Corporate Finance Chapter 26

8/18/2019 Corporate Finance Chapter 26

1/83

Chapter 26 - Mergers and Acquisitions

Chapter 26

Mergers and Acquisitions

Multiple Choice Questions

1. Last month, Keyser Design acquired all o the assets and lia!ilities o "enor Machine#or$s. "he com!ined irm is $no%n as Keyser Design. "enor Machine #or$s no longere&ists as a separate entity. "his acquisition is !est descri!ed as a'A. merger.(. consolidation.C. tender oer.D. spino.). di*estiture.

2. "he Cat (o& acquired "he Dog +ouse. As part o this transaction, !oth irms ceased toe&ist in their prior orm and com!ined to create an all-ne% entity, Animal #orld. #hich oneo the ollo%ing terms !est descri!es this transactionA. di*estiture(. consolidationC. tender oer D. spino ). conglomeration

. "he Daily e%s pu!lished an ad today %herein it announced its desire to purchase shareso a competing ne%spaper, the /il "o%n 0ossip. #hich one o the ollo%ing terms is !estdescri!ed !y this announcementA. merger request(. consolidationC. tender oer D. spino ). di*estiture

26-1


2/83


. ome 3reight Line )&press shareholders are *ery dissatisied %ith the perormance o theirm4s current management team. "hese shareholders %ant to gain control o the !oard odirectors so they can ha*e the po%er to oust current management. As a means o gainingcontrol, these shareholders ha*e select candidates or all o the open positions on the irm4s

!oard o directors. ince they ha*e insuicient *otes to guarantee the election o theseindi*iduals, they are contacting other shareholders and as$ing them to *ote %ith them on thisimportant matter. / course, the current management team is encouraging shareholders to*ote or their candidates or the !oard. #hich one o the ollo%ing terms is !est illustrated !ythis situationA. tender oer (. pro&y contestC. going-pri*ate transactionD. le*eraged !uyout). consolidation

5. A group o indi*idual in*estors is in the process o acquiring all o the pu!licly-tradedshares o /M /utitters. /nce the shares are acquired, they %ill no longer !e pu!licly traded.#hich o the ollo%ing terms applies to this processA. tender oer (. pro&y contestC. going-pri*ate transactionD. le*eraged !uyout). consolidation

6. "he current president and *ice-presidents o Mountain "op Consulting ha*e decided toorm a pri*ate in*estment group %ith the sole purpose o purchasing Mountain "opConsulting. "hese indi*iduals ha*e ound a lender %ho %ill lend them 5 percent o the purchase cost i they pledge their personal assets as collateral or the loan. "he current oicersagree to this arrangement, !orro% the unds, and purchase Mountain "op Consulting. "he purchase o this irm is reerred to as a'A. conglomeration.(. pro&y contest.C. merger.

D. le*eraged !uyout.). consolidation.

26-2


3/83


7. 8ohnson Manuacturers and 9ea!ody )nterprises are !oth manuacturers o plastic products, such as plastic plates and sil*er%are. "hese t%o irms ha*e decided to %or$ together to ind a more eicient %ay to recycle re:ected products so that any re:ected material can !ereused. "hus, each company is going to assign t%o o its engineers to this pro:ect and ha*e

agreed to share any and all costs incurred in this process. "his pro:ect is an e&ample o a'A. consolidation.(. merged alliance.C. :oint *enture.D. ta$eo*er pro:ect.). strategic alliance.

. Diet oda and +igh Caeine are t%o irms that compete in the sot drin$ mar$et. "heset%o competitors ha*e decided to in*est ;1< million to orm a ne% company, 3ruit "ea, %hich

%ill manuacture la*ored teas. "his ne% irm is deined as a'A. consolidation.(. strategic alliance.C. :oint *enture.D. merged alliance.). ta$eo*er pro:ect.

=. Alliance Chemicals recently acquired %enson >ndustries in a transaction that produced a 9? o ;1. million. "his 9? is reerred to as'

A. the agency eect.(. the consolidating *alue.C. di*ersiication.D. the consolidation eect.). synergy.

26-


4/83


1ndustrial upply. Currently, @oger is quite unhappy%ith the direction the irm is headed and is rumored to !e considering an attempt to ta$e o*erthe irm !y soliciting the *otes o other shareholders. "o head o this potential attempt, the !oard o @( >ndustrial upply has decided to oer @oger ;5 a share or all the shares he

o%ns in the irm. "he current mar$et *alue per share is ;2. "his oer to purchase @oger4sshares is commonly reerred to as'A. a golden parachute.(. standstill payments.C. greenmail.D. a poison pill.). a %hite $night.

11. #hich one o the ollo%ing generally has a lip-in pro*ision that signiicantly increases

the cost to a shareholder %ho is attempting to gain control o*er a irmA. golden parachute(. standstill agreementC. greenmailD. poison pill). %hite $night

12. Mel*in %as attempting to gain control o #estern #ood 9roducts until he realied that thee&isting shareholders in the irm had the right to purchase additional shares at a !elo%-mar$et

price gi*en his hostile ta$eo*er attempt. "hus, Mel*in decided to orego in*esting in this irm.#hat term applies to the tactic used !y #estern #ood 9roducts to sta*e o this ta$eo*erattemptA. pac-man deense(. shar$ repellent planC. golden parachute pro*isionD. greenmail pro*ision). share rights plan

26-


5/83


1. ieger Mills engages in arming, truc$ing o arm products, and the milling and retailingo arm grains. "he irm has decided to sell its arming operations to 8asper 3arms. "his saleis reerred to as aBn'A. liquidation.

(. di*estiture.C. merger.D. allocation.). restructuring.

1. 9rinceton )nterprises is a di*ersiied company. >n addition to its primary !usinessoperations, the irm is also the sole shareholder o a %holly o%ned su!sidiary. As part o itsrestructuring plan, 9rinceton has decided to implement an >9/ oering or shares in thesu!sidiary. "his oering is equi*alent to a 25 percent o%nership sta$e in the su!sidiary. #hat

is the distri!ution o these shares calledA. split-up(. equity car*e-outC. countertender oer D. %hite $night transaction). loc$up transaction

15. 3amily "ra*el 9lans is the sole shareholder in its su!sidiary, "ra*eler4s >nsurance Co.3amily "ra*el 9lans has decided to di*est itsel o its insurance operations and does so !y

distri!uting the shares in the su!sidiary to the shareholders o 3amily "ra*el 9lans. "hisdistri!ution o shares is called aBn'A. loc$up transaction.(. !ear hug.C. equity car*e-out.D. spin-o.). split-up.

