List and explain three of these possible
explanations for the minimal returns to the acquiring firm's stockholders.
80. Describe the three basic legal procedures that one firm can use to acquire another and
briefly discuss the advantages and disadvantages of each.
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81. Sometimes the management of a target firm fights a takeover attempt even when that
attempt appears to be in the best interest of the shareholders. Why would management take
this stance?
82. Defensive merger tactics are designed to thwart unwanted takeovers and mergers. Do such
activities work to the advantage of stockholders all of the time? Are these types of activities
ethical? Who do you think benefits most from these activities?
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1. The complete absorption of one company by another, wherein the acquiring firm retains its
identity and the acquired firm ceases to exist as a separate entity, is called a:
A. merger.
B. consolidation.
C. tender offer.
D. spinoff.
E. divestiture.
2. A merger in which an entirely new firm is created and both the acquired and acquiring
firms cease to exist is called a:
A. divestiture.
B. consolidation.
C. tender offer.
D. spinoff.
E. conglomeration.
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3. A public offer by one firm to directly buy the shares of another firm is called a:
A. merger.
B. consolidation.
C. tender offer.
D. spinoff.
E. divestiture.
4. The acquisition of a firm in the same industry as the bidder is called a _____ acquisition.
A. conglomerate
B. forward
C. backward
D. horizontal
E. vertical
5. The acquisition of a firm involved with a different production process stage than the bidder
is called a _____ acquisition.
A. conglomerate
B. forward
C. backward
D. horizontal
E. vertical
29-26
6. The acquisition of a firm whose business is not related to that of the bidder is called a
_____ acquisition.
A. conglomerate
B. forward
C. backward
D. horizontal
E. vertical
8. A business deal in which all publicly owned stock in a firm is replaced with complete
equity ownership by a private group is called a:
A. tender offer.
B. proxy contest.
C. going-private transaction.
D. acquisition.
E. consolidation.
29-27
9. A going-private transaction in which a large percentage of the money used to buy the
outstanding stock is borrowed is called a:
A. tender offer.
B. proxy contest.
C. merger.
D. leveraged buyout.
E. consolidation.
10. The positive incremental net gain associated with the combination of two firms through a
merger or acquisition is called:
A. the agency conflict.
B. goodwill.
C. the merger cost.
D. the consolidation effect.
E. synergy.
11. A change in the corporate charter making it more difficult for the firm to be acquired by
increasing the percentage of shareholders that must approve a merger offer is called a:
A. supermajority amendment.
B. standstill agreement.
C. greenmail provision.
D. poison pill amendment.
E. white knight provision.
29-28
12. A contract wherein the bidding firm agrees to limit its holdings in the target firm is called
a:
A. supermajority amendment.
B. standstill agreement.
C. greenmail provision.
D. poison pill amendment.
E. white knight provision.
13. The payments made by a firm to repurchase shares of its outstanding stock from an
individual investor in an attempt to eliminate a potential unfriendly takeover attempt are
referred to as:
A. a golden parachute.
B. standstill payments.
C. greenmail.
D. a poison pill.
E. a white knight.
14. A financial device designed to make unfriendly takeover attempts financially unappealing,
if not impossible, is called:
A. a golden parachute.
B. a standstill agreement.
C. greenmail.
D. a poison pill.
E. a white knight.
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15. Generous compensation packages paid to a firm's top management in the event of a
takeover are referred to as:
A. golden parachutes.
B. poison puts.
C. white knights.
D. shark repellents.
E. bear hugs.
16. A friendly suitor that a target firm turns to as an alternative to a hostile bidder is called a:
A. golden suitor.
B. poison put.
C. white knight.
D. shark repellent.
E. crown jewel.
17. The sale of stock in a wholly owned subsidiary via an initial public offering is referred to
as a(n):
A. split-up.
B. equity carve-out.
C. countertender offer.
D. white knight transaction.
E. lockup transaction.
29-30
18. The distribution of shares in a subsidiary to existing parent company stockholders is called
a(n):
A. lockup transaction.
B. bear hug.
C. equity carve-out.
D. spin-off.
E. split-up.
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21. When a building supply store acquires a lumber mill it is making a ______ acquisition.
