Chapter 025 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.
SECTION: 25.1
TOPIC: MERGER
TYPE: DEFINITIONS
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.
SECTION: 25.1
TOPIC: CONSOLIDATION
TYPE: DEFINITIONS
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.
SECTION: 25.1
TOPIC: TENDER OFFER
TYPE: DEFINITIONS
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Chapter 025 Mergers and Acquisitions
4. An attempt to gain control of a firm by soliciting a sufficient number of stockholder
votes to replace existing management is called a:
a. tender offer.
B. proxy contest.
c. going-private transaction.
d. leveraged buyout.
e. consolidation.
SECTION: 25.1
TOPIC: PROXY CONTEST
TYPE: DEFINITIONS
5. 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. leveraged buyout.
e. consolidation.
SECTION: 25.1
TOPIC: GOING-PRIVATE TRANSACTION
TYPE: DEFINITIONS
6. Going-private transactions 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.
SECTION: 25.1
TOPIC: LEVERAGED BUYOUT
TYPE: DEFINITIONS
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Chapter 025 Mergers and Acquisitions
7. An agreement between firms to cooperate in pursuit of a joint goal is called a:
a. consolidation.
b. merged alliance.
c. joint venture.
d. takeover project.
E. strategic alliance.
SECTION: 25.1
TOPIC: STRATEGIC ALLIANCE
TYPE: DEFINITIONS
8. An agreement between firms to create a separate, co-owned entity established to pursue
a joint goal is called a:
a. consolidation.
b. strategic alliance.
C. joint venture.
d. merged alliance.
e. takeover project.
SECTION: 25.1
TOPIC: JOINT VENTURE
TYPE: DEFINITIONS
9. 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.
SECTION: 25.4
TOPIC: SYNERGY
TYPE: DEFINITIONS
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Chapter 025 Mergers and Acquisitions
10. 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.
SECTION: 25.7
TOPIC: GREENMAIL
TYPE: DEFINITIONS
11. A financial device designed to make unfriendly takeover attempts unappealing, if not
impossible, is called:
a. a golden parachute.
b. a standstill agreement.
c. greenmail.
D. a poison pill.
e. a white knight.
SECTION: 25.7
TOPIC: POISON PILL
TYPE: DEFINITIONS
12. Corporate charter provisions allowing existing stockholders to purchase stock at some
fixed price in the event of a hostile outside takeover attempt are called:
a. pac-man defenses.
b. shark repellent plans.
c. golden parachute provisions.
d. greenmail provisions.
E. share rights plans.
SECTION: 25.7
TOPIC: SHARE RIGHTS PLANS
TYPE: DEFINITIONS
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Chapter 025 Mergers and Acquisitions
13. The sale of a portion of a firm's assets, operations, or divisions to a third party is
referred to as a:
a. liquidation.
B. divestiture.
c. merger.
d. allocation.
e. restructuring.
SECTION: 25.9
TOPIC: DIVESTITURE
TYPE: DEFINITIONS
14. 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.
SECTION: 25.9
TOPIC: EQUITY CARVE-OUT
TYPE: DEFINITIONS
15. 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.
SECTION: 25.9
TOPIC: SPIN-OFF
TYPE: DEFINITIONS
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Chapter 025 Mergers and Acquisitions
16. The division of a firm into two or more separate companies is called a(n):
a. lockup transaction.
b. divestiture.
c. equity carve-out.
d. spin-off.
E. split-up.
SECTION: 25.9
TOPIC: SPLIT-UP
TYPE: DEFINITIONS
17. Which one of the following statements correctly applies to a legally defined merger?
a. The acquiring firm retains its identity and absorbs only the assets of the acquired firm.
B. The acquired firm is completely absorbed and ceases to exist as a separate legal entity.
c. A new firm is created which includes all the assets and liabilities of the acquiring firm
plus the assets only of the acquired firm.
d. A new firm is created from the assets and liabilities of both the acquiring and acquired
firms.
e. A merger reclassifies the acquired firm into a new entity which becomes a subsidiary of
the acquiring firm.
SECTION: 25.1
TOPIC: ACQUISITIONS
TYPE: CONCEPTS
18. With a merger, the individual assets of:
a. the acquired firm must be retitled to the name of the acquiring firm.
b. the acquiring firm must be retitled to the name of the acquired firm.
c. both the acquiring and the acquired firm must be retitled to the new firm's name.
d. both the acquiring and the acquired firm's assets must be retitled to the firm's joint
name.
