Chapter 26
Mergers and Acquisitions
Multiple Choice Questions
1. Last month, Keyser Design acquired all of the assets and liabilities of Tenor
Machine Works. The 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 Cat Box acquired The Dog House. As part of this transaction, both firms
ceased to exist in their prior 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 Daily News published an ad today wherein it announced its desire to
purchase shares 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 Freight Line Express shareholders are very dissatisfied with the
performance 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 individual investors is in the process of acquiring all of the publiclytraded shares of OM 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 current president and vice-presidents of Mountain Top Consulting have
decided to form a private 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 Manufacturers and Peabody Enterprises are both manufacturers of
plastic products, such as plastic plates and silverware. These two firms have
decided to work together to find a more efficient way 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 Soda and High Caffeine are two firms that compete in the soft drink market.
These two competitors 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 Chemicals recently acquired Swenson Industries in a transaction that
produced 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 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:
A. a golden parachute.
B. standstill payments.
C. greenmail.
D. a poison pill.
E. a white knight.
11. Which one of the following generally has a flip-in provision that significantly
increases the cost to a 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 attempting to gain control of Western Wood Products until he realized
that 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 Mills engages in farming, trucking of farm products, and the milling and
retailing of farm grains. 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. 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?
A. split-up
B. equity carve-out
C. countertender offer
D. white knight transaction
E. lockup transaction
15. Family Travel Plans is the sole shareholder in its subsidiary, Traveler's Insurance
Co. Family Travel 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 Distributors has become a large conglomerate. Its board of directors
recently concluded 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 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.
18. Which of the following statements correctly apply to a merger?
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. In a merger the:
A. legal status of both the acquiring firm and the target firm is terminated.
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, if any, say as to whether or not the
merger occurs.
E. target firm continues to exist but will be a wholly owned subsidiary of the
acquiring firm.
20. Which of the following increase the costs associated with a merger?
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 River Markets has decided to acquire a controlling interest in Blue Jays by
purchasing shares of 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. Biltwell Hotels is acquiring all of the assets of Green Roof Inns. As a result, Green
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 maker recently acquired a windshield manufacturer. Which type of an
acquisition was this?
A. horizontal
B. longitudinal
C. conglomerate
D. vertical
E. indirect
24. If General Electric, a highly diversified company, were to acquire Ocean Freight
Limited, the acquisition would be classified as a _____ acquisition.
A. horizontal
B. longitudinal
C. conglomerate
D. vertical
E. integrated
25. If Paul's Hardware were to acquire Suburban Hardware, the acquisition would be
classified as a _____ acquisition.
A. horizontal
B. longitudinal
C. conglomerate
D. vertical
E. integrated
26. Which of the following is a form of a takeover?
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 and B formally agree to each put up $25 million to create firm C. Firm C
will perform 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 her wealthy friends formed a group and borrowed the funds
necessary to 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-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 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 following are 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
31. Which one of the following statements is correct?
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.
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 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 financial statement purposes, goodwill created by an acquisition:
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 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.
A. I only
B. II only
C. I and IV only
D. II and III only
E. I, II, and IV only
35. 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
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. 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
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 potential merger which produces synergy:
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 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
39. Which of the following represent potential tax benefits that can directly result from
an acquisition?
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 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.
41. Which one of the following best defines synergy given the following?
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 (VA + VB) - VAB
D. greater of 0 or VAB - (VA + VB)
E. greater of 0 or VAB
42. Which one of the following statements is correct?
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.
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
44. Assume the shareholders of a target firm benefit from being acquired in a stock
transaction. 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 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
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.
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.
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.
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.
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.
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
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
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
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
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.
56. Nelson's Interiors has $1.52 million in net working capital. The firm has fixed
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. $1.82 million
B. $3.34 million
C. $3.88 million
D. $4.14 million
E. $6.27 million
57. Troyer Markets and Deb's Grocery are all-equity firms. Troyer Markets has 2,400
shares outstanding 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 Stop has 1,600 shares outstanding at a market price per share of
$8.48. Kate's Wheels has 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. $0.27
B. $0.46
C. $0.90
D. $1.43
E. $2.52
59. Rosie's has 1,800 shares outstanding at a market price per share of $23.50.
Sandy's has 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 Crier and The News Express are all-equity firms. The Town Crier has
11,500 shares 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 $4,500.
