Question 1

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.

Accepted Answer

A) True 
 B)False

Question 2

The 3 main advantages of holding companies are (1) control with fractional ownership, (2) taxation benefits, and (3) isolation of operating risks.

Accepted Answer

A) True 
 B)False

Question 3

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.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following statements is most CORRECT?

Accepted Answer

A)   The acquiring firm's required rate of return in most horizontal mergers will not be affected, because the 2 firms will have similar betas.
B)   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.
C)   The basic rationale for any financial merger is synergy and, thus, the estimation of proforma cash flows is the single most important part of the analysis.
D)   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.
E)   The primary rationale for most operating mergers is synergy.F) A) and C)
G) A) and B)

Question 5

Which of the following actions can help managers defend against a hostile takeover?

Accepted Answer

A)   Establishing a poison pill provision.
B)   Granting lucrative golden parachutes to senior managers.
C)   Establishing a super-majority provision in the company's bylaws to raise the percentage of the board of directors that must approve an acquisition from 50% to 75%.
D)   All of the answers above are correct.
E)   None of the answers above is correct.F) A) and B)
G) A) and C)

Question 6

Which of the following statements is most CORRECT?

Accepted Answer

A)   Leveraged buyouts (LBOs)  occur when a firm issues equity and uses the proceeds to take a firm public.
B)   In a typical LBO, bondholders do well but shareholders see their value decline.
C)   Firms are forbidden by law to sell any assets during the first five years following a leverage buyout.
D)   All of the answers above are correct.
E)   None of the answers above is correct.F) C) and D)
G) A) and B)

Question 7

A conglomerate merger occurs when two firms with either a horizontal or a vertical business relationship combine.

Accepted Answer

A) True 
 B)False

Question 8

Leveraged buyouts (LBOs) occur when a firm's managers, generally backed by private equity groups, try to gain control of a publicly owned company by buying out the public shareholders using large amounts of borrowed money.

Accepted Answer

A) True 
 B)False  True

Question 9

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.

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements is most CORRECT?

Accepted Answer

A)   Tax considerations often play a part in mergers. If one firm has excess cash, purchasing another firm exposes the purchasing firm to additional taxes. Thus, firms with excess cash rarely undertake mergers.
B)   The smaller the synergistic benefits of a particular merger, the greater the scope for striking a bargain in negotiations, and the higher the probability that the merger will be completed.
C)   Since mergers are frequently financed by debt rather than equity, a lower cost of debt or a greater debt capacity are rarely relevant considerations when considering a merger.
D)   Managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification, including more stable earnings. However, since shareholders are free to diversify their own holdings, and at what's probably a lower cost, diversification benefits is generally not a valid motive for a publicly held firm.
E)   All of the answers above are correct.F) A) and D)
G) A) and E)

Question 12

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 34% and if the exclusion on intercompany dividends is 70%, what is the effective tax rate on the intercompany dividends, and how much net dividends are received?

Accepted Answer

A)   10.2%; $2,245,000
B)   10.2%; $2,135,000
C)   23.8%; $1,905,000
D)   10.2%; $1,750,000
E)   34.0%; $1,650,000F) B) and E)
G) A) and B)

Question 13

Magiclean Corporation is considering the acquisition of Dustvac Company. Dustvac has a capital structure consisting of $5 million (market value)  of 11% bonds and $10 million (market value)  of common stock. Dustvac's pre-merger beta is 1.36. Magiclean's beta is 1.02 , and both it and Dustvac face a 40% tax rate. Magiclean's capital structure is 40% debt and 60% equity. The free cash flows from Dustvac are estimated to be $3.0 million for each of the next 4 years and a horizon value of $10.0 million in Year 4. Tax savings are estimated to be $1 million for each of the next 4 years and a horizon value of $5 million in Year 4. New debt would be issued to finance the acquisition and retire the old debt, and this new debt would have an interest rate of 8%. Currently, the risk-free rate is 6.0% and the market risk premium is 4.0%.
-What Dustvac's pre-merger WACC?

Accepted Answer

A)   9.02%
B)   9.50%
C)   9.83%
D)   10.01%
E)   11.29%F) A) and C)
G) None of the above

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the discount rate can only be determined after the merger is consummated.

Accepted Answer

A) True 
 B)False

Question 16

Kelly Tubes is considering a merger with Reilly Tires. Reilly's market-determined beta is 0.9, and the firm currently is financed with 20% debt, at an interest rate of 8%, and its tax rate is 25%. If Kelly acquires Reilly, it will increase the debt to 60% , at an interest rate of 9%, and the tax rate will increase to 35%. The risk-free rate is 6% and the market risk premium is 4%. What will Reilly's required rate of return on equity be after it is acquired?