E. neither firm have to be retitled.
SECTION: 25.1
TOPIC: ACQUISITIONS
TYPE: CONCEPTS
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Chapter 025 Mergers and Acquisitions
19. In a merger the:
a. legal status of both the acquiring firm and the target firm is terminated.
B. acquiring firm retains its name and legal status.
c. acquiring firm acquires the assets but not the liabilities of the target firm.
d. stockholders of the target firm have little, if any, say as to whether or not the merger
occurs.
e. target firm continues to exist as a subsidiary of the acquiring firm.
SECTION: 25.1
TOPIC: MERGER
TYPE: CONCEPTS
20. Which one of the following is a key disadvantage of a merger?
a. As a general rule, 50.01 percent of the shareholders of both the acquiring and the
acquired firms must approve of the merger.
B. As a general rule, at least two-thirds of the shareholders of both the acquiring and the
acquired firms must approve of the merger.
c. The shareholders of only the acquired firm must approve the merger.
d. The shareholders of only the acquiring firm must approve the merger.
e. Neither the shareholders of the acquiring nor the acquired firm have to approve of the
merger.
SECTION: 25.1
TOPIC: MERGER
TYPE: CONCEPTS
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Chapter 025 Mergers and Acquisitions
21. An acquisition of a firm through the purchase of shares of the outstanding stock:
I. is frequently more expensive than if the two firms had just merged.
II. can be accomplished without the involvement of the target firm's board of directors.
III. can be accomplished without having the shareholders vote on the acquisition.
IV. may be dependent upon the maximum amount of shares made available for sale to the
acquiring firm.
a. I and III only
b. II and IV only
c. I, III, and IV only
d. I, II, and III only
E. I, II, III, and IV
SECTION: 25.1
TOPIC: ACQUISITION OF STOCK
TYPE: CONCEPTS
22. Ridge Vents is acquiring all of the assets of Roofs, Inc. As a result, Roofs, Inc.:
a. will become a fully owned subsidiary of Ridge Vents.
B. will remain as a shell corporation unless the shareholders opt to dissolve it.
c. will be fully merged into Ridge Vents and will no longer exist as a separate entity.
d. and Ridge Vents will both cease to exist and a new firm will be formed.
e. will automatically be dissolved.
SECTION: 25.1
TOPIC: ACQUISITION OF ASSETS
TYPE: CONCEPTS
23. If a roof installer acquired a shingle manufacturer they would be doing a ______
acquisition.
a. horizontal
b. longitudinal
c. conglomerate
D. vertical
e. complementary resources
SECTION: 25.1
TOPIC: VERTICAL ACQUISITION
TYPE: CONCEPTS
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Chapter 025 Mergers and Acquisitions
24. If General Electric were to acquire New Start Airways, the acquisition would be
classified as a _____ acquisition.
a. horizontal
b. longitudinal
C. conglomerate
d. vertical
e. integrated
SECTION: 25.1
TOPIC: CONGLOMERATE ACQUISITION
TYPE: CONCEPTS
25. If Children's Wear were to acquire Kid's Clothing, the acquisition would be classified
as a _____ acquisition.
A. horizontal
b. longitudinal
c. conglomerate
d. vertical
e. integrated
SECTION: 25.1
TOPIC: HORIZONTAL ACQUISITION
TYPE: CONCEPTS
26. Takeovers can take which of the following forms?
I. tender offer
II. merger
III. proxy contest
IV. going private transaction
a. I and II only
b. III and IV only
c. II, III, and IV only
d. I, II, and III only
E. I, II, III, and IV
SECTION: 25.1
TOPIC: TAKEOVERS
TYPE: CONCEPTS
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Chapter 025 Mergers and Acquisitions
27. Assume both firm A and firm B formally agree to each put up $10 million to form firm
C. The operations of firm C are restricted to conducting research and development
activities for the benefit of both firm A and firm B. Firm C is classified as a:
A. joint venture.
b. going-private transaction.
c. conglomerate.
d. subsidiary.
e. leveraged buyout.
SECTION: 25.1
TOPIC: TAKEOVERS
TYPE: CONCEPTS
28. A small group of investors banded together and borrowed the funds necessary to
acquire all of the shares of stock of a publicly-traded firm. This transaction is known as a:
a. proxy contest.
b. management buyout.
c. vertical acquisition.
D. leveraged buyout.
e. unfriendly takeover.
SECTION: 25.1
TOPIC: LEVERAGED BUYOUT
TYPE: CONCEPTS
29. In a tax-free acquisition, the shareholders of the target firm:
a. receive income which is considered to be tax-exempt.
b. gift their shares to a tax-exempt organization and therefore have no taxable gain.