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. $303,500
61. 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?
A. -$450
B. $275
C. $500
D. $2,400
E. $3,700
62. 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?
A. $49,000
B. $50,300
C. $57,300
D. $65,100
E. $72,400
63. 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?
A. $25.98
B. $26.45
C. $26.93
D. $27.00
E. $27.33
64. 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?
A. $1,600
B. $6,400
C. $6,700
D. $7,200
E. $7,700
65. Sleep Tight is acquiring Restful Inns for $52,500 in cash. Sleep Tight has 3,000
shares 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 Living has agreed to be acquired by New Adventures for $48,000 worth
of New Adventures stock. New Adventures currently has 8,000 shares of stock
outstanding at a price of $32 a share. Outdoor Living has 1,700 shares
outstanding at 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. $350,100
67. Moore Industries has agreed to be acquired by Scott Enterprises for $22,000
worth of Scott Enterprises 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 Enterprises has agreed to be acquired by Lawson Products in exchange
for $30,000 worth of Lawson Products stock. Lawson has 3,000 shares of stock
outstanding at a price of $28 a share. Aardvark has 1,100 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. $110,700
E. $143,000
69. Hanover Tires is being acquired by Better Tires for $89,000 worth of Better Tires
stock. Hanover 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 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?
A. 7,229 shares
B. 7,282 shares
C. 7,529 shares
D. 7,852 shares
E. 7,900 shares
71. Firm B is being acquired by Firm A for $162,000 worth of Firm A stock. The
incremental value of the acquisition is $4,600. Firm A has 8,500 shares of stock
outstanding at a price of $36 a share. Firm B has 5,900 shares of stock
outstanding at a price of $27 a share. What is the value per 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 being acquired by Firm B for $54,000 worth of Firm B stock. The
incremental value of the acquisition is $5,600. Firm A has 2,400 shares of stock
outstanding at a price of $19 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. $53,200
D. $56,780
E. $60,600
73. Merchantile Exchange is being acquired by National Sales. The incremental value
of the acquisition 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, Inc., is planning on merging with Weston Foods. Dressler will pay
Weston's 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 $25 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. 8,033 shares
E. 8,609 shares
75. Alpha is planning on merging with Beta. Alpha will pay Beta's shareholders the
current value of 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 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?
A. $106,500
B. $107,800
C. $125,400
D. $131,500
E. $131,600
77. George's Equipment is planning on merging with Nelson Machinery. George's will
pay 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. 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?
A. $0
B. $75 million
C. $210 million
D. $710 million
E. $920 million
79. Consider the following premerger information about Firm X and Firm 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
80. Assume the following balance sheets are stated at book value.
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. $38,300
D. $39,200
E. $46,100
81. 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 ______.
A. $1,600; $11,500
B. $1,600; $15,400
C. $10,200; $15,400
D. $14,500; $11,500
E. $14,500; $15,400
82. Silver Enterprises has acquired All Gold Mining in a merger transaction. The
following 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. $27,500; $19,400
83. Silver Enterprises has acquired All Gold Mining in a merger transaction. The
following 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
84. Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms
have no 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 40 percent of its stock of $127 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; $118,324,444
B. $103,000,000; $127,000,000
C. $127,000,000; $103,000,000
D. $127,000,000; $118,324,444
E. $236,000,000; $103,000,000
85. 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 postmerger PE ratio be for Pitt?
A. 8.4
B. 9.2
C. 9.8
D. 10.5
E. 11.2
86. Consider the following premerger information about a bidding firm (Firm B) and a
target 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 $2,500. What is the NPV of the merger assuming that Firm T is willing to be
acquired for $28 per share in cash?
A. $100
B. $400
C. $1,800
D. $2,200
E. $2,600
87. Consider the following premerger information about Firm A and Firm 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. $1.95
D. $2.02
E. $2.10
Essay Questions
88. Empirical evidence indicates that the returns to shareholders of the target firm
vary significantly 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.
89. Identify the three basic legal procedures that one firm can use to acquire another
and briefly discuss the advantages and disadvantages of each.
90. Defensive merger tactics are designed to thwart unwanted takeovers and
mergers. Do such activities 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?
91. 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.
Chapter 26 Mergers and Acquisitions Answer Key
Multiple Choice Questions
1.
