26 Student: ___________________________________________________________________________ 1. Last m month, onth, K Keyser eyser D Design esign acquired all of the as assets sets an and d liabi liabilities lities of Ten Tenor or Mac Machine hine Wo Works. rks. T The he combined firm is known as Keyser Design. Tenor Machine Works no longer exists as a separate entity. This acquisition is best described as a: A. merger. B. consolidation. C. tender offer. D. spinoff. E. divestiture. 2. The Ca Catt Box aacquired cquired T The he Dog House. As part of this transacti transaction, on, both firms ce ceased ased to exist in their pr prior ior form and combined to create an all-new entity, Animal World. Which one of the following terms best describes this transaction? A. divestiture B. consolidation C. tender offer D. spinoff E. conglomeration 3. The Da Daily ily Ne News ws publ publishe ished d an ad today w where herein in it ann announc ounced ed its de desire sire to pu purcha rchase se sha shares res of a competing newspaper, the Oil Town Gossip. Which one of the following terms is best described by this announcement? A. merger request B. consolidation C. tender offer D. spinoff E. divestiture 4. Some F Freight reight L Line ine Expr Express ess share shareholders holders are very dissatisf dissatisfied ied wit with h the pe performance rformance of the firm's current management team. These shareholders want to gain control of the board of directors so they can have the power to oust current management. As a means of gaining control, these shareholders have select candidates for all of the open positions on the firm's board of directors. Since they have insufficient votes to guarantee the election of these individuals, they are contacting other shareholders and asking them to vote with them on this important matter. Of course, the current management team is encouraging shareholders to vote for their candidates for the board. Which one of the following terms is best illustrated by this situation? A. tender offer B. proxy contest C. going-private transaction D. leveraged buyout E. consolidation 5. A group of indivi individual dual inve investors stors is in the process o off acquir acquiring ing all of the p publicly-t ublicly-traded raded sha shares res of O OM M Outfitters. Once the shares are acquired, they will no longer be publicly traded. Which of the following terms applies to this process? A. tender offer B. proxy contest C. going-private transaction D. leveraged buyout E. consolidation 6. The cu current rrent p president resident and vic vice-presiden e-presidents ts of Mountain Top C Consulting onsulting have dec decided ided to form a privat privatee investment group with the sole purpose of purchasing Mountain Top Consulting. These individuals have found a lender who will lend them 85 percent of the purchase cost if they pledge their personal assets as collateral for the loan. The current officers agree to this arrangement, borrow the funds, and purchase Mountain Top Consulting. The purchase of this firm is referred to as a: A. conglomeration. B. proxy contest. C. merger. D. leveraged buyout. E. consolidation. 7. Johnson Manufactu Manufacturers rers an and d Peab Peabody odytwo Ent Enterprises erprises aredecided bo both th manu manufacturers facturers of plas plastic tic pro products, ducts,efficient such as way plastic plates and silverware. These firms have to work together to find a more to recycle rejected products so that any rejected material can be reused. Thus, each company is going to assign two of its engineers to this project and have agreed to share any and all costs incurred in this process. This project is an example of a: A. consolidation. B. merged alliance. C. joint venture. D. takeover project. E. strategic alliance. 8. Diet S Soda oda and High Ca Caffeine ffeine aare re two firms tthat hat comp compete ete in tthe he soft drink m market. arket. T These hese two competit competitors ors have decided to invest $10 million to form a new company, Fruit Tea, which will manufacture flavored teas. This new firm is defined as a: A. consolidation. B. strategic alliance. C. joint venture. D. merged alliance. E. takeover project. 9. Alliance Chemica Chemicals ls rece recently ntly ac acquired quired S Swenson wenson Industrie Industriess in a trans transaction action that pr produced oduced a NPV of $1.3 million. This NPV is referred to as: A. the agency effect. B. the consolidating value. C. diversification. D. the consolidation effect. E. synergy. 10. Roger is a maj major or shareholde shareholderr in RB Indust Industrial rial Suppl Supply. y. Current Currently, ly, Roger is qu quite ite unhappy wi with th 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: A. a golden parachute. B. standstill payments. C. greenmail. D. a poison pill. E. a white knight. 