26-5


6/83


16. (lasco Distri!utors has !ecome a large conglomerate. >ts !oard o directors recentlyconcluded that the irm has !ecome so large that it has lost its eiciency. "he !oard urtherconcluded that the irm could !e !oth more eicient and more proita!le i it %ere di*idedinto three distinct and separate irms. "he !oard presented this suggested to the irm4s

shareholders and those shareholders *oted and agreed to di*ide the irm. Di*iding this irminto separate entities is reerred to as aBn'A. loc$up transaction.(. di*estiture.C. equity car*e-out.D. spin-o.). split-up.

17. #hich one o the ollo%ing statements correctly applies to a legally deined merger

A. "he acquiring irm retains its identity and a!sor!s only the assets o the acquired irm.(. "he acquired irm is completely a!sor!ed and ceases to e&ist as a separate legal entity.C. A ne% irm is created %hich includes all the assets and lia!ilities o the acquiring irm plusthe assets only o the acquired irm.D. A ne% irm is created rom the assets and lia!ilities o !oth the acquiring and acquiredirms.). A merger reclassiies the acquired irm into a ne% entity %hich !ecomes a su!sidiary o theacquiring irm.

1. #hich o the ollo%ing statements correctly apply to a merger>. "he titles to indi*idual assets o the acquired irm must !e transerred into the acquiringirm4s name.>>. "he merged irm %ill retain the use o the acquiring company4s name.>>>. "he acquiring irm does not ha*e to see$ appro*al or the merger rom its shareholders.>?. "he shareholders o the acquired company must appro*e the merger.A. > and >>> only(. >> and >? onlyC. >, >>, and >>> onlyD. >, >>, and >? only). >, >>, >>>, and >?

26-6


7/83


1=. >n a merger the'A. legal status o !oth the acquiring irm and the target irm is terminated.(. acquiring irm retains its pre-merger legal status.C. acquiring irm acquires the assets, !ut not the lia!ilities, o the target irm.

D. shareholders o the target irm ha*e little, i any, say as to %hether or not the mergeroccurs.). target irm continues to e&ist !ut %ill !e a %holly o%ned su!sidiary o the acquiring irm.

29/ sharesD. issue costs associated %ith %arrants that must !e oered to the shareholders o the

acquiring irm). see$ing appro*al o the shareholders o !oth the acquiring and the acquired irm

21. Do%n @i*er Mar$ets has decided to acquire a controlling interest in (lue 8ays !y purchasing shares o stoc$ in the pu!lic mar$ets. #hich o the ollo%ing statements correctlyapply to this acquisition>. "he purchase o pu!licly-traded shares may !e more e&pensi*e than an outright merger %ith(lue 8ays %ould ha*e !een.>>. Do%n @i*er Mar$ets can a*oid dealing %ith the !oard o directors o (lue 8ays !y

purchasing shares in this manner.>>>. > Do%n @i*er Mar$ets is successul in acquiring at least < percent o the outstandingshares o (lue 8ays, the remaining shareholders in (lue 8ays %ill !e orced to also sell theirshares to Do%n @i*er Mar$ets.>?. #hether or not Do%n @i*er Mar$ets gains control o (lue 8ays depends upon the%illingness o (lue 8ays shareholders to sell their shares.A. > and >>> only(. >> and >? onlyC. >, >>, and >? onlyD. >, >>, and >>> only). >, >>, >>>, and >?

26-7


8/83


22. (ilt%ell +otels is acquiring all o the assets o 0reen @oo >nns. As a result, 0reen @oo>nns'A. %ill !ecome a ully o%ned su!sidiary o (ilt%ell +otels.(. %ill remain as a shell corporation unless the shareholders opt to dissol*e it.

C. %ill !e ully merged into (ilt%ell +otels and %ill no longer e&ist as a separate entity.D. and (ilt%ell +otels %ill !oth cease to e&ist and a ne% irm %ill !e ormed.). %ill automatically !e dissol*ed.

2. An auto ma$er recently acquired a %indshield manuacturer. #hich type o an acquisition%as thisA. horiontal(. longitudinalC. conglomerate

D. *ertical). indirect

2. > 0eneral )lectric, a highly di*ersiied company, %ere to acquire /cean 3reight Limited,the acquisition %ould !e classiied as a acquisition.A. horiontal(. longitudinalC. conglomerateD. *ertical

). integrated

25. > 9aul4s +ard%are %ere to acquire u!ur!an +ard%are, the acquisition %ould !eclassiied as a acquisition.A. horiontal(. longitudinalC. conglomerateD. *ertical). integrated

26-


9/83


26. #hich o the ollo%ing is a orm o a ta$eo*er>. tender oer >>. merger >>>. pro&y contest

>?. going pri*ate transactionA. > and >> only(. >>> and >? onlyC. >>, >>>, and >? onlyD. >, >>, and >>> only). >, >>, >>>, and >?

27. 3irms A and ( ormally agree to each put up ;25 million to create irm C. 3irm C %ill perorm en*ironmental testing on the products produced !y !oth 3irm A and 3irm (. #hich

one o the ollo%ing terms descri!es 3irm CA. :oint *enture(. going-pri*ate transactionC. conglomerateD. su!sidiary). le*eraged !uyout

2. Di&ie and ten o her %ealthy riends ormed a group and !orro%ed the unds necessary toacquire 1


10/83


. continuity o equity interest>>. a !usiness purpose, other than a*oiding ta&es, or the acquisition>>>. payment in the orm o equity shares or the acquired irm

>?. cash payment or the equity o the acquired irmA. > and >> only(. >> and >>> onlyC. >> and >? onlyD. >, >>, and >>> only). >, >>, and >? only

1. #hich one o the ollo%ing statements is correctA. "he shareholders o an acquired irm are generally gi*en a choice o accepting either cash

or shares o stoc$ %hen the acquisition is ta&-ree.(. "o !e a ta&-ree acquisition, the shareholders o an acquired irm must recei*e shares in theacquiring irm that are equal to =5 percent or less o the *alue o the shares held in theacquired irm.C. "he assets o an acquired irm are recorded on the !oo$s o the acquiring irm at theircurrent !oo$ *alue regardless o the ta& status o the acquisition.D. "arget irm shareholders demand a higher selling price %hen an acquisition is a non-ta&a!le e*ent.). > the assets o a irm are %ritten up as part o the acquisition process, the increase in *alueis considered to !e a ta&a!le gain.