Last month, Keyser Design acquired all of the assets and liabilities of Tenor
Machine Works. The 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.
Refer to section 26.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.1
Topic: Merger
2.
The Cat Box acquired The Dog House. As part of this transaction, both firms
ceased to exist in their prior 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
Refer to section 26.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.1
Topic: Consolidation
3.
The Daily News published an ad today wherein it announced its desire to
purchase shares 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
Refer to section 26.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.1
Topic: Tender offer
4.
Some Freight Line Express shareholders are very dissatisfied with the
performance 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
Refer to section 26.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.1
Topic: Proxy contest
5.
A group of individual investors is in the process of acquiring all of the publiclytraded shares of OM 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
Refer to section 26.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.1
Topic: Going-private transaction
6.
The current president and vice-presidents of Mountain Top Consulting have
decided to form a private 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.
Refer to section 26.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.1
Topic: Leveraged buyout
7.
Johnson Manufacturers and Peabody Enterprises are both manufacturers of
plastic products, such as plastic plates and silverware. These two firms have
decided to work together to find a more efficient way 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.
Refer to section 26.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.1
Topic: Strategic alliance
8.
Diet Soda and High Caffeine are two firms that compete in the soft drink
market. These two competitors 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.
Refer to section 26.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.1
Topic: Joint venture
9.
Alliance Chemicals recently acquired Swenson Industries in a transaction that
produced 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.
Refer to section 26.4
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.4
Topic: Synergy
10.
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:
A. a golden parachute.
B. standstill payments.
C. greenmail.
D. a poison pill.
E. a white knight.
Refer to section 26.7
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.7
Topic: Greenmail
11.
Which one of the following generally has a flip-in provision that significantly
increases the cost to a shareholder who is attempting to gain control over a
firm?
A. golden parachute
B. standstill agreement
C. greenmail
D. poison pill
E. white knight
Refer to section 26.7
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.7
Topic: Poison pills
12.
Melvin was attempting to gain control of Western Wood Products until he
realized that 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
Refer to section 26.7
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.7
Topic: Share rights plans
13.
Nieger Mills engages in farming, trucking of farm products, and the milling and
retailing of farm grains. 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.
Refer to section 26.9
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.9
Topic: Divestiture
14.
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?
A. split-up
B. equity carve-out
C. countertender offer
D. white knight transaction
E. lockup transaction
Refer to section 26.9
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.9
Topic: Equity carve-out
15.
Family Travel Plans is the sole shareholder in its subsidiary, Traveler's
Insurance Co. Family Travel 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.
Refer to section 26.9
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.9
Topic: Spin-off
16.
Blasco Distributors has become a large conglomerate. Its board of directors
recently concluded 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.
Refer to section 26.9
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.9
Topic: Split-up
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.
Refer to section 26.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.1
Topic: Merger
18.
Which of the following statements correctly apply to a merger?
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
Refer to section 26.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.1
Topic: Merger
19.
In a merger the:
A. legal status of both the acquiring firm and the target firm is terminated.
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, if any, say as to whether or not the
merger occurs.
E. target firm continues to exist but will be a wholly owned subsidiary of the
acquiring firm.
Refer to section 26.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.1
Topic: Merger
20.
Which of the following increase the costs associated with a merger?
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
Refer to section 26.1
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.1
Topic: Merger
21.
Down River Markets has decided to acquire a controlling interest in Blue Jays
by purchasing shares of 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
Refer to section 26.1
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.1
Topic: Stock acquisition
22.
Biltwell Hotels is acquiring all of the assets of Green Roof Inns. As a result,
Green 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.
Refer to section 26.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.1
Topic: Asset acquisition
23.
An auto maker recently acquired a windshield manufacturer. Which type of an
acquisition was this?
A. horizontal
B. longitudinal
C. conglomerate
D. vertical
E. indirect
Refer to section 26.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.1
Topic: Vertical acquisition
24.
If General Electric, a highly diversified company, were to acquire Ocean Freight
Limited, the acquisition would be classified as a _____ acquisition.
A. horizontal
B. longitudinal
C. conglomerate
D. vertical
E. integrated
Refer to section 26.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.1
Topic: Conglomerate acquisition
25.