11. Which one of the ffollowing ollowing ge generally nerally has a fli flip-in p-in provisi provision on that signif significantly icantly incr increases eases the cost tto oa shareholder who is attempting to gain control over a firm? A. golden parachute B. standstill agreement C. greenmail D. poison pill E. white knight 12. Melvin was aattempting ttempting tto o gain control of W Western estern Wood P Products roducts unti untill he realized tha thatt the existing shareholders in the firm had the right to purchase additional shares at a below-market price given his hostile takeover attempt. Thus, Melvin decided to forego investing in this firm. What term applies to the tactic used by Western Wood Products to stave off this takeover attempt? A. pac-man defense B. shark repellent plan C. golden parachute provision D. greenmail provision E. share rights plan 13. Nieger Mill Millss engages in farming, ttrucking rucking of farm produ products, cts, and the millin milling g and retailing of farm grai grains. ns. The firm has decided to sell its farming operations to Jasper Farms. This sale is referred to as a(n): A. liquidation. B. divestiture. C. merger. D. allocation. E. restructuring. 14. Princeto Princeton n Enterprise Enterprisess is a diversified compan company. y. In addition to its primary primary business operat operations, ions, 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? A. split-up B. equity carve-out C. countertender offer D. white knight transaction E. lockup transaction 15. Family Tra Travel vel Plans is the sole share shareholder holder in its subsidia subsidiary, ry, Travele Traveler's r's Insurance Co Co.. Family Trav Travel el Plans has decided to divest itself of its insurance operations and does so by distributing the shares in the subsidiary to the shareholders of Family Travel Plans. This distribution of shares is called a(n): A. lockup transaction. B. bear hug. C. equity carve-out. D. spin-off. E. split-up. 16. Blasco Dist Distributors ributors has becom becomee a large conglomerate. conglomerate. Its board of director directorss recently conclud concluded ed that the firm has become so large that it has lost its efficiency. The board further concluded that the firm could be both more efficient and more profitable if it were divided into three distinct and separate firms. The board presented this suggested to the firm's shareholders and those shareholders voted and agreed to divide the firm. Dividing this firm into separate entities is referred to as a(n): A. lockup transaction. B. divestiture. C. equity carve-out. D. spin-off. E. split-up. 17. Which one of the ffollowing ollowing st statements atements co correctly rrectly appl applies ies to a legally d defined efined merge merger? r? 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 acqu acquired ired firms. E. A merger reclassifies the acquired firm into a new entity which becomes a subsidiary of the acquiring firm. 18. Which of the foll following owing st statements atements correctly apply to a merge merger? r? I. The titles to individual assets of the acquired firm must be transferred into the acquiring firm's name. II. The merged firm will retain the use of the acquiring company's name. III. The acquiring firm does not have to seek approval for the merger from its shareholders. IV. The shareholders of the acquired company must approve the merger. A. I and III only B. II and IV only C. I, II, and III only D. I, II, and IV only E. I, II, III, and IV 19. A. In alegal mer merger ger the the:of : both the acquiring firm and the target firm is terminated. status B. acquiring firm retains its pre-merger legal status. C. acquiring firm acquires the assets, but not the liabilities, of the target firm. D. shareholders of the target firm have little, littl e, if any, say as to whether or not the merger occurs. E. target firm continues to exist but will be a wholly owned subsidiar subsidiary y of the acquiring firm. 20. Which of tthe he follow following ing increas increasee the costs associate associated d with a m merger? erger? 