2. "he purchase accounting method requires that'A. the e&cess o the purchase price o*er the air mar$et *alue o the target irm !e recorded asa one-time e&pense on the income statement o the acquiring irm.(. good%ill !e amortied on a yearly !asis or inancial statement purposes.C. the equity o the acquiring irm !e reduced !y the e&cess o the purchase price o*er the air mar$et *alue o the target irm.D. the assets o the target irm !e recorded at their air mar$et *alue on the !alance sheet othe acquiring irm.). the e&cess amount paid or the target irm !e recorded as a tangi!le asset on the !oo$s o

the acquiring irm.

26-1


11/83


. 3or inancial statement purposes, good%ill created !y an acquisition'A. must !e amortied on a straight-line !asis o*er 1< years.(. must !e re*ie%ed each year and amortied to the e&tent that it has lost *alue.C. is e&pensed e*enly o*er a 2. re*enue

>>. capital requirements>>>. operating costs>?. income ta&esA. > and >> only(. >>, >>>, and >? onlyC. >, >>>, and >? onlyD. >, >>, and >>> only). >, >>, >>>, and >?

26-11


12/83


6. #hich o the ollo%ing are e&amples o cost reductions that can result rom anacquisition>. allocating i&ed o*erhead across a %ider range o products>>. lo%ering oice payroll costs !y com!ining :o! unctions

>>>. !eneiting rom economies o scale %hen purchasing ra% materials>?. reducing the num!er o management personnel requiredA. > and >>> only(. >> and >? onlyC. >, >>, and >? onlyD. >>, >>>, and >? only). >, >>, >>>, and >?

7. A potential merger %hich produces synergy'

A. should !e re:ected due to the pro:ected negati*e cash lo%s.(. should !e re:ected !ecause the synergy %ill dilute the !eneits o the merger.C. has a net present *alue o ero.D. creates *alue and thereore should !e pursued.). reduces the anticipated net income rom the target irm.

. A proposed acquisition may create synergy !y'>. increasing the mar$et po%er o the com!ined irm.>>. impro*ing the distri!ution net%or$ o the acquiring irm.

>>>. pro*iding the com!ined irm %ith a strategic ad*antage.>?. reducing the utiliation o the acquiring irm4s assets.A. > and >>> only(. >> and >>> onlyC. > and >? onlyD. >, >>, and >>> only). >, >>, >>>, and >?

26-12


13/83


=. #hich o the ollo%ing represent potential ta& !eneits that can directly result rom anacquisition>. an increase in depreciation e&pense>>. an increase in surplus unds

>>>. the use o net operating losses>?. an increased use o le*erageA. > and >? only(. >> and >>> onlyC. >, >>>, and >? onlyD. >>, >>>, and >? only). >, >>, >>>, and >?


14/83


2. #hich one o the ollo%ing statements is correctA. 3irms %ith large net operating losses tend to !e acquiring irms rather than target irms.(. "he le*erage associated %ith an acquisition increases the ta& lia!ility o the acquiring irm.C. > either an increase or a decrease in the le*el o production causes the a*erage cost per unit

to increase then the irm is currently operating at its optimal production le*el.D. 3irms can al%ays !eneit rom economies o scale i they increase the sie o their irmthrough acquisitions.). > a irm uses it surplus cash to acquire another irm then the shareholders o the acquiringirm immediately incur a ta& lia!ility related to the transaction.

. #hich one o the ollo%ing pairs o !usinesses could pro!a!ly !eneit the most !y sharingcomplementary resourcesA. rooer and architect

(. tennis court and pharmacyC. s$i resort and gol courseD. dry cleaner and maid ser*ice). truc$ing company and la%n ser*ice

. Assume the shareholders o a target irm !eneit rom !eing acquired in a stoc$transaction. 0i*en this, these shareholders are most apt to realie the largest !eneit i the'A. acquiring irm has the !etter management team and replaces the target irm4s managers.(. management o the target irm is more eicient than the management o the acquiring irm

%hich replaces them.C. management o !oth the acquiring irm and the target irm are as equi*alent as possi!le.D. current management team o the target irm is $ept in place e*en though the managers othe acquiring irm are more suited to manage the target irm4s situation.). current management team o the target irm is technologically $no%ledgea!le !ut yetineecti*e.

26-1


15/83


5. #hich o the ollo%ing represent potential gains rom an acquisition>. increased use o de!t>>. lo%er costs per unit produced>>>. strategic !eachhead

>?. diseconomies o scaleA. >> and >>> only(. > and >? onlyC. >, >>, and >>> onlyD. >, >>>, and >? only). >, >>, >>>, and >?

6. "he *alue o a target irm to the acquiring irm is equal to'A. the *alue o the target irm as a separate entity plus the incremental *alue deri*ed rom the

acquisition.(. the purchase cost o the target irm.C. the *alue o the merged irm minus the *alue o the target irm as a separate entity.D. the purchase cost plus the incremental *alue deri*ed rom the acquisition.). the incremental *alue deri*ed rom the acquisition.

7. > an acquisition does not create *alue and the mar$et is smart, then the'A. earnings per share o the acquiring irm must !e the same !oth !eore and ater theacquisition.

(. earnings per share can change !ut the stoc$ price o the acquiring irm should remainconstant.C. price per share o the acquiring irm should increase !ecause o the gro%th o the irm.D. earnings per share %ill most li$ely increase %hile the price-earnings ratio remains constant.). price-earnings ratio should remain constant regardless o any changes in the earnings pershare.

. An acquisition completed simply to di*ersiy a irm %ill'A. create e&cessi*e synergy in almost all situations.

(. lo%er systematic ris$ and increase the *alue o the irm.C. !eneit the irm !y eliminating unsystematic ris$.D. !eneit the shareholders !y pro*iding other%ise uno!taina!le di*ersiication.). generally not add any *alue to the irm.