If Paul's Hardware were to acquire Suburban Hardware, the acquisition would
be classified as a _____ acquisition.
A. horizontal
B. longitudinal
C. conglomerate
D. vertical
E. integrated
Refer to section 26.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.1
Topic: Horizontal acquisition
26.
Which of the following is a form of a takeover?
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
Refer to section 26.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.1
Topic: Takeovers
27.
Firms A and B formally agree to each put up $25 million to create firm C. Firm
C will perform 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
Refer to section 26.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.1
Topic: Joint venture
28.
Dixie and ten of her wealthy friends formed a group and borrowed the funds
necessary to 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.
Refer to section 26.1
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.1
Topic: Leveraged buyout
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 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.
Refer to section 26.2
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.2
Topic: Taxes and acquisitions
30.
Which of the following are 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
Refer to section 26.2
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.2
Topic: Taxes and acquisitions
31.
Which one of the following statements is correct?
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.
Refer to section 26.2
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.2
Topic: Taxes 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 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.
Refer to section 26.3
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 26-02 How accountants construct the combined balance sheet of the new company.
Section: 26.3
Topic: Purchase accounting method
33.
For financial statement purposes, goodwill created by an acquisition:
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.
Refer to section 26.3
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 26-02 How accountants construct the combined balance sheet of the new company.
Section: 26.3
Topic: Purchase accounting method
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 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
Refer to section 26.3
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 26-02 How accountants construct the combined balance sheet of the new company.
Section: 26.3
Topic: Pooling of interests
35.
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
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
Refer to section 26.4
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.4
Topic: Incremental cash flows
36.
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
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
Refer to section 26.4
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.4
Topic: Cost reductions
37.
A potential merger which produces synergy:
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.
Refer to section 26.4
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.4
Topic: Synergy
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
Refer to section 26.4
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.4
Topic: Synergy
39.
Which of the following represent potential tax benefits that can directly result
from an acquisition?
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
Refer to section 26.4
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.4
Topic: Acquisition gains
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.
Refer to section 26.4
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.4
Topic: Acquisition considerations
41.
Which one of the following best defines synergy given the following?
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 (VA + VB) - VAB
D. greater of 0 or VAB - (VA + VB)
E. greater of 0 or VAB
Refer to section 26.4
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.4
Topic: Tax gains
42.
Which one of the following statements is correct?
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.
Refer to section 26.4
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.4
Topic: Acquisition effects
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
Refer to section 26.4
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.4
Topic: Complementary resources
44.
Assume the shareholders of a target firm benefit from being acquired in a stock
transaction. 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.
Refer to section 26.4
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.4
Topic: Inefficient management
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
Refer to section 26.4
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.4
Topic: Acquisition gains
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.
Refer to section 26.4
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.4
Topic: Cost of an acquisition
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.
Refer to section 26.5
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.5
Topic: Acquisitions and earnings per share
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.
Refer to section 26.5
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.5
Topic: Diversification
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.
Refer to section 26.5
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.5
Topic: Effects of acquisitions
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.
Refer to section 26.7
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.7
Topic: Defensive tactics
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
Refer to section 26.7
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.7
Topic: Defensive tactics
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
Refer to section 26.7
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.7
Topic: Defensive tactics
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
Refer to section 26.8
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.8
Topic: Acquisition effects on stockholders
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
Refer to section 26.9
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.9
Topic: Divestitures and restructurings
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.
Refer to section 26.9
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.9
Topic: Divestitures and restructurings
56.
Nelson's Interiors has $1.52 million in net working capital. The firm has fixed
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. $1.82 million
B. $3.34 million
C. $3.88 million
D. $4.14 million
E. $6.27 million
Goodwill = $29.5m - $1.52m - $26.16m = $1.82
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 26-02 How accountants construct the combined balance sheet of the new company.
Section: 26.3
Topic: Goodwill
57.
Troyer Markets and Deb's Grocery are all-equity firms. Troyer Markets has
2,400 shares outstanding 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
Merger premium per share = ($37,500/2,400) - $14.80 = $0.825
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 26-02 How accountants construct the combined balance sheet of the new company.
Section: 26.3
Topic: Merger premium
58.