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 firm 21. Down Rive Riverr Markets has de decided cided to acqui acquire re a controlli controlling ng interest in B Blue lue Jays by purc purchasing hasing shares o off stock in the public markets. Which of the following statements correctly apply to this acquisition? I. The purchase of publicly-traded shares may be more expensive than an outright merger with Blue Jays would have been. II. Down River Markets can avoid dealing with the board of directors of Blue Jays by purchasing shares in this manner. III. If Down River Markets is successful in acquiring at least 80 percent of the outstanding shares of Blue Jays, the remaining shareholders in Blue Jays will be forced to also sell their shares to Down River Markets. IV. Whether or not Down River Markets gains control of Blue Jays depends upon the willingness of Blue Jays shareholders to sell their shares. A. I and III only B. II and IV only C. I, II, and IV only D. I, II, and III only E. I, II, III, and IV 22. Biltwel Biltwelll Hotels is acq acquiring uiring all of th thee assets of Gre Green en Roof Inns. A Ass a result, Gr Green een Roof Inns: A. will become a fully owned subsidiary of Biltwell Hotels. B. will remain as a shell corporation unless the shareholders opt to dissolve it. C. will be fully merged into Biltwell Hotels and will no longer exist as a separate entity. D. and Biltwell Hotels will both cease to exist and a new firm will be formed. E. will automatically be dissolved. 23. An auto make makerr recently acqu acquired ired a windsh windshield ield manufa manufacturer. cturer. Wh Which ich type of an acqui acquisition sition was tthis? his? A. horizontal B. longitudinal C. conglomerate D. vertical E. indirect 24. If General Ele Electric, ctric, a highly diver diversified sified compa company, ny, were to acquire Oc Ocean ean Freight Lim Limited, ited, the acquis acquisition ition would be classified as a _____ acquisition. A. horizontal B. longitudinal C. conglomerate D. vertical E. integrated 25. If Paul's Hardw Hardware are were to acquire Sub Suburban urban Hardwa Hardware, re, the acquisit acquisition ion would be classif classified ied as a _____ acquisition. A. horizontal B. C. D. E. longitudinal conglomerate vertical integrated 26. Whic Which h of the fol follow lowing ing is a for form m of a takeo takeover? ver? 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 27. Firms A an and d B formally ag agree ree to each put up $25 m million illion to cre create ate firm C. F Firm irm C will p perform erform environmental testing on the products produced by both Firm A and Firm B. Which one of the following terms describes Firm C? A. joint venture B. going-private transaction C. conglomerate D. subsidiary E. leveraged buyout 28. Dixie and ten of h her er wealthy fr friends iends form formed ed a group and borro borrowed wed the funds ne necessary cessary to acquire acquire 100 percent of the outstanding shares of Southern Fried Chicken. This transaction is known as a: A. proxy contest. B. management buyout. C. vertical acquisition. D. leveraged buyout. E. unfriendly takeover. 29. In a tax-f tax-free ree acquisi acquisition, tion, the shareholde shareholders rs of the ttarget arget firm 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 shares on a dollar-for-dollar basis. 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. 30. Which of the fol following lowing are rrequired equired for an ac acquisition quisition to be cconsidered onsidered ta tax-free? x-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 31. A Which one of the fol following lowing statement statements s is The shareholders of an acquired firm arecorrect? generally given a choice of accepting either cash or shares of . stock when the acquisition is tax-free. BTo 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. 32. The purc purchase hase acc account ounting ing meth method od requi requires res that 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 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. 33. For finan financial cial state statement ment purp purposes, oses, goodw goodwill ill create created d by an acqu acquisition: isition: A. must be amortized on a straight-line basis over 10 years. B. must be reviewed each year and amortized to the extent that it has lost value. C. is expensed evenly over a 20-year period. D. never affects the profits of the acquiring firm. E. is recorded in an amount equal to the fair market value of the assets of the target firm. 34. The poo pooling ling of in intere terests sts met method hod of acco accounti unting: ng: 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. A. I only B. II only C. I and IV only D. II and III only E. I, II, and IV only 35. The increm incremental ental cash flo flows ws of a merger ccan an relate to chan changes ges in which of tthe he followin following? g? I. revenue II. capital requirements III. operating costs IV. income 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 36. I. Which of thefixed fol following lowing are ex examples amples of cos cost t reductions th that at can result fr from om an acquisi acquisition? tion? allocating 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 