C. are viewed as having exchanged their shares.
d. sell their shares to a qualifying entity thereby avoiding both income and capital gains
taxes.
e. sell their shares at cost thereby avoiding the capital gains tax.
SECTION: 25.2
TOPIC: TAXES AND ACQUISITIONS
TYPE: CONCEPTS
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Chapter 025 Mergers and Acquisitions
30. Which of the following is required for an acquisition to be considered tax-free?
I. continuity of equity interest
II. a business purpose, other than avoiding taxes, for the acquisition
III. payment in the form of equity shares for the acquired firm
IV. cash payment for the equity of the acquired firm
a. I and II only
b. II and III only
c. II and IV only
D. I, II, and III only
e. I, II, and IV only
SECTION: 25.2
TOPIC: TAX-FREE ACQUISITION
TYPE: CONCEPTS
31. Which one of the following statements is correct?
a. If an acquisition is made with cash then the cost of that acquisition is dependent upon
the acquisition gains.
b. Acquisitions made by exchanging shares of stock are normally taxable transactions.
C. The increase in value from writing up assets is considered a taxable gain.
d. Target firm shareholders demand a higher selling price when an acquisition is a nontaxable event.
e. Acquisitions based on legitimate business purposes are not taxable transactions
regardless of the means of financing used.
SECTION: 25.2
TOPIC: CASH VERSUS STOCK ACQUISITION
TYPE: CONCEPTS
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Chapter 025 Mergers and Acquisitions
32. The purchase accounting method requires that:
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.
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.
SECTION: 25.3
TOPIC: PURCHASE ACCOUNTING METHOD
TYPE: CONCEPTS
33. Goodwill created by an acquisition:
a. affects the cash flows of the acquiring firm on an annual basis for a period of years.
B. must be reviewed each year to determine its current value to the firm.
c. reduces the taxable income of the firm as it is expensed.
d. has no effect on the reported earnings of a firm when it is expensed.
e. is recorded in an amount equal to the fair market value of the assets of the target firm.
SECTION: 25.3
TOPIC: PURCHASE ACCOUNTING METHOD
TYPE: CONCEPTS
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Chapter 025 Mergers and Acquisitions
34. 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 no longer permitted by FASB.
IV. acknowledges the excess of the purchase price over the fair market value and records
this amount on the balance sheet of the acquiring firm.
a. I and III only
b. I and IV only
c. II and IV only
D. II and III only
e. I, II, and IV only
SECTION: 25.3
TOPIC: POOLING OF INTERESTS
TYPE: CONCEPTS
35. The incremental cash flows of a merger can relate to changes in which of the
following?
I. revenue
II. capital needs
III. costs
IV. taxes
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 IV
SECTION: 25.4
TOPIC: INCREMENTAL CASH FLOWS
TYPE: CONCEPTS
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Chapter 025 Mergers and Acquisitions
36. Which of the following are examples of cost reductions which can result from an
acquisition?
I. spreading overhead
II. eliminating duplicate back office functions by sharing central facilities
III. buying raw materials in larger quantities at a lower per unit cost
IV. gaining economies of scale
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 IV
SECTION: 25.4
TOPIC: COST REDUCTIONS
TYPE: CONCEPTS
37. A potential merger which has synergy:
a. should be rejected due to the projected negative cash flows.
b. should be rejected because synergy destroys firm value.
c. has a net present value of zero and thus returns the minimal required rate of return.
D. creates value and therefore should be pursued.
e. reduces the anticipated net income of the acquiring firm.
SECTION: 25.4
TOPIC: SYNERGY
TYPE: CONCEPTS
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Chapter 025 Mergers and Acquisitions
38. A proposed acquisition may create synergy by:
I. increasing the market power of the combined firm.
II. improving the distribution network of the acquiring firm.
III. providing the combined firm with a strategic advantage.
IV. reducing the utilization of the acquiring firm's assets.
a. I and III only
b. II and III only
c. I and IV only
D. I, II, and III only
e. I, II, III, and IV
SECTION: 25.4
TOPIC: SYNERGY
TYPE: CONCEPTS
39. Which of the following represents 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
SECTION: 25.4
TOPIC: ACQUISITION GAINS
TYPE: CONCEPTS
40. When evaluating an acquisition you should:
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.