A. horizontal
B. longitudinal
C. conglomerate
D. vertical
E. complementary resources
22. If Microsoft were to acquire U.S. Airways, the acquisition would be classified as a _____
acquisition.
A. horizontal
B. longitudinal
C. conglomerate
D. vertical
E. complementary resources
23. Which of the following activities are commonly associated with takeovers?
I. the acquisition of assets
II. proxy contests
III. management buyouts
IV. leveraged buyouts
A. I and III only
B. II and IV only
C. I, III, and IV only
D. I, II, and IV only
E. I, II, III, and IV
29-32
29-33
27. Which of the following represent potential tax gains from an acquisition?
I. a reduction in the level of debt
II. an increase in surplus funds
III. the use of net operating losses
IV. an increased use of leverage
A. I and IV only
B. II and III only
C. III and IV only
D. I and III only
E. II, III, and IV only
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30. Which one of the following combinations of firms would benefit the most through the use
of complementary resources?
A. a ski resort and a travel trailer sales outlet
B. a golf resort and a ski resort
C. a hotel and a home improvement center
D. a swimming pool distributor and a kitchen designer
E. a fast food restaurant and a dry cleaner
31. Which one of the following is most likely a good candidate for an acquisition that could
benefit from the use of complementary resources?
A. a sports arena that is home only to an indoor hockey team
B. a hotel in a busy downtown business district of a major city
C. a day care center located near a major route into the main business district of a large city
D. an amusement park located in a centralized Florida location
E. a fast food restaurant located near a major transportation hub
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34. The value of a target firm to the acquiring firm is equal to:
A. the value of the target firm as a separate entity plus the incremental value derived from the
acquisition.
B. the purchase cost of the target firm.
C. the value of the merged firm minus the value of the target firm as a separate entity.
D. the purchase cost plus the incremental value derived from the acquisition.
E. the incremental value derived from the acquisition.
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36. If a firm wants to take over another firm but feels the attempt to do so will be viewed as
unfriendly it could decide to take a _____ approach to the acquisition.
A. crown jewel
B. shark repellent
C. bear hug
D. countertender offer
E. lockup
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37. Which of the following are reasons why a firm may want to divest itself of some of its
assets?
I. to raise cash
II. to get rid of unprofitable operations
III. to get rid of some assets received in an acquisition
IV. to cash in on some profitable operations
A. I and II only
B. I, II, and III only
C. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV
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41. One company wishes to acquire another. Which of the following forms of acquisition does
not require a formal vote by the shareholders of the acquired firm?
A. Merger
B. Acquisition of stock
C. Acquisition of assets
D. Consolidation
E. All of the above require a formal vote.
42. Firm A and Firm B join to create Firm AB. This is an example of:
A. a tender offer.
B. an acquisition of assets.
C. an acquisition of stock.
D. a consolidation.
E. Both B and C.
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43. Suppose that Verizon and Sprint were to merge. Ignoring potential antitrust problems, this
merger would be classified as a:
A. horizontal merger.
B. vertical merger.
C. conglomerate merger.
D. monopolistic merger.
E. None of the above.
44. Suppose that General Motors has made an offer to acquire General Mills. Ignoring
potential antitrust problems, this merger would be classified as a:
A. monopolistic merger.
B. horizontal merger.
C. vertical merger.
D. conglomerate merger.
E. None of the above.
45. Suppose that a McDonalds acquired a small potato grower. This merger would be
classified as a:
A. monopolistic merger.
B. vertical merger.
C. conglomerate merger.
D. horizontal merger.
E. None of the above.
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46. A dissident group solicits votes in an attempt to replace existing management. This is
called a:
A. tender offer.
B. shareholder derivative action.
C. proxy contest.
D. management freeze-out.
E. shareholder's revenge.
47. If the All-Star Fuel Filling Company, a chain of gasoline stations, acquires the Mid-States
Refining Company, a refiner of oil products, this would be an example of a:
A. conglomerate acquisition.
B. white knight.
C. vertical acquisition.
D. going-private transaction.
E. horizontal acquisition.
48. Which of the following is not true of an acquisition of stock or tender offer?
A. No stockholder meetings need to be held.
B. No vote is required.
C. The bidding firm deals directly with the stockholders of the target firm.
D. In most cases, 100% of the stock of the target firm is tendered.
E. All of the above are true of tender offers.
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49. When the management and/or a small group of investors take over a firm and the shares of
the firm are delisted and no longer publicly available, this action is known as a:
A. consolidation.
B. vertical acquisition.
C. proxy contest.
D. going-private transaction.
E. None of the above.
51. Cowboy Curtiss' Cowboy Hat Company recently completed a merger. When valuing the
combined firm after the merger, which of the following is an example of the type of common
mistakes that can occur?
A. The use of market values in valuing the new firm.
B. The inclusion of cash flows that are incremental to the decision.
C. The use of Curtiss' discount rate when valuing the cash flows of the entire company.
D. The inclusion of all relevant transaction costs associated with the acquisition.
E. None of the above.
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52. Turner, Inc. has $4.2 million in net working capital. The firm has fixed assets with a book
value of $48.6 million and a market value of $53.4 million. Martin & Sons is buying Turner,
Inc. for $60 million in cash. The acquisition will be recorded using the purchase accounting
method. What is the amount of goodwill that Martin & Sons will record on its balance sheet
as a result of this acquisition?
A. $0
B. $2.4 million
C. $6.6 million
D. $7.2 million
E. $11.4 million
Goodwill = $60m - ($4.2m + $53.4m) = $2.4m
53. Rudy's, Inc. and Blackstone, Inc. are all-equity firms. Rudy's has 1,500 shares outstanding
at a market price of $22 a share. Blackstone has 2,500 shares outstanding at a price of $38 a
share. Blackstone is acquiring Rudy's for $36,000 in cash. What is the merger premium per
share?
A. $2.00
B. $4.25
C. $6.50
D. $8.00
E. $14.00
Merger premium per share = ($36,000 1,500) - $22 = $2
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54. Jennifer's Boutique has 2,100 shares outstanding at a market price per share of $26. Sally's
has 3,000 shares outstanding at a market price of $41 a share. Neither firm has any debt.
Sally's is acquiring Jennifer's for $58,000 in cash. What is the merger premium per share?
A. $1.43
B. $1.62
C. $1.81
D. $2.04
E. $2.07
Merger premium per share = ($58,000 2,100) - $26 = $1.62
55. Jennifer's Boutique has 2,100 shares outstanding at a market price per share of $26. Sally's
has 3,000 shares outstanding at a market price of $41 a share. Neither firm has any debt.
Sally's is acquiring Jennifer's for $58,000 in cash. The incremental value of the acquisition is
$2,500. What is the value of Jennifer's Boutique to Sally's?
A. $26,000
B. $27,600
C. $57,100
D. $58,200
E. $60,500
Value of Jennifer's to Sally's = (2,100 $26) + $2,500 = $57,100
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56. Rudy's, Inc. and Blackstone, Inc. are all-equity firms. Rudy's has 1,500 shares outstanding
at a market price of $22 a share. Blackstone has 2,500 shares outstanding at a price of $38 a
share. Blackstone is acquiring Rudy's for $36,000 in cash. The incremental value of the
acquisition is $3,500. What is the value of Rudy's Inc. to Blackstone?
A. $30,000
B. $32,500
C. $33,000
D. $36,500
E. $39,500
Value of Rudy's to Blackstone = (1,500 $22) + $3,500 = $36,500
57. ABC and XYZ are all-equity firms. ABC has 1,750 shares outstanding at a market price of
$20 a share. XYZ has 2,500 shares outstanding at a price of $28 a share. XYZ is acquiring
ABC for $36,000 in cash. The incremental value of the acquisition is $3,000. What is the net
present value of acquiring ABC to XYZ?
A. $1,000
B. $2,000
C. $3,000
D. $4,000
E. $5,000
NPV = (1,750 $20) + $3,000 - $36,000 = $2,000
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58. Firm A is acquiring Firm B for $40,000 in cash. Firm A has 2,500 shares of stock
outstanding at a market value of $18 a share. Firm B has 1,500 shares of stock outstanding at
a market price of $25 a share. Neither firm has any debt. The net present value of the
acquisition is $2,500. What is the value of Firm A after the acquisition?