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 37. A poten potential tial m merge ergerr which pr produc oduces es syne synergy: rgy: A. should be rejected due to the projected negative cash flows. B. should be rejected because the synergy will dilute the benefits of the merger. C. has a net present value of zero. D. creates value and therefore should be pursued. E. reduces the anticipated net income from the target firm. 38. A pr proposed oposed acquisiti acquisition on ma may y cre create ate sy synergy nergy 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 39. Which of the fol following lowing repr represent esent potent potential ial tax benefi benefits ts that can dire directly ctly result fr from om an acquisi acquisition? tion? I. an increase in depreciation expense 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. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV 40. When ev evalua aluating ting an ac acquis quisitio ition n you should: should: A. concentrate on book values and ignore market values. B. focus on the total cash flows of the merged firm. C. of return that is relevant the incremental D. apply ignorethe anyrate one-time acquisition fees ortotransaction costs. cash flows. E. ignore any potential changes in management. 41. Which one of the foll following owing best defines sy synergy nergy given the follow following? ing? VA = Value of firm A VB = Value of firm B VAB = Value of merged firm AB A. (VA + VB) - VAB B. VAB - (VA + VB) C. greater of 0 or (V A + VB) - VAB D. greater of 0 or V AB - (VA + VB) E. greater of 0 or V AB 42. Which one of the fol following lowing statement statementss is correct? A. Firms with large net operating tend toincreases be acquiring firms ratherofthan firms. B. The leverage associated with anlosses acquisition the tax liability the target 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. 43. Which one of the ffollowing ollowing pa pairs irs of business businesses es could probab probably ly benefit the m most ost 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 44. Assume the shar shareholders eholders of a target firm benefit benefit from being acqu acquired ired in a stock transacti transaction. on. Given this, these shareholders are most apt to realize the largest benefit if the: A. acquiring firm has the better management team and replaces the target firm's managers. B. management of the target firm is more efficient than the management of the acquiring firm which replaces them. C. management of both the acquiring firm and the target firm are as equivalent as possible. D 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. current management team of the target firm is technologically knowledgeable but yet ineffective. 45. Which of tthe he follow following ing represe represent nt potenti potential al gains fr from om an acqui acquisition? sition? 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 46. The value of a target firm to tthe he acquiri acquiring ng 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. 47. If an acqui acquisition sition doe doess not creat createe value and the market is smart smart,, then the 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. 48. An acqui acquisition sition ccompleted ompleted simply to divers diversify ify a ffirm irm wi will: ll: 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 thenot shareholders by providing E. generally add any value to the firm.otherwise unobtainable diversification. 49. Which one of the fol following lowing statement statementss 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. 50. The pr primary imary 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. 51. If a firm sells its crown jew jewels els when threat threatened ened with a takeover atte attempt, mpt, the firm is employing employing a strategy commonly referred to as a _____ strategy. A. scorched earth B. shark repellent C. bear hug D. white knight E. lockup 52. Which ollowing de defensive fensive tact tactics ics is designe designed d to prevent a "tw "two-tier" o-tier" takeover takeover offer? A. bearone hugof the ffollowing B. poison put C. shark repellent D. dual class capitalization E. fair price provision 53. Which of the fol following lowing have b been een suggested aass reasons why th thee stockholder stockholderss in acquiring ffirms irms 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 III, andand IV only C. I, IV only D. I, II, and IV only E. I, II, III, and IV 54. Which of the fol following lowing are rreasons easons why a fir firm m may want to di divest vest itself of ssome ome of its asse assets? ts? 