SECTION: 25.4
TOPIC: ACQUISTION CONSIDERATIONS
TYPE: CONCEPTS
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Chapter 025 Mergers and Acquisitions
41. Which of the following can produce tax gains as a result of an acquisition?
I. reduction in debt capacity
II. use of tax losses
III. use of surplus funds
IV. write up of depreciable assets
a. I and III only
b. II and IV only
c. I, II, and III only
D. II, III, and IV only
e. I, II, III, and IV
SECTION: 25.4
TOPIC: TAX GAINS
TYPE: CONCEPTS
42. Which one of the following statements is correct?
a. Acquiring firms tend to avoid firms with large net operating losses when they are
seeking a target firm to acquire.
b. If an acquisition increases the debt level of a firm then the tax liability of the firm tends
to increase as a result.
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 size.
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.
SECTION: 25.4
TOPIC: ACQUISITION EFFECTS
TYPE: CONCEPTS
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Chapter 025 Mergers and Acquisitions
43. Which one of the following pairs of businesses could probably benefit the most by
sharing complementary resources?
a. roofer and architect
b. tennis court and pharmacy
C. ski resort and golf course
d. dry cleaner and maid service
e. trucking company and lawn service
SECTION: 25.4
TOPIC: COMPLEMENTARY RESOURCES
TYPE: CONCEPTS
44. The shareholders of a target firm benefit the most when:
A. an acquiring firm has the better management team and replaces the target firm's
managers.
b. the management of the target firm is more efficient than the management of the
acquiring firm which replaces them.
c. the management of both the acquiring firm and the target firm are as equivalent as
possible.
d. the current management team of the target firm is kept in place even though the
managers of the acquiring firm are more suited to manage the target firm's situation.
e. the current management team of the target firm is technologically knowledgeable but
yet ineffective.
SECTION: 25.4
TOPIC: INEFFICIENT MANAGEMENT
TYPE: CONCEPTS
45. Which of the following represent potential gains from an acquisition?
I. increased use of debt
II. lower costs per unit produced
III. strategic beachhead
IV. diseconomies of scale
a. II and III only
b. I and IV only
C. I, II, and III only
d. I, III, and IV only
e. I, II, III, and IV
SECTION: 25.4
TOPIC: ACQUISITION GAINS
TYPE: CONCEPTS
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Chapter 025 Mergers and Acquisitions
46. 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.
SECTION: 25.4
TOPIC: COST OF AN ACQUISITION
TYPE: CONCEPTS
47. If an acquisition does not create value and the market is smart, then the:
a. earnings per share of the acquiring firm must be the same both before and after the
acquisition.
B. earnings per share can change but the stock price of the acquiring firm should remain
constant.
c. price per share of the acquiring firm should increase because of the growth of the firm.
d. earnings per share will most likely increase while the price-earnings ratio remains
constant.
e. price-earnings ratio should remain constant regardless of any changes in the earnings
per share.
SECTION: 25.5
TOPIC: ACQUISITIONS AND EARNINGS PER SHARE
TYPE: CONCEPTS
48. An acquisition completed simply to diversify a firm will:
a. create excessive synergy in almost all situations.
b. lower systematic risk and increase the value of the firm.
c. benefit the firm by eliminating unsystematic risk.
d. benefit the shareholders by providing otherwise unobtainable diversification.
E. generally not add any value to the firm.
SECTION: 25.5
TOPIC: DIVERSIFICATION
TYPE: CONCEPTS
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Chapter 025 Mergers and Acquisitions
49. Which one of the following statements is correct?
a. An increase in the earnings per share as a result of an acquisition will increase the price
per share of the acquiring firm.
b. The price-earnings ratio will remain constant as a result of an acquisition which fails to
create value.
c. If firm A acquires firm B then the number of shares in AB will equal the number of
shares of A plus the number of shares of B.
D. If no value is created when firm A acquires firm B, then the total value of AB will
equal the value of A plus the value of B.
e. Diversification is one of the greatest benefits derived from an acquisition.
SECTION: 25.5
TOPIC: EFFECTS OF ACQUISITIONS
TYPE: CONCEPTS
50. The primary purpose of a flip-in provision is to:
a. increase the number of shares outstanding while also increasing the value per share.
B. dilute a corporate raider's ownership position.
c. reduce the market value of each share of stock.
d. give the existing corporate directors the sole right to remove a poison pill.
e. provide additional compensation to any senior manager who loses his or her job as a
result of a corporate takeover.
SECTION: 25.7
TOPIC: DEFENSIVE TACTICS
TYPE: CONCEPTS
51. If a firm sells its crown jewels when threatened with a takeover attempt, the firm is
employing a strategy commonly referred to as a _____ strategy.
