Question 1

Which one of the following statements is correct?

Accepted Answer

A)   The shareholders of an acquired firm are generally given a choice of accepting either cash or shares of stock when the acquisition is tax-free.
B)   To be a tax-free acquisition,the shareholders of an acquired firm must receive shares in the acquiring firm that are equal to 95 percent or less of the value of the shares held in the acquired firm.
C)   The assets of an acquired firm are recorded on the books of the acquiring firm at their current book value regardless of the tax status of the acquisition.
D)   Target firm shareholders demand a higher selling price when an acquisition is a non-taxable event.
E)   If the assets of a firm are written up as part of the acquisition process,the increase in value is considered to be a taxable gain.F) B) and E)
G) C) and E)

Question 2

Which one of the following statements is correct?

Accepted Answer

A)   Firms with large net operating losses tend to be acquiring firms rather than target firms.
B)   The leverage associated with an acquisition increases the tax liability of the acquiring firm.
C)   If either an increase or a decrease in the level of production causes the average cost per unit to increase then the firm is currently operating at its optimal production level.
D)   Firms can always benefit from economies of scale if they increase the size of their firm through acquisitions.
E)   If a firm uses it surplus cash to acquire another firm then the shareholders of the acquiring firm immediately incur a tax liability related to the transaction.F) C) and E)
G) A) and C)

Question 3

The pooling of interests method of accounting:
I.creates an account called goodwill which is recorded on the balance sheet of the merged firm.
II.consists of simply combining the balance sheets of the acquiring and the target firm.
III.is currently the accounting method required by FASB for all cash acquisitions.
IV.recognizes the excess of the purchase price over the fair market value and records that excess as an asset of the acquiring firm.

Accepted Answer

A)   I only
B)   II only
C)   I and IV only
D)   II and III only
E)   I,II,and IV onlyF) B) and C)
G) A) and E)

Question 4

The Sweet Shoppe and Candy Land are all-equity firms.The Sweet Shoppe has 500 shares outstanding at a market price of $96 a share.Candy Land has 2,700 shares outstanding at a price of $24 a share.The Sweet Shoppe is acquiring Candy Land for $62,000 in cash.The incremental value of the acquisition is $3,600.What is the net present value of acquiring Candy Land to The Sweet Shoppe?

Accepted Answer

A)   $1,600
B)   $6,400
C)   $6,700
D)   $7,200
E)   $7,700F) A) and D)
G) A) and B)

Question 5

Firm A is acquiring Firm B for $75,000 in cash.Firm A has 4,500 shares of stock outstanding at a market value of $27 a share.Firm B has 2,500 shares of stock outstanding at a market price of $29 a share.Neither firm has any debt.The incremental value of the acquisition is $2,200.What is the price per share of Firm A's stock after the acquisition?

Accepted Answer

A)   $25.98
B)   $26.45
C)   $26.93
D)   $27.00
E)   $27.33F) All of the above
G) C) and E)

Question 6

The Floral Shoppe and Maggie's Flowers are all-equity firms.The Floral Shoppe has 2,500 shares outstanding at a market price of $16.50 a share.Maggie's Flowers has 5,000 shares outstanding at a price of $17 a share.Maggie's Flowers is acquiring The Floral Shoppe for $42,900 in cash.The incremental value of the acquisition is $1,200.What is the net present value of acquiring The Floral Shoppe to Maggie's Flowers?

Accepted Answer

A)   -$450
B)   $275
C)   $500
D)   $2,400
E)   $3,700F) C) and E)
G) None of the above

Question 7

Glendale Marine is being acquired by Inland Motors for $53,000 worth of Inland Motors stock.Inland Motors has 6,200 shares of stock outstanding at a price of $49 a share.Glendale Marine has 1,700 shares outstanding with a market value of $30 a share.The incremental value of the acquisition is $2,600.What is the total number of shares in the new firm?

Accepted Answer

A)   7,229 shares
B)   7,282 shares
C)   7,529 shares
D)   7,852 shares
E)   7,900 sharesF) A) and B)
G) C) and D)

Question 8

Assume the following balance sheets are stated at book value. 
Suppose the fair market value of Loaf's fixed assets is $7,200 versus the $3,300 book value shown.Meat pays $10,200 for Loaf and raises the needed funds through an issue of long-term debt.Assume the purchase method of accounting is used.The post-merger balance sheet of Meat Co.will have total debt of ______ and total equity of ______.

Accepted Answer

A)   $1,600;$11,500
B)   $1,600;$15,400
C)   $10,200;$15,400
D)   $14,500;$11,500
E)   $14,500;$15,400F) A) and D)
G) C) and E)

Question 9

Which of the following are examples of cost reductions that can result from an acquisition?
I.allocating fixed overhead across a wider range of products
II.lowering office payroll costs by combining job functions
III.benefiting from economies of scale when purchasing raw materials
IV.reducing the number of management personnel required

Accepted Answer

A)   I and III only
B)   II and IV only
C)   I,II,and IV only
D)   II,III,and IV only
E)   I,II,III,and IVF) A) and B)
G) B) and C)

Question 10

Which of the following increase the costs associated with a merger?