A. $40,000
B. $42,500
C. $45,000
D. $47,500
E. $50,000
Value of A = (2,500 $18) + $2,500 = $47,500
59. Firm A is acquiring Firm B for $25,000 in cash. Firm A has 2,000 shares of stock
outstanding at a market value of $21 a share. Firm B has 1,200 shares of stock outstanding at
a market price of $17 a share. Neither firm has any debt. The net present value of the
acquisition is $1,500. What is the price per share of Firm A after the acquisition?
A. $21.00
B. $21.25
C. $21.75
D. $22.00
E. $22.50
Price per share of A = [(2,000 $21) + $1,500] 2,000 = $21.75
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60. Alto and Solo are all-equity firms. Alto has 2,400 shares outstanding at a market price of
$24 a share. Solo has 4,000 shares outstanding at a price of $17 a share. Solo is acquiring Alto
for $63,000 in cash. The incremental value of the acquisition is $5,500. What is the net
present value of acquiring Alto to Solo?
A. $100
B. $400
C. $1,200
D. $2,400
E. $5,500
NPV = (2,400 $24) + $5,500 - $63,000 = $100
61. Principal, Inc. is acquiring Secondary Companies for $29,000 in cash. Principal has 2,500
shares of stock outstanding at a market price of $30 a share. Secondary has 1,600 shares of
stock outstanding at a market price of $15 a share. Neither firm has any debt. The net present
value of the acquisition is $4,500. What is the price per share of Principal after the
acquisition?
A. $30.00
B. $30.70
C. $31.80
D. $32.10
E. $32.50
Price per share = [(2,500 $30) + $4,500] 2,500 = $31.80
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62. Winslow Co. has agreed to be acquired by Ferrier, Inc. for $25,000 worth of Ferrier stock.
Ferrier currently has 1,500 shares of stock outstanding at a price of $21 a share. Winslow has
1,000 shares outstanding at a price of $22. The incremental value of the acquisition is $4,000.
What is the merger premium per share?
A. $1
B. $2
C. $3
D. $4
E. $5
Merger premium per share = ($25,000 1,000) - $22 = $3
63. Brite Industries has agreed to merge with Nu-Day, Inc. for $20,000 worth of Nu-Day
stock. Brite has 1,200 shares of stock outstanding at a price of $15 a share. Nu-Day has 2,000
shares outstanding with a market value of $19 a share. The incremental value of the
acquisition is $3,500. What is the value of Nu-Day after the merger?
A. $53,000
B. $54,250
C. $56,000
D. $57,750
E. $59,500
Value after merger = (1,200 $15) + (2,000 $19) + $3,500 = $59,500
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64. Goodday & Sons is being acquired by Baker, Inc. for $19,000 worth of Baker stock.
Baker has 1,500 shares of stock outstanding at a price of $25 a share. Goodday has 1,000
shares outstanding with a market value of $16 a share. The incremental value of the
acquisition is $2,000. How many new shares of stock will be issued to complete this
acquisition?
A. 760.0 shares
B. 840.0 shares
C. 960.0 shares
D. 1,187.5 shares
E. 1,312.5 shares
Number of shares issued = $19,000 $25 = 760 shares
65. Holiday & Sons is being acquired by Miller's, Inc. for $20,000 worth of Miller's stock.
Miller has 1,300 shares of stock outstanding at a price of $20 a share. Holiday has 1,000
shares outstanding with a market value of $18 a share. The incremental value of the
acquisition is $2,000. What is the total number of shares in the new firm?
A. 1,000 shares
B. 1,300 shares
C. 1,500 shares
D. 2,000 shares
E. 2,300 shares
Total number of shares = 1,300 + ($20,000 $20) = 2,300 shares
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66. Firm A is being acquired by Firm B for $24,000 worth of Firm B stock. The incremental
value of the acquisition is $3,500. Firm A has 1,500 shares of stock outstanding at a price of
$15 a share. Firm B has 1,200 shares of stock outstanding at a price of $30 a share. What is
the value per share of Firm B after the acquisition?