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 55. A. Which one of frequently the fol following lowing statement statements s is correct? A spin-off 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. 56. Nelson's Int Interiors eriors has $2.13 mil million lion in net working capital. capital. The firm has fixe fixed d assets with a book value of $23.23 million and a market value of $26.16 million. The firm has no long-term debt. The Home Centre is buying Nelson's Interiors for $29.5 million in cash. The acquisition will be recorded using the purchase accounting method. What is the amount of goodwill that The Home Centre will record on its balance sheet as a result of this acquisition? A. $1.21 million B. $3.34 million C. $3.88 million D. $4.14 million E. $6.27 million 57. Troyer Mark Markets ets and Deb's Grocer Grocery y are all-equity fir firms. ms. Troyer Markets Markets has 2,400 shares out outstanding standing at a market price of $14.80 a share. Deb's Grocery has 3,200 shares outstanding at a price of $28 a share. Deb's Grocery is acquiring Troyer Markets for $37,500 in cash. What is the merger premium per share? A. $0 B. $0.825 C. $1.108 D. $1.216 E. $1.320 58. The Cycle S Stop top has 1,500 sh shares ares outstan outstanding ding at a market p price rice per share o off $8.48. Kat Kate's e's Wheels ha hass 1,750 shares outstanding at a market price of $13 a share. Neither firm has any debt. Kate's Wheels is acquiring The Cycle Stop for $15,000 in cash. What is the merger premium per share? A. $1.27 B. $1.46 C. $1.52 D. $4.43 E. $4.52 59. Rosie's has 1 1,800 ,800 shares ou outstanding tstanding at a m market arket price pe perr share of $23.5 $23.50. 0. Sandy's ha hass 2,500 shares outstanding at a market price of $21 a share. Neither firm has any debt. Sandy's is acquiring Rosie's. The incremental value of the acquisition is $1,200. What is the value of Rosie's to Sandy's? A. $41,100 B. $41,900 C. $42,300 D. $42,700 E. $43,500 60. The Town C Crier rier and The N News ews Expres Expresss are all-equ all-equity ity firms. T The he Town Cri Crier er has 11,500 sha shares res outstanding at a market price of $26 a share. The News Express has 15,000 shares outstanding at a price of $31 a share. The News Express is acquiring The Town Crier. The incremental value of the acquisition is $3,800. What is the value of The Town Crier to The News Express? A. $57,500 B. $75,000 C. $87,000 D. $299,000 E. $302,800 61. The Floral Sh Shoppe oppe and Maggie's Flo Flowers wers are all-equ all-equity ity firms. Th Thee Floral Shoppe has 2,5 2,500 00 shares outstanding at aMaggie's market price of $16.50 a share. Maggie's Flowersfor has$42,900 5,000 shares outstanding at a price of $17 a share. Flowers is acquiring The Floral Shoppe 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? A. -$450 B. $275 C. $500 D. $2,400 E. $3,700 62. Taylor's Ha Hardware rdware is acquir acquiring ing The Corner Sto Store re for $20,000 in cash. Tay Taylor's lor's has 1,500 share sharess 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? A. $49,000 B. $50,300 C. $67,300 D. $70,100 E. $72,400 63. Firm A is ac acquiring quiring Fir Firm m B for $75,00 $75,000 0 in cash. Fir Firm m A has 4,500 sha shares res of stock out outstanding standing at a ma market rket 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? A. $25.98 B. $26.45 C. $26.93 D. $27.00 E. $27.33 64. The Sweet Sh Shoppe oppe and Candy Land are allall-equity equity firms. T The he Sweet Shop Shoppe pe has 500 shares outstandi outstanding ng at a market price of $96 a share. Candy Land has 2,500 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? A. $1,100 B. $1,600 C. $2,700 D. $4,200 E. $5,700 65. Sleep Tig Tight ht is acquirin acquiring g Restful Inns ffor or $52,500 in ca cash. sh. Sleep T Tight ight has 3,000 sshares hares of stock outstanding at a market price of $38 a share. Restful Inns has 2,100 shares of stock outstanding at a market price of $24 a share. Neither firm has any debt. The incremental value of the acquisition is $1,700. What is the price per share of Sleep Tight after the acquisition? A. $36.92 B. $37.30 C. $37.87 D. $39.19 E. $39.29 66. Outdoor Li Living ving has agree agreed d to be acquired by N New ew Adventu Adventures res for $48,00 $48,000 0 worth of New Adventures stock. Adventures hasat8,000 shares of stock outstanding at a price of $32 a share. Outdoor LivingNew has 1,500 shares currently outstanding a price of $43 a share. The incremental value of the acquisition is $21,000. What is the value of the merged firm? A. $85,500 B. $256,000 C. $277,000 D. $320,500 E. $341,500 67. Moore Industr Industries ies has agreed to be acquired by Sco Scott tt Enterpris Enterprises es for $22,000 worth of Sco Scott tt Enterpris Enterprises es stock. Scott Enterprises currently has 7,500 