A. scorched earth
b. shark repellent
c. bear hug
d. white knight
e. lockup
SECTION: 25.7
TOPIC: DEFENSIVE TACTICS
TYPE: CONCEPTS
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Chapter 025 Mergers and Acquisitions
52. Which one of the following defensive tactics is designed to prevent a "two-tier"
takeover offer?
a. bear hug
b. poison put
c. shark repellent
d. dual class capitalization
E. fair price provision
SECTION: 25.7
TOPIC: DEFENSIVE TACTICS
TYPE: CONCEPTS
53. Which of the following have been suggested as reasons why the stockholders in
acquiring firms may not benefit to any significant degree from an acquisition?
I. the price paid for the target firm might equal the target firm's total value
II. management may have priorities other than the interest of the stockholders
III. the takeover market may not be competitive
IV. anticipated merger gains may not be fully achieved
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
SECTION: 25.8
TOPIC: ACQUISITION EFFECTS ON STOCKHOLDERS
TYPE: CONCEPTS
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Chapter 025 Mergers and Acquisitions
54. 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 unload unprofitable operations
III. to improve the strategic fit of a firm's various divisions
IV. to comply with antitrust regulations
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
SECTION: 25.9
TOPIC: DIVESTITURES AND RESTRUCTURINGS
TYPE: CONCEPTS
55. Which one of the following statements is correct?
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.
SECTION: 25.9
TOPIC: DIVESTITURES AND RESTRUCTURINGS
TYPE: CONCEPTS
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56. Carsen's Centre, Inc. has $2.85 million in net working capital. The firm has fixed
assets with a book value of $31.67 million and a market value of $33.98 million. Krystal's
is buying Carsen's Centre, Inc. for $38.4 million in cash. The acquisition will be recorded
using the purchase accounting method. What is the amount of goodwill that Krystal's will
record on their balance sheet as a result of this acquisition?
A. $1.57 million
b. $2.67 million
c. $3.88 million
d. $4.13 million
e. $6.73 million
Goodwill = $38.4m
$2.85m
$33.98m = $1.57m
AACSB TOPIC: ANALYTIC
SECTION: 25.3
TOPIC: GOODWILL
TYPE: PROBLEMS
57. Capitol Stores and The Back Corner are all-equity firms. Capitol Stores has 1,750
shares outstanding at a market price of $18.40 a share. The Back Corner has 2,100 shares
outstanding at a price of $34 a share. The Back Corner is acquiring Capitol Stores for
$34,900 in cash. What is the merger premium per share?
a. $0.46
b. $0.89
C. $1.54
d. $1.65
e. $2.00
Merger premium per share = ($34,900 / 1,750)
$18.40 = $1.54
AACSB TOPIC: ANALYTIC
SECTION: 25.3
TOPIC: MERGER PREMIUM
TYPE: PROBLEMS
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Chapter 025 Mergers and Acquisitions
58. Bob's Bait Shop has 1,200 shares outstanding at a market price per share of $13. Ed's
Fish Shop has 2,800 shares outstanding at a market price of $29 a share. Neither firm has
any debt. Ed's Fish Shop is acquiring Bob's Bait Shop for $19,500 in cash. What is the
merger premium per share?
a. $1.13
b. $1.20
c. $2.75
d. $2.88
E. $3.25
Merger premium per share = ($19,500 / 1,200)
$13 = $3.25
AACSB TOPIC: ANALYTIC
SECTION: 25.3
TOPIC: MERGER PREMIUM
TYPE: PROBLEMS
59. The Sandwich Shoppe has 1,600 shares outstanding at a market price per share of $11.
Joe's Slop Hut has 1,800 shares outstanding at a market price of $14 a share. Neither firm
has any debt. Joe's Slop Hut is acquiring The Sandwich Shoppe. The incremental value of
the acquisition is $1,600. What is the value of The Sandwich Shoppe to Joe's Slop Hut?
a. $1,600
b. $2,200
c. $17,600
D. $19,200
e. $22,500
Value of The Sandwich Shoppe to Joe's Slop Hut = (1,600
$11) + $1,600 = $19,200
AACSB TOPIC: ANALYTIC
SECTION: 25.4
TOPIC: VALUE OF FIRM B TO A
TYPE: PROBLEMS
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25-23
Chapter 025 Mergers and Acquisitions
60. Tuesday's and Thursday's are all-equity firms. Tuesday's has 5,600 shares outstanding
at a market price of $28 a share. Thursday's has 4,500 shares outstanding at a price of $42
a share. Thursday's is acquiring Tuesday's. The incremental value of the acquisition is
$4,200. What is the value of Tuesday's to Thursday's?
a. $130,200
b. $152,600
c. $156,800
D. $161,000
e. $165,400
Value of Tuesday's to Thursday's = (5,600
$28) + $4,200 = $161,000
AACSB TOPIC: ANALYTIC
SECTION: 25.4
TOPIC: VALUE OF FIRM B TO A
TYPE: PROBLEMS
61. Guido's and Elrod's are all-equity firms. Guido's has 2,200 shares outstanding at a
market price of $37 a share. Elrod's has 3,100 shares outstanding at a price of $46 a share.