The Cycle Stop has 1,600 shares outstanding at a market price per share of
$8.48. Kate's Wheels has 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. $0.27
B. $0.46
C. $0.90
D. $1.43
E. $2.52
Merger premium per share = ($15,000/1,600) - $8.48 = $0.90
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 26-02 How accountants construct the combined balance sheet of the new company.
Section: 26.3
Topic: Merger premium
59.
Rosie's has 1,800 shares outstanding at a market price per share of $23.50.
Sandy's has 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
Value of Rosie's to Sandy's = (1,800 × $23.50) + $1,200 = $43,500
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.4
Topic: Value of firm B to firm A
60.
The Town Crier and The News Express are all-equity firms. The Town Crier
has 11,500 shares 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 $4,500. 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. $303,500
Value of The Town Crier to The News Express = (11,500 × $26) + $4,500 =
$303,500
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.4
Topic: Value of firm B to firm A
61.
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?
A. -$450
B. $275
C. $500
D. $2,400
E. $3,700
NPV = (2,500 × $16.50) + $1,200 - $42,900 = -$450
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.6
Topic: Cash acquisition
62.
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?
A. $49,000
B. $50,300
C. $57,300
D. $65,100
E. $72,400
Post-acquisition value of Taylor's = (1,500 × $46) + (2,200 × $8) + $3,500 $25,000 = $65,100
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.6
Topic: Cash acquisition
63.
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?
A. $25.98
B. $26.45
C. $26.93
D. $27.00
E. $27.33
Price per share of A = [(4,500 × $27) + (2,500 × $29) + $2,200 - $75,000]/4,500
= $26.93
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.6
Topic: Cash acquisition
64.
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?
A. $1,600
B. $6,400
C. $6,700
D. $7,200
E. $7,700
NPV = (2,700 × $24) + $3,600 - $62,000 = $6,400
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.6
Topic: Cash acquisition
65.
Sleep Tight is acquiring Restful Inns for $52,500 in cash. Sleep Tight has 3,000
shares 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
Price per share = [(3,000 × $38) + (2,100 × $24) + $1,700 - $52,500]/3,000 =
$37.87
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.6
Topic: Cash acquisition
66.
Outdoor Living has agreed to be acquired by New Adventures for $48,000
worth of New Adventures stock. New Adventures currently has 8,000 shares of
stock outstanding at a price of $32 a share. Outdoor Living has 1,700 shares
outstanding at 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. $350,100
Value of merged firm = (8,000 × $32) + (1,700 × $43) + $21,000 = $350,100
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.6
Topic: Stock acquisition
67.
Moore Industries has agreed to be acquired by Scott Enterprises for $22,000
worth of Scott Enterprises 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
Value per share = [(7,500 × $28) + (1,800 × $12) + $1,100]/[7,500 +
($22,000/28)] = $28.08
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.6
Topic: Stock acquisition
68.
Aardvark Enterprises has agreed to be acquired by Lawson Products in
exchange for $30,000 worth of Lawson Products stock. Lawson has 3,000
shares of stock outstanding at a price of $28 a share. Aardvark has 1,100
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. $110,700
E. $143,000
Value after merger = (3,000 × $28) + (1,100 × $23) + $1,400 = $110,700
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.6
Topic: Stock acquisition
69.
Hanover Tires is being acquired by Better Tires for $89,000 worth of Better
Tires stock. Hanover 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
Number of shares issued = $89,000/$23 = 3,870 shares
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.6
Topic: Stock acquisition
70.
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?
A. 7,229 shares
B. 7,282 shares
C. 7,529 shares
D. 7,852 shares
E. 7,900 shares
Total number of shares = 6,200 + ($53,000/$49) = 7,282 shares
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.6
Topic: Stock acquisition
71.
Firm B is being acquired by Firm A for $162,000 worth of Firm A stock. The
incremental value of the acquisition is $4,600. Firm A has 8,500 shares of stock
outstanding at a price of $36 a share. Firm B has 5,900 shares of stock
outstanding at a price of $27 a share. What is the value per share of Firm A
after the acquisition?
A. $35.28
B. $35.71
C. $36.00
D. $36.15
E. $37.04
Value per share = [(8,500 × $36) + (5,900 × $27) + $4,600]/[8,500 +
($162,000/$36)] = $36.15
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.6
Topic: Stock acquisition
72.