shares of stock outstanding at a price of $28 a share. Moore Industries has 1,800 shares outstanding at a price of $12 a share. The incremental value of the acquisition is $1,100. What is the value per share of Scott Enterprises stock after the acquisition? A. $27.52 B. $27.96 C. $28.08 D. $28.47 E. $31.03 68. Aardvark E Enterprise nterprisess has agreed to be acq acquired uired by Law Lawson son Product Productss in exchange for $3 $30,000 0,000 wort worth h of Lawson Products stock. Lawson has 3,000 shares of stock outstanding at a price of $28 a share. Aardvark has 1,200 shares outstanding with a market value of $23 a share. The incremental value of the acquisition is $1,400. What is the value of Lawson Products after the merger? A. $79,400 B. $83,000 C. $111,600 D. $113,000 E. $143,000 69. Hanover Tir Tires es is being acquired by Bett Better er Tires for $89,000 wo worth rth of Better Tire Tiress stock. Hanover Tires Tires has 2,500 shares of stock outstanding at a price of $36 a share. Better Tires has 6,000 shares outstanding with a market value of $23 a share. The incremental value of the acquisition is $4,200. How many new shares of stock will be issued to complete this acquisition? A. 2,472 shares B. 3,016 shares C. 3,133 shares D. 3,870 shares E. 3,987 shares 70. Glendale M Marine arine is being ac acquired quired by Inla Inland nd Motors for $5 $53,000 3,000 worth of of Inland Motor Motorss stock. Inla Inland nd Motors has 6,200 shares of stock outstanding at a price of $54 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? A. 6,200 shares B. 7,181 shares C. 7,229 shares D. 7,852 shares E. 7,900 shares 71. Firm B is bei being ng acquired by F Firm irm A for $162 $162,000 ,000 worth of F Firm irm A stock. The increm incremental ental value of tthe he acquisition $4,600. Firm A has 8,500 shares of stock outstanding at avalue price per of $36 a share. Firm B has 5,900 sharesisof stock outstanding at a price of $27 a share. What is the share of Firm A after the acquisition? A. $35.28 B. $35.71 C. $36.00 D. $36.15 E. $37.04 72. Firm A is bei being ng acquired by F Firm irm B for $54, $54,000 000 worth of Fi Firm rm B stock. T The he increment incremental al value of the acquisition is $5,600. Firm A has 2,400 shares of stock outstanding at a price of $21 a share. Firm B has 2,700 shares of stock outstanding at a price of $50 a share. What is the actual cost of the acquisition using company stock? A. $50,509 B. $52,276 C. $54,571 D. $56,780 E. $60,600 73. Merchanti Merchantile le Exchange is being acqu acquired ired by National Sales. Sales. The increm incremental ental value of the acquisi acquisition tion is $1,800. Merchantile Exchange has 1,500 shares of stock outstanding at a price of $18 a share. National Sales has 3,500 shares of stock outstanding at a price of $54 a share. What is the net present value of the acquisition given that the actual cost of the acquisition using company stock is $28,780? A. $8 B. $11 C. $20 D. $37 E. $46 74. Dressler Dressler,, Inc., is planning on mer merging ging with Weston Weston Foods. Dressler Dressler will pay Weston' Weston'ss shareholders the current value of its stock in shares of Dressler stock. Dressler's currently has 6,200 shares of stock outstanding at a market price of $30 a share. Weston's has 2,200 shares outstanding at a price of $28 a share. How many shares of stock will be outstanding in the merged firm? A. 6,840 shares B. 7,061 shares C. 7,200 shares D. 8,253 shares E. 8,609 shares 75. Alpha is plan planning ning on mergin merging g with Beta. Alpha will p pay ay Beta's sha shareholders reholders th thee current value o off their stock in shares of Alpha. Alpha currently has 4,200 shares of stock outstanding at a market price of $40 a share. Beta has 2,500 shares outstanding at a price of $18 a share. The after-merger earnings will be $8,800. What will the earnings per share be after the merger? A. $1.61 B. $1.65 C. $1.75 D. $1.81 E. $1.86 76. Sue's Baker Bakery y is planning on merging wit with h Ted's Deli. Sue's Sue's will pay Ted's shar shareholders eholders the curre current nt value of their shares of Sue's Bakery. Sue's currently has stock outstanding at a market price of stock $19 ain share. Ted's has 2,100 shares outstanding at a4,500 price shares of $20 of a share. What is the value of the merged firm? A. $106,500 B. $107,800 C. $125,400 D. $127,500 E. $131,600 77. George's Eq Equipment uipment is planni planning ng on merging with Nelson Nelson Machinery. G George's eorge's will pay Nelson's Nelson's shareholders the current value of their stock in shares of George's Equipment. George's currently has 4,600 shares of stock outstanding at a market price of $31 a share. Nelson's has 1,600 shares outstanding at a price of $38 a share. What is the value per share of the merged firm? A. $30.77 B. $31.00 C. $31.29 D. $31.74 E. $32.06 78. Empiric Empirical al evidence indica indicates tes that the returns to share shareholders holders of the target firm firm vary significa significantly ntly from the returns to the shareholders of the acquiring firm. Identify the shareholders that tend to realize the smaller return and provide some possible explanation for these low returns. 