Accepted Answer

A)   7.4%
B)   8.9%
C)   9.3%
D)   9.6%
E)   9.7%F) B) and E)
G) A) and D) E

Question 17

Magiclean Corporation is considering the acquisition of Dustvac Company. Dustvac has a capital structure consisting of $5 million (market value)  of 11% bonds and $10 million (market value)  of common stock. Dustvac's pre-merger beta is 1.36. Magiclean's beta is 1.02 , and both it and Dustvac face a 40% tax rate. Magiclean's capital structure is 40% debt and 60% equity. The free cash flows from Dustvac are estimated to be $3.0 million for each of the next 4 years and a horizon value of $10.0 million in Year 4. Tax savings are estimated to be $1 million for each of the next 4 years and a horizon value of $5 million in Year 4. New debt would be issued to finance the acquisition and retire the old debt, and this new debt would have an interest rate of 8%. Currently, the risk-free rate is 6.0% and the market risk premium is 4.0%.
-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)   13.49%F) C) and D)
G) B) and C)

Question 18

The distribution of synergistic gains between the stockholders of 2 merged firms is almost always based strictly on their respective market values before the announcement of the merger.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following statements about accounting for mergers is most CORRECT?

Accepted Answer

A)   Goodwill is amortized for shareholder reporting.
B)   Goodwill is amortized for Federal tax purposes.
C)   Goodwill is no longer created in a merger.
D)   Answers a and b are correct.
E)   None of the statements above is correct.F) A) and B)
G) A) and E) B

Question 20

Which of the following are given by the text as valid, acceptable reasons for the high level of merger activity in the U.S. during the 1980s?

Accepted Answer

A)   Synergistic benefits arising from mergers.
B)   Reduction in competition resulting from mergers.
C)   Attempts to stabilize earnings by diversifying.
D)   All of the above.
E)   Both a and c above.F) B) and E)
G) D) and E)

Exam 26: Mergers, Lbos, Divestitures, and Holding Companies

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.

Correct Answer
verified

The 3 main advantages of holding companies are (1) control with fractional ownership, (2) taxation benefits, and (3) isolation of operating risks.

Correct Answer
verified

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.

Correct Answer
verified

Which of the following statements is most CORRECT?

Correct Answer
verified

Which of the following actions can help managers defend against a hostile takeover?

Correct Answer
verified

Which of the following statements is most CORRECT?

Correct Answer
verified

A conglomerate merger occurs when two firms with either a horizontal or a vertical business relationship combine.

Correct Answer
verified

Leveraged buyouts (LBOs) occur when a firm's managers, generally backed by private equity groups, try to gain control of a publicly owned company by buying out the public shareholders using large amounts of borrowed money.

Correct Answer
verified
True

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.

Correct Answer
verified

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

Correct Answer
verified

Which of the following statements is most CORRECT?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

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

Correct Answer
verified

Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the discount rate can only be determined after the merger is consummated.

Correct Answer
verified

Correct Answer
verified
E

Correct Answer
verified

The distribution of synergistic gains between the stockholders of 2 merged firms is almost always based strictly on their respective market values before the announcement of the merger.

Correct Answer
verified

Which of the following statements about accounting for mergers is most CORRECT?

Correct Answer
verified
B

Which of the following are given by the text as valid, acceptable reasons for the high level of merger activity in the U.S. during the 1980s?

Correct Answer
verified

Exam 26: Mergers, Lbos, Divestitures, and Holding Companies

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.

Correct AnswerverifiedShow Answer

The 3 main advantages of holding companies are (1) control with fractional ownership, (2) taxation benefits, and (3) isolation of operating risks.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Which of the following statements is most CORRECT?

Correct AnswerverifiedShow Answer

Which of the following actions can help managers defend against a hostile takeover?

Correct AnswerverifiedShow Answer

Which of the following statements is most CORRECT?

Correct AnswerverifiedShow Answer

A conglomerate merger occurs when two firms with either a horizontal or a vertical business relationship combine.

Correct AnswerverifiedShow Answer

Leveraged buyouts (LBOs) occur when a firm's managers, generally backed by private equity groups, try to gain control of a publicly owned company by buying out the public shareholders using large amounts of borrowed money.

Correct AnswerverifiedTrue

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.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements is most CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the discount rate can only be determined after the merger is consummated.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedE

Correct AnswerverifiedShow Answer

The distribution of synergistic gains between the stockholders of 2 merged firms is almost always based strictly on their respective market values before the announcement of the merger.

Correct AnswerverifiedShow Answer

Which of the following statements about accounting for mergers is most CORRECT?

Correct AnswerverifiedB

Which of the following are given by the text as valid, acceptable reasons for the high level of merger activity in the U.S. during the 1980s?

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
True

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
E

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
B

Correct Answer
verified