Accepted Answer

A)   changing the title to all the combined firm's assets
B)   disbanding the operations of the target firm
C)   hiring an underwriter to distribute the IPO shares
D)   issue costs associated with warrants that must be offered to the shareholders of the acquiring firm
E)   seeking approval of the shareholders of both the acquiring and the acquired firmF) A) and E)
G) A) and D)

Question 11

When evaluating an acquisition you should:

Accepted Answer

A)   concentrate on book values and ignore market values.
B)   focus on the total cash flows of the merged firm.
C)   apply the rate of return that is relevant to the incremental cash flows.
D)   ignore any one-time acquisition fees or transaction costs.
E)   ignore any potential changes in management.F) A) and E)
G) B) and C)

Question 12

Taylor's Hardware is acquiring The Corner Store for $25,000 in cash.Taylor's has 1,500 shares of stock outstanding at a market value of $46 a share.The Corner Store has 2,200 shares of stock outstanding at a market price of $8 a share.Neither firm has any debt.The incremental value of the acquisition is $3,500.What is the value of Taylor's Hardware after the acquisition?

Accepted Answer

A)   $49,000
B)   $50,300
C)   $57,300
D)   $65,100
E)   $72,400F) C) and E)
G) A) and E)

Question 13

Princeton Enterprises is a diversified company.In addition to its primary business operations,the firm is also the sole shareholder of a wholly owned subsidiary.As part of its restructuring plan,Princeton has decided to implement an IPO offering for shares in the subsidiary.This offering is equivalent to a 25 percent ownership stake in the subsidiary.What is the distribution of these shares called?

Accepted Answer

A)   split-up
B)   equity carve-out
C)   countertender offer
D)   white knight transaction
E)   lockup transactionF) C) and E)
G) A) and B)

Question 14

Which one of the following statements is correct?

Accepted Answer

A)   A spin-off frequently follows an equity carve-out.
B)   A split-up frequently follows a spin-off.
C)   An equity carve-out is a specific type of acquisition.
D)   A spin-off involves an initial public offering.
E)   A divestiture means that the original firm ceases to exist.F) A) and C)
G) B) and C)

Question 15

The purchase accounting method requires that:

Accepted Answer

A)   the excess of the purchase price over the fair market value of the target firm be recorded as a one-time expense on the income statement of the acquiring firm.
B)   goodwill be amortized on a yearly basis for financial statement purposes.
C)   the equity of the acquiring firm be reduced by the excess of the purchase price over the fair market value of the target firm.
D)   the assets of the target firm be recorded at their fair market value on the balance sheet of the acquiring firm.
E)   the excess amount paid for the target firm be recorded as a tangible asset on the books of the acquiring firm.F) B) and C)
G) B) and E)

Question 16

The incremental cash flows of a merger can relate to changes in which of the following?
I.revenue
II.capital requirements
III.operating costs
IV.income taxes

Accepted Answer

A)   I and II only
B)   II,III,and IV only
C)   I,III,and IV only
D)   I,II,and III only
E)   I,II,III,and IVF) B) and D)
G) C) and E)

Question 17

Sue's Bakery is planning on merging with Ted's Deli.Sue's will pay Ted's shareholders the current value of their stock in shares of Sue's Bakery.Sue's currently has 4,500 shares of stock outstanding at a market price of $19 a share.Ted's has 2,300 shares outstanding at a price of $20 a share.What is the value of the merged firm?

Accepted Answer

A)   $106,500
B)   $107,800
C)   $125,400
D)   $131,500
E)   $131,600F) A) and E)
G) A) and B)

Question 18

Pearl,Inc.has offered $920 million cash for all of the common stock in Jam Corporation.Based on recent market information,Jam is worth $710 million as an independent operation.For the merger to make economic sense for Pearl,what would the minimum estimated value of the synergistic benefits from the merger have to be?

Accepted Answer

A)   $0
B)   $75 million
C)   $210 million
D)   $710 million
E)   $920 millionF) A) and E)
G) A) and D)

Question 19

The shareholders of Jolie Company have voted in favor of a buyout offer from Pitt Corporation.Information about each firm is given here: 
Jolie's shareholders will receive one share of Pitt stock for every three shares they hold in Jolie.Assume the NPV of the acquisition is zero.What will the post-merger PE ratio be for Pitt?

Accepted Answer

A)   8.4
B)   9.2
C)   9.8
D)   10.5
E)   11.2F) All of the above
G) B) and C)

Question 20

Roger is a major shareholder in RB Industrial Supply.Currently,Roger is quite unhappy with the direction the firm is headed and is rumored to be considering an attempt to take over the firm by soliciting the votes of other shareholders.To head off this potential attempt,the board of RB Industrial Supply has decided to offer Roger $35 a share for all the shares he owns in the firm.The current market value per share is $32.This offer to purchase Roger's shares is commonly referred to as:

Accepted Answer

A)   a golden parachute.
B)   standstill payments.
C)   greenmail.
D)   a poison pill.
E)   a white knight.F) C) and D)
G) C) and E)

Exam 26: Mergers and Acquisitions

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Which one of the following statements is correct?

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Which of the following increase the costs associated with a merger?

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Which one of the following statements is correct?

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The incremental cash flows of a merger can relate to changes in which of the following? I.revenue II.capital requirements III.operating costs IV.income taxes

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When evaluating an acquisition you should:

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Which one of the following statements is correct?

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The purchase accounting method requires that:

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Exam 26: Mergers and Acquisitions

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Which one of the following statements is correct?

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Which of the following increase the costs associated with a merger?

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Which one of the following statements is correct?

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The incremental cash flows of a merger can relate to changes in which of the following? I.revenue II.capital requirements III.operating costs IV.income taxes

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When evaluating an acquisition you should:

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Which one of the following statements is correct?

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The purchase accounting method requires that:

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