79. Identify the tthree hree basic leg legal al procedure proceduress that one firm ca can n use to acquire another another and brief briefly ly discuss the advantages and disadvantages of each. 80. Defensiv Defensivee merger tactics are des designed igned to thwart unwanted unwanted takeovers and mergers. mergers. Do such acti activities vities work to the advantage of shareholders all of the time? Are these types of activities ethical? Who do you think benefits the most from these activities? 81. Firms can frequ frequently ently create syner synergy gy by merging and sharing complementa complementary ry resources wit with h another firm. Give two examples of situations where this would most likely occur. 82. Pearl, Inc. ha hass offered $860 milli million on cash for all of the common stock in Jam Corporation. Corporation. Based 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? A. $0 B. $75 million C. $150 million D. $710 million E. $860 million 83. Consider the follow following ing preme premerger rger infor information mation abo about ut Firm X and Fir Firm m Y: Assume that Firm X acquires Firm Y by paying cash for all the shares outstanding at a merger premium of $3 per share. Also assume that neither firm has any debt before or after the merger. What is the value of the total equity of the combined firm, XY, if the purchase method of accounting is used? A. $1,274,000 B. $1,316,000 C. $1,352,000 D. $1,422,000 E. $1,427,000 84. Assume the foll following owing ba balance lance she sheets ets are stated aatt book va value. lue. What will be the value of the equity account on the postmerger balance sheet assuming that Meat Co. purchases Loaf, Inc. and the pooling of interests method of accounting is used. A. $26,700 B. $33,600 C. $35,800 D. $38,200 E. $46,100 85. Assume the foll following owing ba balance lance she sheets ets are stated aatt book va value. lue. 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 ______. A. $1,600; $11,500 B. $1,600; $15,400 C. $10,200; $15,400 D. $14,500; $15,400 $11,500 E. $14,500; 86. Silver Ente Enterprises rprises has acqui acquired red All Gold Minin Mining g in a merger transactio transaction. n. The followi following ng balance sheets represent the premerger book values for both firms. Assume the merger is treated as a pooling of interests for accounting purposes. The total assets are _____ and the total equity is _____ on the post-merger balance sheet. A. $24,500; $10,500 B. $24,500; $18,200 C. $26,300; $10,500 D. $26,300; $16,600 E. $26,300; $18,200 87. Silver Ente Enterprises rprises has acqui acquired red All Gold Minin Mining g in a merger transactio transaction. n. The followi following ng balance sheets represent the premerger book values for both firms. Assume the merger is treated as a purchase for accounting purposes. The market value of All Gold Mining's fixed assets is $3,800; the market values for current and other assets are the same as the book values. Assume that Silver Enterprises issues $5,000 in new long-term debt to finance the acquisition. The post-merger balance sheet will reflect goodwill of _____ and total equity of _____. A. $640; $2,700 B. $640; $4,610 C. $890; $2,700 D. $890; $4,610 E. $890; $5,500 88. Penn Corp. is analyzing tthe he possible acq acquisition uisition of T Teller eller Comp Company. any. Both fi firms rms have no debt debt.. Penn believes the acquisition will increase its total aftertax annual cash flows by $3.7 million indefinitely. The current market value of Teller is $103 million, and that of Penn is $151.7 million. The appropriate discount rate for the incremental cash flows is 9 percent. Penn is trying to decide whether it should offer 44 percent of its stock of $133 million in cash to Teller's shareholders. The cost of the cash alternative is _____, while the cost of the stock alternative is _____. A. $103,000,000; $130,156,889 B. $103,000,000; $133,000,000 C. $133,000,000; $103,000,000 D. $133,000,000; $103,000,000 $130,156,889 E. $236,000,000; 89. The shareho shareholders lders of Jolie C Company ompany have vo voted ted in favor of a buyout buyout offer from Pitt Corpo Corporation. ration. 