26-15


16/83


=. #hich one o the ollo%ing statements is correctA. An increase in the earnings per share as a result o an acquisition %ill increase the price per share o the acquiring irm.(. "he price-earnings ratio %ill remain constant as a result o an acquisition %hich ails to

create *alue.C. > irm A acquires irm ( then the num!er o shares in A( %ill equal the num!er o shareso A plus the num!er o shares o (.D. > no *alue is created %hen irm A acquires irm (, then the total *alue o A( %ill equalthe *alue o A plus the *alue o (.). Di*ersiication is one o the greatest !eneits deri*ed rom an acquisition.

5


17/83


5. #hich o the ollo%ing ha*e !een suggested as reasons %hy the stoc$holders in acquiringirms may not !eneit to any signiicant degree rom an acquisition>. the price paid or the target irm might equal the target irm4s total *alue>>. management may ha*e priorities other than the interest o the stoc$holders

>>>. the ta$eo*er mar$et may not !e competiti*e>?. anticipated merger gains may not !e ully achie*edA. > and >>> only(. >> and >? onlyC. >, >>>, and >? onlyD. >, >>, and >? only). >, >>, >>>, and >?

5. #hich o the ollo%ing are reasons %hy a irm may %ant to di*est itsel o some o its

assets>. to raise cash>>. to unload unproita!le operations>>>. to impro*e the strategic it o a irm4s *arious di*isions>?. to comply %ith antitrust regulationsA. > and >> only(. >, >>, and >>> onlyC. >, >>>, and >? onlyD. >>, >>>, and >? only). >, >>, >>>, and >?

55. #hich one o the ollo%ing statements is correctA. A spin-o requently ollo%s an equity car*e-out.(. A split-up requently ollo%s a spin-o.C. An equity car*e-out is a speciic type o acquisition.D. A spin-o in*ol*es an initial pu!lic oering.). A di*estiture means that the original irm ceases to e&ist.

26-17


18/83


56. elson4s >nteriors has ;2.1 million in net %or$ing capital. "he irm has i&ed assets %itha !oo$ *alue o ;2.2 million and a mar$et *alue o ;26.16 million. "he irm has no long-term de!t. "he +ome Centre is !uying elson4s >nteriors or ;2=.5 million in cash. "heacquisition %ill !e recorded using the purchase accounting method. #hat is the amount o

good%ill that "he +ome Centre %ill record on its !alance sheet as a result o this acquisitionA. ;1.21 million(. ;. millionC. ;. millionD. ;.1 million). ;6.27 million

57. "royer Mar$ets and De!4s 0rocery are all-equity irms. "royer Mar$ets has 2,


19/83


5=. @osie4s has 1,


20/83


62. "aylor4s +ard%are is acquiring "he Corner tore or ;2


21/83


65. leep "ight is acquiring @estul >nns or ;52,5


22/83


6. Aard*ar$ )nterprises has agreed to !e acquired !y La%son 9roducts in e&change or;


23/83


71. 3irm ( is !eing acquired !y 3irm A or ;162,


24/83


7. Dressler, >nc., is planning on merging %ith #eston 3oods. Dressler %ill pay #eston4sshareholders the current *alue o its stoc$ in shares o Dressler stoc$. Dressler4s currently has6,2


25/83


77. 0eorge4s )quipment is planning on merging %ith elson Machinery. 0eorge4s %ill pay elson4s shareholders the current *alue o their stoc$ in shares o 0eorge4s )quipment.0eorge4s currently has ,6


26/83


nc. has oered ;6< million cash or all o the common stoc$ in 8am Corporation.

(ased on recent mar$et inormation, 8am is %orth ;71< million as an independent operation.3or the merger to ma$e economic sense or 9earl, %hat %ould the minimum estimated *alueo the synergistic !eneits rom the merger ha*e to !eA. ;<(. ;75 millionC. ;15< millionD. ;71< million). ;6< million

26-26


27/83


. Consider the ollo%ing premerger inormation a!out 3irm H and 3irm I'

Assume that 3irm H acquires 3irm I !y paying cash or all the shares outstanding at a merger premium o ; per share. Also assume that neither irm has any de!t !eore or ater themerger. #hat is the *alue o the total equity o the com!ined irm, HI, i the purchase methodo accounting is usedA. ;1,27,


28/83


. Assume the ollo%ing !alance sheets are stated at !oo$ *alue.

#hat %ill !e the *alue o the equity account on the postmerger !alance sheet assuming thatMeat Co. purchases Loa, >nc. and the pooling o interests method o accounting is used.A. ;26,7


29/83


5. Assume the ollo%ing !alance sheets are stated at !oo$ *alue.

uppose the air mar$et *alue o Loa4s i&ed assets is ;7,2


30/83


6. il*er )nterprises has acquired All 0old Mining in a merger transaction. "he ollo%ing !alance sheets represent the premerger !oo$ *alues or !oth irms.

Assume the merger is treated as a pooling o interests or accounting purposes. "he totalassets are and the total equity is on the post-merger !alance sheet.A. ;2,5


31/83



Assume the merger is treated as a purchase or accounting purposes. "he mar$et *alue o All0old Mining4s i&ed assets is ;,


32/83


=. "he shareholders o 8olie Company ha*e *oted in a*or o a !uyout oer rom 9ittCorporation. >normation a!out each irm is gi*en here'

8olie4s shareholders %ill recei*e one share o 9itt stoc$ or e*ery three shares they hold in8olie. Assume the 9? o the acquisition is ero. #hat %ill the post-merger 9) ratio !e or9ittA. .(. =.2C. =.

D. 1


33/83


=1. Consider the ollo%ing premerger inormation a!out 3irm A and 3irm ('

Assume that 3irm A acquires 3irm ( *ia an e&change o stoc$ at a price o ;25 or each shareo (4s stoc$. (oth A and ( ha*e no de!t outstanding. #hat %ill the earnings per share o 3irmA !e ater the mergerA. ;1.6<(. ;1.6C. ;1.=5D. ;2.


34/83


Chapter 26 Mergers and Acquisitions Ans%er Key

Multiple Choice Questions

1. Last month, Keyser Design acquired all o the assets and lia!ilities o "enor Machine#or$s. "he com!ined irm is $no%n as Keyser Design. "enor Machine #or$s no longere&ists as a separate entity. "his acquisition is !est descri!ed as a'A. merger.(. consolidation.C. tender oer.D. spino.