Elrod's is acquiring Guido's for $82,500 in cash. The incremental value of the acquisition
is $4,400. What is the net present value of acquiring Guido's to Elrod's?
a. $1,100
b. $2,200
C. $3,300
d. $4,400
e. $7,700
NPV = (2,200
$37) + $4,400
$82,500 = $3,300
AACSB TOPIC: ANALYTIC
SECTION: 25.6
TOPIC: CASH ACQUISITION
TYPE: PROBLEMS
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25-24
Chapter 025 Mergers and Acquisitions
62. Calipers, Inc. is acquiring Johnson Warehouse for $47,000 in cash. Calipers has 2,700
shares of stock outstanding at a market value of $32 a share. Johnson Warehouse has
3,200 shares of stock outstanding at a market price of $14 a share. Neither firm has any
debt. The net present value of the acquisition is $1,800. What is the value of Caliper's after
the acquisition?
a. $84,600
B. $86,000
c. $110,000
d. $124,800
e. $133,000
Value of Caliper's = (2,700
$32) + (3,200
$14) + $1,800
$47,000 = $86,000
AACSB TOPIC: ANALYTIC
SECTION: 25.6
TOPIC: CASH ACQUISITION
TYPE: PROBLEMS
63. Firm A is acquiring Firm B for $37,000 in cash. Firm A has 3,400 shares of stock
outstanding at a market value of $15 a share. Firm B has 2,200 shares of stock outstanding
at a market price of $37 a share. Neither firm has any debt. The net present value of the
acquisition is $2,100. What is the price per share of Firm A's stock after the acquisition?
a. $15.62
b. $16.07
C. $28.68
d. $34.18
e. $39.56
Price per share of A = [(3,400
$28.68
$15) + (2,200
$37) + $2,100
$37,000] / 3,400 =
AACSB TOPIC: ANALYTIC
SECTION: 25.6
TOPIC: CASH ACQUISITION
TYPE: PROBLEMS
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25-25
Chapter 025 Mergers and Acquisitions
64. Andre's Breads and Butter Top are all-equity firms. Andre's has 800 shares outstanding
at a market price of $56 a share. Butter Top has 2,400 shares outstanding at a price of $37
a share. Butter Top is acquiring Andre's Breads for $47,500 in cash. The incremental value
of the acquisition is $4,200. What is the net present value of acquiring Andre's Breads to
Butter Top?
a. $950
B. $1,500
c. $2,700
d. $4,200
e. $5,700
NPV = (800
$56) + $4,200
$47,500 = $1,500
AACSB TOPIC: ANALYTIC
SECTION: 25.6
TOPIC: CASH ACQUISITION
TYPE: PROBLEMS
65. Palace Inns is acquiring Sequoia for $38,000 in cash. Palace Inns has 1,500 shares of
stock outstanding at a market price of $26 a share. Sequoia has 1,800 shares of stock
outstanding at a market price of $18 a share. Neither firm has any debt. The net present
value of the acquisition is $1,400. What is the price per share of Palace Inns after the
acquisition?
A. $23.20
b. $26.93
c. $35.47
d. $44.93
e. $47.26
Price per share = [(1,500
$26) + (1,800
$18) + $1,400
$38,000] / 1,500 = $23.20
AACSB TOPIC: ANALYTIC
SECTION: 25.6
TOPIC: CASH ACQUISITION
TYPE: PROBLEMS
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25-26
Chapter 025 Mergers and Acquisitions
66. Watson's Office Supply has agreed to be acquired by New Concepts for $30,000 worth
of New Concepts stock. New Concepts currently has 2,300 shares of stock outstanding at a
price of $24 a share. Watson's has 1,300 shares outstanding at a price of $21. The
incremental value of the acquisition is $1,200. What is the valued of the merged firm?
a. $55,200
b. $56,400
c. $81,500
D. $83,700
e. $91,900
Value of merged firm = (2,300
$24) + (1,300
$21) + $1,200 = $83,700
AACSB TOPIC: ANALYTIC
SECTION: 25.6
TOPIC: STOCK ACQUISITION
TYPE: PROBLEMS
67. Cavalier Enterprises has agreed to be acquired by The Fox Hunt for $65,000 worth of
The Fox Hunt stock. The Fox Hunt currently has 3,300 shares of stock outstanding at a
price of $32 a share. Cavalier Enterprises has 2,400 shares outstanding at a price of $26 a
share. The incremental value of the acquisition is $2,800. What is the value per share of
The Fox Hunt stock after the acquisition?