A. $17.50
B. $24.00
C. $30.00
D. $31.00
E. $35.00
Value per share = [(1,200 $30) + (1,500 $15) + $3,500] [1,200 + ($24,000 $30)] =
$62,000 2,000 = $31.00
67. Firm X is being acquired by Firm Y for $35,000 worth of Firm Y stock. The incremental
value of the acquisition is $2,500. Firm X has 2,000 shares of stock outstanding at a price of
$16 a share. Firm Y has 1,200 shares of stock outstanding at a price of $40 a share. What is
the actual cost of the acquisition using company stock?
A. $34,750
B. $34,789
C. $35,000
D. $35,289
E. $35,500
Number of shares issued = $35,000 $40 = 875 shares; Value per share after merger =
[(1,200 $40) + (2,000 $16) + $2,500] [1,200 + 875] = $82,500 2,075 = $39.75904;
Actual cost of acquisition = 875 $39.75904 = $34,789.16 = $34,789
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68. Firm Q is being acquired by Firm S for $30,000 worth of Firm S stock. The incremental
value of the acquisition is $2,000. Firm Q has 1,900 shares of stock outstanding at a price of
$15 a share. Firm S has 1,500 shares of stock outstanding at a price of $40 a share. What is
the net present value of the acquisition given that the actual cost of the acquisition using
company stock is $30,167?
A. $167
B. $225
C. $333
D. $425
E. $433
Net present value = [(1,900 $15) + $2,000] - $30,167 = $30,500 - $30,167 = $333
69. The Sligo Co. is planning on merging with the Thorton Co. Sligo will pay Thorton's
stockholders the current value of their stock in shares of Sligo. Sligo currently has 2,300
shares of stock outstanding at a market price of $20 a share. Thorton has 1,800 shares
outstanding at a price of $15 a share. How many shares of stock will be outstanding in the
merged firm?
A. 1,800 shares
B. 2,300 shares
C. 2,750 shares
D. 3,650 shares
E. 4,100 shares
Number of shares = 2,300 + (1,800 $15 $20) = 3,650 shares
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70. Firm A is planning on merging with Firm B. Firm A will pay Firm B's stockholders the
current value of their stock in shares of Firm A. Firm A currently has 2,300 shares of stock
outstanding at a market price of $20 a share. Firm B has 1,800 shares outstanding at a price of
$15 a share. The after-merger earnings will be $6,500. What will the earnings per share be
after the merger?
A. $1.67
B. $1.78
C. $1.83
D. $1.87
E. $1.92
Number of shares = 2,300 + (1,800 $15 $20) = 3,650; Earnings per share = $6,500
3,650 = $1.78
71. Firm A is planning on merging with Firm B. Firm A will pay Firm B's stockholders the
current value of their stock in shares of Firm A. Firm A currently has 2,300 shares of stock
outstanding at a market price of $20 a share. Firm B has 1,800 shares outstanding at a price of
$15 a share. What is the value of the merged firm?
A. $73,000
B. $75,000
C. $76,667
D. $77,778
E. $78,000
Value of merged firm = (2,300 $20) + (1,800 $15) = $73,000
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72. Firm A is planning on merging with Firm B. Firm A will pay Firm B's stockholders the
current value of their stock in shares of Firm A. Firm A currently has 2,300 shares of stock
outstanding at a market price of $20 a share. Firm B has 1,800 shares outstanding at a price of
$15 a share. What is the value per share of the merged firm?
A. $19.00
B. $19.18
C. $19.44
D. $20.00
E. $20.33
Value per share = [(2,300 $20) + (1,800 $15)] [2,300 + (1,800 $15 $20)] = $73,000
3,650 = $20
73. Firm V was worth $450 and Firm A had a market value of $375. Firm V acquired Firm A
for $425 because they thought the combination of the new Firm VA was worth $925. What is
the synergy from the merger of Firm V and Firm A?
A. $50
B. $100
C. $475
D. $500
E. None of the above.
Merger premium = $925 - ($450 + $375) = $100
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74. Firm V was worth $450 and Firm A had a market value of $375. Firm V acquired Firm A
for $425 because they thought the combination of the new Firm VA was worth $925. What is
the NPV from the merger of Firm V and Firm A?