). di*estiture.

@eer to section 26.1

AACSB: N/A

Bloom's: Knowledge

Difficulty: Basic Learning Obecti!e: "#$%

Section: "#&%

o(ic: )erger

2. "he Cat (o& acquired "he Dog +ouse. As part o this transaction, !oth irms ceased toe&ist in their prior orm and com!ined to create an all-ne% entity, Animal #orld. #hich oneo the ollo%ing terms !est descri!es this transactionA. di*estitureB. consolidationC. tender oer D. spino ). conglomeration


AACSB: N/A

Bloom's: Knowledge

Difficulty: Basic

Learning Obecti!e: "#$%

Section: "#&%o(ic: Consolidation

26-


35/83


. "he Daily e%s pu!lished an ad today %herein it announced its desire to purchase shareso a competing ne%spaper, the /il "o%n 0ossip. #hich one o the ollo%ing terms is !estdescri!ed !y this announcementA. merger request

(. consolidationC. tender oer D. spino ). di*estiture


AACSB: N/A

Bloom's: Knowledge


Section: "#&%o(ic: ender offer

. ome 3reight Line )&press shareholders are *ery dissatisied %ith the perormance o theirm4s current management team. "hese shareholders %ant to gain control o the !oard odirectors so they can ha*e the po%er to oust current management. As a means o gainingcontrol, these shareholders ha*e select candidates or all o the open positions on the irm4s !oard o directors. ince they ha*e insuicient *otes to guarantee the election o theseindi*iduals, they are contacting other shareholders and as$ing them to *ote %ith them on thisimportant matter. / course, the current management team is encouraging shareholders to*ote or their candidates or the !oard. #hich one o the ollo%ing terms is !est illustrated !y

this situationA. tender oer B. pro&y contestC. going-pri*ate transactionD. le*eraged !uyout). consolidation


AACSB: N/A Bloom's: Knowledge

Difficulty: Basic


Section: "#&%

o(ic: *ro+y contest

26-5


36/83


5. A group o indi*idual in*estors is in the process o acquiring all o the pu!licly-tradedshares o /M /utitters. /nce the shares are acquired, they %ill no longer !e pu!licly traded.#hich o the ollo%ing terms applies to this processA. tender oer

(. pro&y contestC. going-pri*ate transactionD. le*eraged !uyout). consolidation


AACSB: N/A

Bloom's: Knowledge


Section: "#&%o(ic: ,oing$(ri!ate transaction

6. "he current president and *ice-presidents o Mountain "op Consulting ha*e decided toorm a pri*ate in*estment group %ith the sole purpose o purchasing Mountain "opConsulting. "hese indi*iduals ha*e ound a lender %ho %ill lend them 5 percent o the purchase cost i they pledge their personal assets as collateral or the loan. "he current oicersagree to this arrangement, !orro% the unds, and purchase Mountain "op Consulting. "he purchase o this irm is reerred to as a'A. conglomeration.(. pro&y contest.

C. merger.D. le*eraged !uyout.). consolidation.


AACSB: N/A

Bloom's: Knowledge

Difficulty: Basic


Section: "#&%o(ic: Le!eraged buyout

26-6


37/83


7. 8ohnson Manuacturers and 9ea!ody )nterprises are !oth manuacturers o plastic products, such as plastic plates and sil*er%are. "hese t%o irms ha*e decided to %or$ together to ind a more eicient %ay to recycle re:ected products so that any re:ected material can !ereused. "hus, each company is going to assign t%o o its engineers to this pro:ect and ha*e

agreed to share any and all costs incurred in this process. "his pro:ect is an e&ample o a'A. consolidation.(. merged alliance.C. :oint *enture.D. ta$eo*er pro:ect.E. strategic alliance.


AACSB: N/A

Bloom's: Knowledge Difficulty: Basic


Section: "#&%o(ic: Strategic alliance

. Diet oda and +igh Caeine are t%o irms that compete in the sot drin$ mar$et. "heset%o competitors ha*e decided to in*est ;1< million to orm a ne% company, 3ruit "ea, %hich%ill manuacture la*ored teas. "his ne% irm is deined as a'A. consolidation.(. strategic alliance.C. :oint *enture.

D. merged alliance.). ta$eo*er pro:ect.


AACSB: N/A



Section: "#&%

o(ic: -oint !enture

26-7


38/83


=. Alliance Chemicals recently acquired %enson >ndustries in a transaction that produced a 9? o ;1. million. "his 9? is reerred to as'A. the agency eect.(. the consolidating *alue.

C. di*ersiication.D. the consolidation eect.E. synergy.

@eer to section 26.

AACSB: N/A

Bloom's: Knowledge

Difficulty: Basic

Learning Obecti!e: "#$.Section: "#&

o(ic: Synergy

1ndustrial upply. Currently, @oger is quite unhappy%ith the direction the irm is headed and is rumored to !e considering an attempt to ta$e o*erthe irm !y soliciting the *otes o other shareholders. "o head o this potential attempt, the !oard o @( >ndustrial upply has decided to oer @oger ;5 a share or all the shares heo%ns in the irm. "he current mar$et *alue per share is ;2. "his oer to purchase @oger4sshares is commonly reerred to as'A. a golden parachute.(. standstill payments.C. greenmail.

D. a poison pill.). a %hite $night.


AACSB: N/A



Section: "#&0

o(ic: ,reenmail

26-


39/83


11. #hich one o the ollo%ing generally has a lip-in pro*ision that signiicantly increasesthe cost to a shareholder %ho is attempting to gain control o*er a irmA. golden parachute(. standstill agreement

C. greenmailD. poison pill). %hite $night


AACSB: N/A

Bloom's: Knowledge

Difficulty: Basic

Learning Obecti!e: "#$%Section: "#&0

o(ic: *oison (ills

12. Mel*in %as attempting to gain control o #estern #ood 9roducts until he realied that thee&isting shareholders in the irm had the right to purchase additional shares at a !elo%-mar$et price gi*en his hostile ta$eo*er attempt. "hus, Mel*in decided to orego in*esting in this irm.#hat term applies to the tactic used !y #estern #ood 9roducts to sta*e o this ta$eo*erattemptA. pac-man deense(. shar$ repellent planC. golden parachute pro*isionD. greenmail pro*isionE. share rights plan


AACSB: N/A

Bloom's: Knowledge


Section: "#&0

o(ic: S1are rig1ts (lans

26-=


40/83


1. ieger Mills engages in arming, truc$ing o arm products, and the milling and retailingo arm grains. "he irm has decided to sell its arming operations to 8asper 3arms. "his saleis reerred to as aBn'A. liquidation.