Firm A is being acquired by Firm B for $54,000 worth of Firm B stock. The
incremental value of the acquisition is $5,600. Firm A has 2,400 shares of stock
outstanding at a price of $19 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. $53,200
D. $56,780
E. $60,600
Number of shares issued = $54,000/$50 = 1,080 shares
Value per share after merger = [(2,400 × $19) + (2,700 × $50) + $5,600]/[2,700
+ 1,080] = $49.2593
Actual cost of acquisition = 1,080 × $49.2593 = $53,200
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.6
Topic: Stock acquisition
73.
Merchantile Exchange is being acquired by National Sales. The incremental
value of the acquisition 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
Net present value = [(1,500 × $18) + $1,800] - $28,780 = $20
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.6
Topic: Stock acquisition
74.
Dressler, Inc., is planning on merging with Weston Foods. Dressler will pay
Weston's 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 $25
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. 8,033 shares
E. 8,609 shares
Number of shares = 6,200 + [(2,200 × $25)/$30] = 8,033 shares
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.5
Topic: Earnings and valuation
75.
Alpha is planning on merging with Beta. Alpha will pay Beta's shareholders the
current value of 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
Number of shares = 4,200 + [(2,500 × $18)/$40] = 5,325
Earnings per share = $8,800/5,325 = $1.65
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 26-02 How accountants construct the combined balance sheet of the new company.
Section: 26.5
Topic: Earnings and valuation
76.
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?
A. $106,500
B. $107,800
C. $125,400
D. $131,500
E. $131,600
Value of merged firm = (4,500 × $19) + (2,300 × $20) = $131,500
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.5
Topic: Earnings and valuation
77.
George's Equipment is planning on merging with Nelson Machinery. George's
will pay 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
Value per share = [(4,600 × $31) + (1,600 × $38)]/{[4,600 + (1,600 × $38)]/$31}
= $31
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.5
Topic: Earnings and valuation
78.
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?
A. $0
B. $75 million
C. $210 million
D. $710 million
E. $920 million
Minimum economic value = $920 million - $710 million = $210 million
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 26-1
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.4
Topic: Calculating synergy
79.
Consider the following premerger information about Firm X and Firm 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
Assets from X = 26,000($26) = $676,000 (book value)
Assets from Y = 26,000($23) = $598,000 (market value)
Goodwill = 26,000($23 + $3) - $598,000 = $78,000
Total Assets XY = Total equity XY = $676,000 + $598,000 + $78,000 =
$1,352,000
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 26-2
Learning Objective: 26-02 How accountants construct the combined balance sheet of the new company.
Section: 26.2
Topic: Balance sheet for mergers
80.
Assume the following balance sheets are stated at book value.
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. $38,300
D. $39,200
E. $46,100
Postmerger equity = $28,900 + $9,400 = $38,300
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 26-3
Learning Objective: 26-02 How accountants construct the combined balance sheet of the new company.
Section: 26.3
Topic: Balance sheet for mergers
81.
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 ______.
A. $1,600; $11,500
B. $1,600; $15,400
C. $10,200; $15,400
D. $14,500; $11,500
E. $14,500; $15,400
Total post-merger debt = $1,800 + $1,100 + $900 + $500 + $10,200 = $14,500
Total post-merger equity = Pre-merger equity of acquiring firm = $11,500
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 26-4
Learning Objective: 26-02 How accountants construct the combined balance sheet of the new company.
Section: 26.3
Topic: Balance sheet for mergers
82.
Silver Enterprises has acquired All Gold Mining in a merger transaction. The
following 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 postmerger balance sheet.
A. $24,500; $10,500
B. $24,500; $18,200
C. $26,300; $10,500
D. $26,300; $16,600
E. $27,500; $19,400
Post-merger total assets = $17,400 + $10,100 = $27,500
Post-merger total equity = $11,300 + $8,100 = $19,400
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 26-5
Learning Objective: 26-02 How accountants construct the combined balance sheet of the new company.
Section: 26.3
Topic: Balance sheet for mergers
83.
Silver Enterprises has acquired All Gold Mining in a merger transaction. The
following 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
Goodwill will be created since the acquisition price is greater than the book
value. The goodwill amount is equal to the purchase price minus the market
value of assets, plus the market value of the acquired company's debt.