A. $32.04
b. $36.18
c. $48.28
d. $51.76
e. $54.20
Value per share = [(3,300
$32.04
$32) + (2,400
$26) + $2,800] / [3,300 + ($65,000 / $32)] =
AACSB TOPIC: ANALYTIC
SECTION: 25.6
TOPIC: STOCK ACQUISITION
TYPE: PROBLEMS
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25-27
Chapter 025 Mergers and Acquisitions
68. Babson Industrial has agreed to merge with Dailey Iron for $32,000 worth of Dailey
Iron stock. Babson has 2,000 shares of stock outstanding at a price of $34 a share. Dailey
has 2,600 shares outstanding with a market value of $13 a share. The incremental value of
the acquisition is $900. What is the value of Dailey Iron after the merger?
a. $34,700
b. $68,900
c. $97,300
d. $101,800
E. $102,700
Value after merger = (2,000
$34) + (2,600
$13) + $900 = $102,700
AACSB TOPIC: ANALYTIC
SECTION: 25.6
TOPIC: STOCK ACQUISITION
TYPE: PROBLEMS
69. Gillison Markets is being acquired by Bakersfield Ltd. for $129,000 worth of
Bakersfield Ltd. stock. Bakersfield Ltd. has 7,500 shares of stock outstanding at a price of
$54 a share. Gillison Markets has 1,500 shares outstanding with a market value of $27 a
share. The incremental value of the acquisition is $3,700. How many new shares of stock
will be issued to complete this acquisition?
A. 2,389 shares
b. 3,186 shares
c. 4,778 shares
d. 7,209 shares
e. 8,063 shares
Number of shares issued = $129,000 / $54 = 2,389 shares
AACSB TOPIC: ANALYTIC
SECTION: 25.6
TOPIC: STOCK ACQUISITION
TYPE: PROBLEMS
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25-28
Chapter 025 Mergers and Acquisitions
70. Hallaman's Auto is being acquired by Macy's Trucking for $32,000 worth of Macy's
Trucking stock. Macy's Trucking has 5,500 shares of stock outstanding at a price of $73 a
share. Hallaman's Auto has 1,200 shares outstanding with a market value of $25 a share.
The incremental value of the acquisition is $12,600. What is the total number of shares in
the new firm?
a. 5,827 shares
B. 5,938 shares
c. 6,351 shares
d. 6,700 shares
e. 6,780 shares
Total number of shares = 5,500 + ($32,000 / $73) = 5,938 shares
AACSB TOPIC: ANALYTIC
SECTION: 25.6
TOPIC: STOCK ACQUISITION
TYPE: PROBLEMS
71. Firm A is being acquired by Firm B for $38,000 worth of Firm B stock. The
incremental value of the acquisition is $7,400. Firm A has 2,500 shares of stock
outstanding at a price of $22 a share. Firm B has 7,400 shares of stock outstanding at a
price of $48 a share. What is the value per share of Firm B after the acquisition?
a. $48.91
B. $50.98
c. $52.27
d. $55.43
e. $56.43
Value per share = [(7,400 $48) + (2,500
$417,600 / 8,191.67 = $50.98
$22) + $7,400] / [7,400 + ($38,000 / $48)] =
AACSB TOPIC: ANALYTIC
SECTION: 25.6
TOPIC: STOCK ACQUISITION
TYPE: PROBLEMS
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25-29
Chapter 025 Mergers and Acquisitions
72. Firm A is being acquired by Firm B for $35,000 worth of Firm B stock. The
incremental value of the acquisition is $2,500. Firm A has 2,000 shares of stock
outstanding at a price of $16 a share. Firm B 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
AACSB TOPIC: ANALYTIC
SECTION: 25.6
TOPIC: STOCK ACQUISITION
TYPE: PROBLEMS
73. Delta is being acquired by Gamma. The incremental value of the acquisition is $1,600.
Delta has 1,200 shares of stock outstanding at a price of $22 a share. Gamma has 3,100
shares of stock outstanding at a price of $50 a share. What is the net present value of the
acquisition given that the actual cost of the acquisition using company stock is $27,575?