B. di*estiture.C. merger.D. allocation.). restructuring.

@eer to section 26.=

AACSB: N/A

Bloom's: Knowledge


Section: "#&2o(ic: Di!estiture

1. 9rinceton )nterprises is a di*ersiied company. >n addition to its primary !usinessoperations, the irm is also the sole shareholder o a %holly o%ned su!sidiary. As part o itsrestructuring plan, 9rinceton has decided to implement an >9/ oering or shares in thesu!sidiary. "his oering is equi*alent to a 25 percent o%nership sta$e in the su!sidiary. #hatis the distri!ution o these shares calledA. split-upB. equity car*e-outC. countertender oer

D. %hite $night transaction). loc$up transaction


AACSB: N/A



Section: "#&2

o(ic: 34uity car!e$out

26-


41/83


15. 3amily "ra*el 9lans is the sole shareholder in its su!sidiary, "ra*eler4s >nsurance Co.3amily "ra*el 9lans has decided to di*est itsel o its insurance operations and does so !ydistri!uting the shares in the su!sidiary to the shareholders o 3amily "ra*el 9lans. "hisdistri!ution o shares is called aBn'

A. loc$up transaction.(. !ear hug.C. equity car*e-out.D. spin-o.). split-up.




Section: "#&2

o(ic: S(in$off

16. (lasco Distri!utors has !ecome a large conglomerate. >ts !oard o directors recentlyconcluded that the irm has !ecome so large that it has lost its eiciency. "he !oard urtherconcluded that the irm could !e !oth more eicient and more proita!le i it %ere di*idedinto three distinct and separate irms. "he !oard presented this suggested to the irm4sshareholders and those shareholders *oted and agreed to di*ide the irm. Di*iding this irminto separate entities is reerred to as aBn'A. loc$up transaction.

(. di*estiture.C. equity car*e-out.D. spin-o.E. split-up.


AACSB: N/A

Bloom's: Knowledge

Difficulty: Basic

Learning Obecti!e: "#$%Section: "#&2

o(ic: S(lit$u(

26-1


42/83


17. #hich one o the ollo%ing statements correctly applies to a legally deined mergerA. "he acquiring irm retains its identity and a!sor!s only the assets o the acquired irm.B. "he acquired irm is completely a!sor!ed and ceases to e&ist as a separate legal entity.C. A ne% irm is created %hich includes all the assets and lia!ilities o the acquiring irm plus

the assets only o the acquired irm.D. A ne% irm is created rom the assets and lia!ilities o !oth the acquiring and acquiredirms.). A merger reclassiies the acquired irm into a ne% entity %hich !ecomes a su!sidiary o theacquiring irm.




Section: "#&%

o(ic: )erger

1. #hich o the ollo%ing statements correctly apply to a merger>. "he titles to indi*idual assets o the acquired irm must !e transerred into the acquiringirm4s name.>>. "he merged irm %ill retain the use o the acquiring company4s name.>>>. "he acquiring irm does not ha*e to see$ appro*al or the merger rom its shareholders.>?. "he shareholders o the acquired company must appro*e the merger.A. > and >>> onlyB. >> and >? onlyC. >, >>, and >>> onlyD. >, >>, and >? only). >, >>, >>>, and >?


AACSB: N/A

Bloom's: Knowledge

Difficulty: Basic

Learning Obecti!e: "#$%Section: "#&%

o(ic: )erger

26-2


43/83


1=. >n a merger the'A. legal status o !oth the acquiring irm and the target irm is terminated.B. acquiring irm retains its pre-merger legal status.C. acquiring irm acquires the assets, !ut not the lia!ilities, o the target irm.

D. shareholders o the target irm ha*e little, i any, say as to %hether or not the mergeroccurs.). target irm continues to e&ist !ut %ill !e a %holly o%ned su!sidiary o the acquiring irm.


AACSB: N/A

Bloom's: Knowledge

Difficulty: Basic


o(ic: )erger

29/ sharesD. issue costs associated %ith %arrants that must !e oered to the shareholders o theacquiring irmE. see$ing appro*al o the shareholders o !oth the acquiring and the acquired irm


AACSB: N/A

Bloom's: Com(re1ension


Section: "#&%

o(ic: )erger

26-


44/83


21. Do%n @i*er Mar$ets has decided to acquire a controlling interest in (lue 8ays !y purchasing shares o stoc$ in the pu!lic mar$ets. #hich o the ollo%ing statements correctlyapply to this acquisition>. "he purchase o pu!licly-traded shares may !e more e&pensi*e than an outright merger %ith

(lue 8ays %ould ha*e !een.>>. Do%n @i*er Mar$ets can a*oid dealing %ith the !oard o directors o (lue 8ays !y purchasing shares in this manner.>>>. > Do%n @i*er Mar$ets is successul in acquiring at least < percent o the outstandingshares o (lue 8ays, the remaining shareholders in (lue 8ays %ill !e orced to also sell theirshares to Do%n @i*er Mar$ets.>?. #hether or not Do%n @i*er Mar$ets gains control o (lue 8ays depends upon the%illingness o (lue 8ays shareholders to sell their shares.A. > and >>> only(. >> and >? onlyC. >, >>, and >? only

D. >, >>, and >>> only). >, >>, >>>, and >?


AACSB: N/A


Difficulty: Basic


o(ic: Stoc5 ac4uisition

22. (ilt%ell +otels is acquiring all o the assets o 0reen @oo >nns. As a result, 0reen @oo>nns'A. %ill !ecome a ully o%ned su!sidiary o (ilt%ell +otels.B. %ill remain as a shell corporation unless the shareholders opt to dissol*e it.C. %ill !e ully merged into (ilt%ell +otels and %ill no longer e&ist as a separate entity.D. and (ilt%ell +otels %ill !oth cease to e&ist and a ne% irm %ill !e ormed.). %ill automatically !e dissol*ed.