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? A. 8.4 B. 9.2 C. 9.8 D. 10.5 E. 11.2 90. Consider the fol following lowing preme premerger rger informa information tion about a bidding firm (F (Firm irm B) and a target firm (Firm (Firm T). Assume that neither firm has any debt outstanding. Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $2,600. What is the NPV of the merger assuming that Firm T is willing to be acquired for $28 per share in cash? A. $400 B. $600 C. $1,800 D. $2,200 E. $2,600 91. Consider the follow following ing preme premerger rger infor information mation abo about ut Firm A and Fir Firm m B: Assume that Firm A acquires Firm B via an exchange of stock at a price of $25 for each share of B's stock. Both A and B have no debt outstanding. What will the earnings per share of Firm A be after the merger? A. $1.60 B. $1.86 C. D. $1.95 $2.02 E. $2.10 26 Key 1. A 2. B 3. C 4. B 5. C 6. D 7. E 8. C 9. E 10. C 11. D 12. E 13. B 14. B 15. D 16. E 17. B 18. B 19. B 20. E 21. C 22. B 23. D 24. C 25. A 26. E 27. A 28. D 29. C 30. D 31. E 32. D 33. B 34. B 35. E 36. E 37. D 38. D 39. C 40. C 41. D 42. C 43. C 44. A 45. C 46. A 47. B 48. E 49. D 50. B 51. A 52. E 53. D 54. E 55. A 56. A 57. B 58. C 59. E 60. E 61. A 62. D 63. C 64. B 65. C 66. E 67. C 68. D 69. D 70. B 71. D 72. C 73. C 74. D 75. B 76. D 77. B Feedback: Refer to section 26.8 78. The empirical evidence strongly indicates that the shareholders of the target firm realize large wealth gains as a result of a takeover bid but the shareholders in the acquiring firm gain little, if anything. While a definitive answer is elusive, the following have been offered as possible explanations for these low returns to acquiring shareholders: 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. Feedback: Refer to section 26.1 79. 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. b ypassed. 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. Feedback: Refer to section 26.7 80. 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. Some students will argue that management benefits most from these activities. The ethics debate about these issues is always an interesting one. Feedback: Refer to section 26.4 81. Student examples will vary but bu t should display an understanding of how complementary resources can be shared in a manner that will reduce costs. A common example firms suchall as be a golf course and a ski resort where assets hospitality staff, the dining would areas, be andtwo the seasonal resort areas would considered complementary resource resources. s. such as the administrative functions, the 82. C 83. C 84. C 85. D 86. E 87. C 88. D 89. D 90. A 91. E 26 Summary Category # of Questions AACSB: Analytic 32 AACSB: N/A 55 AACSB: Reflective thinking 4 Blooms: Analysis 14 Blooms: Application 24 Blooms: Comprehension 15 Blooms: Knowledge 38 Difficulty: Basic 79 Difficulty: Intermediate 12 EOC #: 26-1 1 EOC #: 26-11 1 EOC #: 26-2 1 EOC #: 26-3 1 EOC #: 26-4 1 EOC #: 26-5 1 EOC #: 26-6 1 EOC #: 26-7 1 EOC #: 26-8 1 EOC #: 26-9 1 Learning Objective: 26-1 32 Learning Objective: 26-2 Learning Objective: 26-3 12 47 Ross - Chapter 26 91 Section: 26.1 21 Section: 26.2 4 Section: 26.3 10 Section: 26.4 17 Section: 26.5 9 Section: 26.6 15 Section: 26.7 7 Section: 26.8 2 Section: 26.9 6 Topic: Acquisition considerations 1 Topic: Acquisition effects 1 Topic: Acquisition effects on stockholders Topic: Acquisition gains 1 2 Topic: Acquisitions and earnings per share 1 Topic: Asset acquisition 1 Topic: Balance sheet for mergers 4 Topic: Calculating synergy 1 Topic: Cash acquisition 5 Topic: Cash versus stock payment 1 Topic: Complementary resources 2 Topic: Conglomerate acquisition 1 Topic: Consolidation 1 Topic: Cost of an acquisition 1 Topic: Cost reductions 1 Topic: Defensive tactics 3 Topic: Diversification Topic: Divestiture 1 1 Topic: Divestitures and restructurings 2 Topic: Earnings and valuation 4 Topic: Effects of acquisitions 1 Topic: Equity carve-out 1 Topic: Forms of acquisitions 1 Topic: Going-private transaction 1 Topic: Goodwill 1 Topic: Greenmail 1 Topic: Horizontal acquisition 1 Topic: Incorporating goodwill 1 Topic: Incremental cash flows 1 Topic: Inefficient management 1 Topic: Joint venture 2 Topic: Leveraged buyout 2 Topic: Merger Topic: Merger gains 5 1 Topic: Merger NPV 1 Topic: Merger PE 1 Topic: Merger premium 2 Topic: Poison pills 2 Topic: Pooling of interests 1 Topic: Post-merger EPS 1 Topic: Proxy contest 1 Topic: Purchase accounting method 2 Topic: Share rights plans 1 Topic: Spin-off 1 Topic: Split-up 1 Topic: Stock acquisition 9 Topic: Strategic alliance Topic: Synergy 1 3 Topic: Takeovers 1 Topic: Tax gains 1 Topic: Taxes and acquisitions 3 Topic: Tender offer 1 Topic: Value of firm B to firm A 2 Topic: Vertical acquisition 1