A. $0
B. $50
C. $425
D. $450
E. None of the above.
Net Present Value = $925 - $450 - $375 - ($425 - $375) = $50
75. Firm A is planning on merging with Firm B. Firm A will pay Firm B's stockholders the
current value of their stock in shares of Firm A. Firm A currently has 3,000 shares of stock
outstanding at a market price of $15 a share. Firm B has 1,000 shares outstanding at a price of
$10 a share. What is the value of the merged firm?
A. $25,000
B. $45,000
C. $55,000
D. $60,000
E. None of the above
Value of merged firm = (3,000 $15) + (1,000 $10) = $55,000
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76. Firm A is planning on merging with Firm B. Firm A will pay Firm B's stockholders the
current value of their stock in shares of Firm A. Firm A currently has 3,000 shares of stock
outstanding at a market price of $15 a share. Firm B has 1,000 shares outstanding at a price of
$10 a share. What is the value per share of the merged firm?
A. $10.00
B. $15.00
C. $16.25
D. $20.00
E. $20.50
Value per share = [(3,000 $15) + (1,000 $10)] [3,000 + (1,000 $10 $15)] = $55,000
3,666.67 = $15
77. Firm V was worth $500 and Firm A had a market value of $400. Firm V acquired Firm A
for $450 because they thought the combination of the new Firm VA was worth $1,000. What
is the synergy from the merger of Firm V and Firm A?
A. $50
B. $100
C. $450
D. $1,000
E. None of the above.
Merger premium = $1,000 - ($500 + $400) = $100
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78. Firm V was worth $500 and Firm A had a market value of $400. Firm V acquired Firm A
for $450 because they thought the combination of the new Firm VA was worth $1,000. What
is the NPV from the merger of Firm V and Firm A?
A. $0
B. $50
C. $400
D. $450
E. None of the above.
Net Present Value = $1,000 - $500 - $400 - ($450 - $400) = $50
Essay Questions
79. The empirical evidence strongly indicates that the stockholders of the target firm realize
large wealth gains as a result of a takeover bid but the stockholders in the acquiring firm gain
little, if anything. Although there exists no definitive answer as to why this is the case, several
possible explanations have been proposed. List and explain three of these possible
explanations for the minimal returns to the acquiring firm's stockholders.
Size differentials, competition in the takeover market, lack of achieving merger gains,
management goals other than the best interests of the shareholders, and early announcements
of corporate acquisition intent are all presented as possible explanations in the textbook.
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80. Describe the three basic legal procedures that one firm can use to acquire another and
briefly discuss the advantages and disadvantages of each.
The three forms are merger, acquisition of stock, and acquisition of assets. A merger has the
advantage that it is legally simple and therefore low cost but it has the disadvantage that it
must be approved by the shareholders of both firms. Acquisition by stock requires no
shareholder meetings and management of the target firm can be bypassed. However, it can be
a costly form of acquisition and minority shareholders may hold out, thereby raising the cost
of the purchase. An acquisition of assets requires the vote of the target firm's shareholders.
However, it can become quite costly to transfer title to all of the assets.
81. Sometimes the management of a target firm fights a takeover attempt even when that
attempt appears to be in the best interest of the shareholders. Why would management take
this stance?
Often, the management of the target firm is replaced after an acquisition. If management
believes this may be the case, they may fight the takeover attempt in an effort to maintain
their current positions. In other cases, management may fight the attempt if they feel that by
doing so, they may increase the amount paid by the acquiring firm.
82. Defensive merger tactics are designed to thwart unwanted takeovers and mergers. Do such
activities work to the advantage of stockholders all of the time? Are these types of activities
ethical? Who do you think benefits most from these activities?
Good answers will acknowledge that defensive tactics "insulate" existing management from
the vagaries of the marketplace and may allow ineffective management to remain in charge.
Obviously, defensive maneuvers do not always act in the best interest of shareholders and
many students will argue that management benefits most from these activities. The ethics
debate about these issues is always an interesting one.
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