Orange: Financial Management - Chapter 26 Mergers and Acquisitions

Chapter 26 Mergers and Acquisitions

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:

merger.

B.	consolidation.

C.	tender offer.

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

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

spinoff

E.	conglomeration

Refer to section 26.1

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

spinoff

E.	divestiture

Refer to section 26.1

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

A group of individual investors is in the process of acquiring all of the publicly-traded 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

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.

merger.

D.	leveraged buyout.

E.	consolidation.

Refer to section 26.1

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

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

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.

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

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

greenmail

D.	poison pill

E.	white knight

Refer to section 26.7

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

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.

merger.

D.	allocation.

E.	restructuring.

Refer to section 26.9

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?

split-up

B.	equity carve-out

C.	countertender offer

D.	white knight transaction

E.	lockup transaction

Refer to section 26.9

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.

bear hug.

C.	equity carve-out.

spin-off.

split-up.

Refer to section 26.9

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.

spin-off.

split-up.

Refer to section 26.9

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

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

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

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

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

23.

An auto maker recently acquired a windshield manufacturer. Which type of an acquisition was this?

A.	horizontal

B.	longitudinal

C.	conglomerate

vertical

indirect

Refer to section 26.1

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

vertical

E.	integrated

Refer to section 26.1

25.

If Paul's Hardware were to acquire Suburban Hardware, the acquisition would be classified as a _____ acquisition.

A.	horizontal

B.	longitudinal

C.	conglomerate

vertical

E.	integrated

Refer to section 26.1

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

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

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

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

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

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

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

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.

I only

II only

C.	I and IV only

D.	II and III only

E.	I, II, and IV only

Refer to section 26.3

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

41.

Which one of the following best defines synergy given the following?

V_A = Value of firm A
V_B = Value of firm B
V_AB = Value of merged firm AB

A.	(V_A + V_B) - V_AB

B.	V_AB - (V_A + V_B)

C.	greater of 0 or (V_A + V_B) - V_AB

D.	greater of 0 or V_AB - (V_A + V_B)

E.	greater of 0 or V_AB

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

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

Orange

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Tuesday, November 1, 2016

Financial Management - Chapter 26 Mergers and Acquisitions

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