a. $289
b. $377
c. $407
D. $425
e. $436
Net present value = [(1,200
$22) + $1,600]
$27,575 = $28,000
$27,575 = $425
AACSB TOPIC: ANALYTIC
SECTION: 25.6
TOPIC: STOCK ACQUISITION
TYPE: PROBLEMS
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25-30
Chapter 025 Mergers and Acquisitions
74. Jane's Footwear is planning on merging with Trailer Shoes. Jane's Footwear will pay
Trailer Shoes' shareholders the current value of their stock in shares of Jane's Footwear
stock. Jane's Footwear currently has 4,700 shares of stock outstanding at a market price of
$25 a share. Trailer Shoes has 2,500 shares outstanding at a price of $31 a share. How
many shares of stock will be outstanding in the merged firm?
a. 3,100 shares
b. 4,700 shares
c. 7,200 shares
D. 7,800 shares
e. 10,300 shares
Number of shares = 4,700 + [(2,500
$31) / $25] = 7,800 shares
AACSB TOPIC: ANALYTIC
SECTION: 25.5
TOPIC: EARNINGS AND VALUATION
TYPE: PROBLEMS
75. Firm X is planning on merging with Firm Y. Firm X will pay Firm Y's stockholders
the current value of their stock in shares of Firm X. Firm X currently has 3,900 shares of
stock outstanding at a market price of $40 a share. Firm Y has 2,200 shares outstanding at
a price of $17 a share. The after-merger earnings will be $7,800. What will the earnings
per share be after the merger?
A. $1.61
b. $1.67
c. $1.75
d. $1.81
e. $1.86
Number of shares = 3,900 + [(2,200
4,835 = $1.61
$17) / $40] = 4,835; Earnings per share = $7,800 /
AACSB TOPIC: ANALYTIC
SECTION: 25.5
TOPIC: EARNINGS AND VALUATION
TYPE: PROBLEMS
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25-31
Chapter 025 Mergers and Acquisitions
76. Firm S is planning on merging with Firm T. Firm S will pay Firm T's stockholders the
current value of their stock in shares of Firm S. Firm S currently has 5,100 shares of stock
outstanding at a market price of $15 a share. Firm T has 2,600 shares outstanding at a
price of $19 a share. What is the value of the merged firm?
a. $76,500
b. $87,200
C. $125,900
d. $128,400
e. $131,600
Value of merged firm = (5,100
$15) + (2,600
$19) = $125,900
AACSB TOPIC: ANALYTIC
SECTION: 25.5
TOPIC: EARNINGS AND VALUATION
TYPE: PROBLEMS
77. 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 1,800 shares of
stock outstanding at a market price of $40 a share. Firm B has 1,200 shares outstanding at
a price of $47 a share. What is the value per share of the merged firm?
a. $38.70
B. $40.00
c. $42.10
d. $44.40
e. $45.60
Value per share = [(1,800
$128,400 / 3,210 = $40
$40) + (1,200
$47)] / {[1,800 + (1,200
$47)] / $40)} =
AACSB TOPIC: ANALYTIC
SECTION: 25.5
TOPIC: EARNINGS AND VALUATION
TYPE: PROBLEMS
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25-32
Chapter 025 Mergers and Acquisitions
Essay Questions
78. 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.
AACSB TOPIC: REFLECTIVE THINKING
SECTION: 25.8
TOPIC: MERGER GAINS
79. 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.
AACSB TOPIC: REFLECTIVE THINKING
SECTION: 25.1
TOPIC: FORMS OF ACQUISITION
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25-33
Chapter 025 Mergers and Acquisitions
80. 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 students will recognize 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.
AACSB TOPIC: REFLECTIVE THINKING
SECTION: 25.7
TOPIC: POISON PILLS
81. Firms can frequently create synergy by merging and sharing complementary resources
with another firm. Give two examples of situations where this would most likely occur.
Student examples will vary but should display an understanding of how complementary
resources can be shared in a manner that will reduce costs. A common example would be
two seasonal firms such as a golf course and a ski resort where assets such as the
administrative functions, the hospitality staff, the dining areas, and the resort areas would
all be considered complementary resources.
AACSB TOPIC: REFLECTIVE THINKING
SECTION: 25.4
TOPIC: COMPLEMENTARY RESOURCES
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25-34