Goodwill = $5,000 - ($3,800 market value FA) - ($600 market value of CA) ($210 market value OA) + ($500 current liabilities) = $890
Total equity = Equity of acquiring firm = $2,700
AACSB: Analytic
Blooms: Analyze
Difficulty: 1 Easy
EOC: 26-6
Learning Objective: 26-02 How accountants construct the combined balance sheet of the new company.
Section: 26.3
Topic: Incorporating goodwill
84.
Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms
have no 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 40 percent of its stock of $127 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; $118,324,444
B. $103,000,000; $127,000,000
C. $127,000,000; $103,000,000
D. $127,000,000; $118,324,444
E. $236,000,000; $103,000,000
Cash cost = Amount of cash offered = $127 million
To calculate the cost of the stock offer, we first need to calculate the value of
the target to the acquirer. The value of the target firm to the acquiring firm will
be the market value of the target plus the PV of the incremental cash flows
generated by the target firm. The cash flows are a perpetuity, so:
V* = $103,000,000 + $3,700,000/0.09 = $144,111,111
The cost of the stock offer is the percentage of the acquiring firm given up
times the sum of the market value of the acquiring firm and the value of the
target firm to the acquiring firm. So, the equity cost will be:
Equity cost = 0.4($151,700,000 + $144,111,111) = $118,324,444
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
EOC: 26-7
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.6
Topic: Cash versus stock payment
85.
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?
A. 8.4
B. 9.2
C. 9.8
D. 10.5
E. 11.2
The EPS of the combined company will be the sum of the earnings of both
companies divided by the number of shares in the combined company. Since
the stock offer is one share of the acquiring firm for three shares of the target
firm, net shares in the acquiring firm will increase by one-third of the target
firm's current shares. So, the new EPS will be:
EPS = ($210,000 + $630,000)/[124,000 + (1/3)(62,000)] = $5.81
The market price of Pitt will remain unchanged if it is a zero NPV acquisition.
Using the PE ratio, we find the current market price of Pitt stock, which is:
P = 12($630,000)/124,000 = $60.967742
If the acquisition has a zero NPV, the stock price should remain unchanged.
Therefore, the new PE will be:
PE = $60.967742/$5.81 = 10.5
AACSB: Analytic
Blooms: Analyze
Difficulty: 1 Easy
EOC: 26-8
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.5
Topic: Merger PE
86.
Consider the following premerger information about a bidding firm (Firm B) and
a target 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 $2,500. What is the NPV of the merger assuming that Firm T is willing
to be acquired for $28 per share in cash?
A. $100
B. $400
C. $1,800
D. $2,200
E. $2,600
The NPV of the merger is the market value of the target firm, plus the value of
the synergy, minus the acquisition costs, so:
NPV = 1,200 ($26) + $2,500 - 1,200($28) = $100
AACSB: Analytic
Blooms: Analyze
Difficulty: 1 Easy
EOC: 26-9
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.6
Topic: Merger NPV
87.
Consider the following premerger information about Firm A and Firm 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. $1.95
D. $2.02
E. $2.10
Cost of acquisition = 210 ($25) = $5,250
Since the stock price of the acquiring firm is $40, the firm will have to give up:
Shares offered = $5,250/$40 = 131.25 shares
The EPS of the merged firm will be the combined earnings of the existing firms
divided by the new shares outstanding, so:
EPS = ($930 + $650)/(620 + 131.25) = $2.10
AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
EOC: 26-11
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.5
Topic: Post-merger EPS
Essay Questions
88.
Empirical evidence indicates that the returns to shareholders of the target firm
vary significantly 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.
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 26.8
AACSB: Reflective Thinking
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.8
Topic: Merger gains
89.
Identify 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.
Feedback: Refer to section 26.1
AACSB: Reflective Thinking
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.1
Topic: Forms of acquisitions
90.
Defensive merger tactics are designed to thwart unwanted takeovers and
mergers. Do such activities 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?
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 26.7
AACSB: Reflective Thinking
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 26-01 The different types of mergers and acquisitions; why they should (or shouldn't) take place; and the
terminology associated with them.
Section: 26.7
Topic: Poison pills
91.
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.
Feedback: Refer to section 26.4
AACSB: Reflective Thinking
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 26-03 The gains from a merger or acquisition and how to value the transaction.
Section: 26.4
Topic: Complementary resources