AACSB: N/A

Bloom's: Knowledge


Section: "#&%

o(ic: Asset ac4uisition

26-


45/83


2. An auto ma$er recently acquired a %indshield manuacturer. #hich type o an acquisition%as thisA. horiontal(. longitudinal

C. conglomerateD. *ertical). indirect


AACSB: N/A

Bloom's: Knowledge

Difficulty: Basic


o(ic: 6ertical ac4uisition

2. > 0eneral )lectric, a highly di*ersiied company, %ere to acquire /cean 3reight Limited,the acquisition %ould !e classiied as a acquisition.A. horiontal(. longitudinalC. conglomerateD. *ertical). integrated


AACSB: N/A

Bloom's: Knowledge


Section: "#&%

o(ic: Conglomerate ac4uisition

26-5


46/83


25. > 9aul4s +ard%are %ere to acquire u!ur!an +ard%are, the acquisition %ould !eclassiied as a acquisition.A. horiontal(. longitudinal

C. conglomerateD. *ertical). integrated


AACSB: N/A

Bloom's: Knowledge

Difficulty: Basic


o(ic: 7ori8ontal ac4uisition

26. #hich o the ollo%ing is a orm o a ta$eo*er>. tender oer >>. merger >>>. pro&y contest>?. going pri*ate transactionA. > and >> only(. >>> and >? onlyC. >>, >>>, and >? onlyD. >, >>, and >>> onlyE. >, >>, >>>, and >?


AACSB: N/A

Bloom's: Knowledge


Section: "#&%

o(ic: a5eo!ers

26-6


47/83


27. 3irms A and ( ormally agree to each put up ;25 million to create irm C. 3irm C %ill perorm en*ironmental testing on the products produced !y !oth 3irm A and 3irm (. #hichone o the ollo%ing terms descri!es 3irm CA. :oint *enture

(. going-pri*ate transactionC. conglomerateD. su!sidiary). le*eraged !uyout


AACSB: N/A

Bloom's: Knowledge


Section: "#&%o(ic: -oint !enture

2. Di&ie and ten o her %ealthy riends ormed a group and !orro%ed the unds necessary toacquire 1


48/83


2=. >n a ta&-ree acquisition, the shareholders o the target irm'A. recei*e income %hich is considered to !e ta&-e&empt.(. git their shares to a ta&-e&empt organiation and thereore ha*e no ta&a!le gain.C. are *ie%ed as ha*ing e&changed shares on a dollar-or-dollar !asis.

D. sell their shares to a qualiying entity there!y a*oiding !oth income and capital gains ta&es.). sell their shares at cost there!y a*oiding the capital gains ta&.



Difficulty: Basic


Section: "#&"

o(ic: a+es and ac4uisitions

. continuity o equity interest>>. a !usiness purpose, other than a*oiding ta&es, or the acquisition>>>. payment in the orm o equity shares or the acquired irm>?. cash payment or the equity o the acquired irmA. > and >> only(. >> and >>> onlyC. >> and >? onlyD. >, >>, and >>> only). >, >>, and >? only


AACSB: N/A

Bloom's: Knowledge

Difficulty: Basic


Section: "#&"o(ic: a+es and ac4uisitions

26-


49/83


1. #hich one o the ollo%ing statements is correctA. "he shareholders o an acquired irm are generally gi*en a choice o accepting either cashor shares o stoc$ %hen the acquisition is ta&-ree.(. "o !e a ta&-ree acquisition, the shareholders o an acquired irm must recei*e shares in the

acquiring irm that are equal to =5 percent or less o the *alue o the shares held in theacquired irm.C. "he assets o an acquired irm are recorded on the !oo$s o the acquiring irm at theircurrent !oo$ *alue regardless o the ta& status o the acquisition.D. "arget irm shareholders demand a higher selling price %hen an acquisition is a non-ta&a!le e*ent.E. > the assets o a irm are %ritten up as part o the acquisition process, the increase in *alueis considered to !e a ta&a!le gain.


AACSB: N/A

Bloom's: Com(re1ension Difficulty: Basic


Section: "#&"

o(ic: a+es and ac4uisitions

2. "he purchase accounting method requires that'A. the e&cess o the purchase price o*er the air mar$et *alue o the target irm !e recorded asa one-time e&pense on the income statement o the acquiring irm.(. good%ill !e amortied on a yearly !asis or inancial statement purposes.

C. the equity o the acquiring irm !e reduced !y the e&cess o the purchase price o*er the air mar$et *alue o the target irm.D. the assets o the target irm !e recorded at their air mar$et *alue on the !alance sheet othe acquiring irm.). the e&cess amount paid or the target irm !e recorded as a tangi!le asset on the !oo$s othe acquiring irm.

@eer to section 26.

AACSB: N/A Bloom's: Com(re1ension

Difficulty: Basic

Learning Obecti!e: "#$"

Section: "#&.

o(ic: *urc1ase accounting met1od

26-=


50/83


. 3or inancial statement purposes, good%ill created !y an acquisition'A. must !e amortied on a straight-line !asis o*er 1< years.B. must !e re*ie%ed each year and amortied to the e&tent that it has lost *alue.C. is e&pensed e*enly o*er a 2. creates an account called good%ill %hich is recorded on the !alance sheet o the mergedirm.>>. consists o simply com!ining the !alance sheets o the acquiring and the target irm.>>>. is currently the accounting method required !y 3A( or all cash acquisitions.>?. recognies the e&cess o the purchase price o*er the air mar$et *alue and records thate&cess as an asset o the acquiring irm.A. > onlyB. >> onlyC. > and >? only

D. >> and >>> only). >, >>, and >? only

@eer to section 26.

AACSB: N/A



Section: "#&.

o(ic: *ooling of interests

26-5


51/83


5. "he incremental cash lo%s o a merger can relate to changes in %hich o the ollo%ing>. re*enue>>. capital requirements>>>. operating costs

>?. income ta&esA. > and >> only(. >>, >>>, and >? onlyC. >, >>>, and >? onlyD. >, >>, and >>> onlyE. >, >>, >>>, and >?

@eer to section 26.

AACSB: N/A


Learning Obecti!e: "#$.

Section: "#&o(ic: 9ncremental cas1 flows

6. #hich o the ollo%ing are e&amples o cost reductions that can result rom anacquisition>. allocating i&ed o*erhead across a %ider range o products>>. lo%ering oice payroll costs !y com!ining :o! unctions>>>. !eneiting rom economies o scale %hen purchasing ra% materials>?. reducing the num!er o management personnel required

A. > and >>> only(. >> and >? onlyC. >, >>, and >? onlyD. >>, >>>, and >? onlyE. >, >>, >>>, and >?

@eer to section 26.

AACSB: N/A



Section: "#&

o(ic: Cost reductions

26-51


52/83


7. A potential merger %hich produces synergy'A. should !e re:ected due to the pro:ected negati*e cash lo%s.(. should !e re:ected !ecause the synergy %ill dilute the !eneits o the merger.C. has a net present *alue o ero.

D. creates *alue and thereore should !e pursued.). reduces the anticipated net income rom the target irm.

@eer to section 26.


Difficulty: Basic


Section: "#&

o(ic: Synergy

. A proposed acquisition may create synergy !y'>. increasing the mar$et po%er o the com!ined irm.>>. impro*ing the distri!ution net%or$ o the acquiring irm.>>>. pro*iding the com!ined irm %ith a strategic ad*antage.>?. reducing the utiliation o the acquiring irm4s assets.A. > and >>> only(. >> and >>> onlyC. > and >? onlyD. >, >>, and >>> only). >, >>, >>>, and >?

@eer to section 26.

AACSB: N/A


Difficulty: Basic


Section: "#&o(ic: Synergy

26-52


53/83


=. #hich o the ollo%ing represent potential ta& !eneits that can directly result rom anacquisition>. an increase in depreciation e&pense>>. an increase in surplus unds

>>>. the use o net operating losses>?. an increased use o le*erageA. > and >? only(. >> and >>> onlyC. >, >>>, and >? onlyD. >>, >>>, and >? only). >, >>, >>>, and >?

@eer to section 26.

AACSB: N/A

Bloom's: Analysis

Difficulty: 9ntermediate Learning Obecti!e: "#$.

Section: "#&

o(ic: Ac4uisition gains


54/83


1. #hich one o the ollo%ing !est deines synergy gi*en the ollo%ing?A E ?alue o irm A?( E ?alue o irm (?A( E ?alue o merged irm A(

A. B?A F ?( - ?A((. ?A( - B?A F ?(C. greater o < or B?A F ?( - ?A(D. greater o < or ?A( - B?A F ?(). greater o < or ?A(

@eer to section 26.


Difficulty: Basic Learning Obecti!e: "#$.

Section: "#&

o(ic: a+ gains

2. #hich one o the ollo%ing statements is correctA. 3irms %ith large net operating losses tend to !e acquiring irms rather than target irms.(. "he le*erage associated %ith an acquisition increases the ta& lia!ility o the acquiring irm.C. > either an increase or a decrease in the le*el o production causes the a*erage cost perunit to increase then the irm is currently operating at its optimal production le*el.D. 3irms can al%ays !eneit rom economies o scale i they increase the sie o their irmthrough acquisitions.

). > a irm uses it surplus cash to acquire another irm then the shareholders o the acquiringirm immediately incur a ta& lia!ility related to the transaction.

@eer to section 26.

AACSB: N/A

Bloom's: Com(re1ension Difficulty: 9ntermediate


Section: "#&

o(ic: Ac4uisition effects

26-5


55/83


56/83


5. #hich o the ollo%ing represent potential gains rom an acquisition>. increased use o de!t>>. lo%er costs per unit produced>>>. strategic !eachhead

>?. diseconomies o scaleA. >> and >>> only(. > and >? onlyC. >, >>, and >>> onlyD. >, >>>, and >? only). >, >>, >>>, and >?

@eer to section 26.

AACSB: N/A



Section: "#&o(ic: Ac4uisition gains

6. "he *alue o a target irm to the acquiring irm is equal to'A. the *alue o the target irm as a separate entity plus the incremental *alue deri*ed rom theacquisition.(. the purchase cost o the target irm.C. the *alue o the merged irm minus the *alue o the target irm as a separate entity.D. the purchase cost plus the incremental *alue deri*ed rom the acquisition.

). the incremental *alue deri*ed rom the acquisition.

@eer to section 26.

AACSB: N/A

Bloom's: Knowledge


Section: "#&

o(ic: Cost of an ac4uisition

26-56


57/83


7. > an acquisition does not create *alue and the mar$et is smart, then the'A. earnings per share o the acquiring irm must !e the same !oth !eore and ater theacquisition.B. earnings per share can change !ut the stoc$ price o the acquiring irm should remain

constant.C. price per share o the acquiring irm should increase !ecause o the gro%th o the irm.D. earnings per share %ill most li$ely increase %hile the price-earnings ratio remains constant.). price-earnings ratio should remain constant regardless o any changes in the earnings pershare.


AACSB: N/A Bloom's: Analysis

Difficulty: 9ntermediate Learning Obecti!e: "#$.

Section: "#&

o(ic: Ac4uisitions and earnings (er s1are

. An acquisition completed simply to di*ersiy a irm %ill'A. create e&cessi*e synergy in almost all situations.(. lo%er systematic ris$ and increase the *alue o the irm.C. !eneit the irm !y eliminating unsystematic ris$.D. !eneit the shareholders !y pro*iding other%ise uno!taina!le di*ersiication.E. generally not add any *alue to the irm.



Difficulty: Basic


Section: "#&

o(ic: Di!ersif ication

26-57


58/83


=. #hich one o the ollo%ing statements is correctA. An increase in the earnings per share as a result o an acquisition %ill increase the price per share o the acquiring irm.(. "he price-earnings ratio %ill remain constant as a result o an acquisition %hich ails to

create *alue.C. > irm A acquires irm ( then the num!er o shares in A( %ill equal the num!er o shareso A plus the num!er o shares o (.D. > no *alue is created %hen irm A acquires irm (, then the total *alue o A( %ill equalthe *alue o A plus the *alue o (.). Di*ersiication is one o the greatest !eneits deri*ed rom an acquisition.


AACSB: N/A

Bloom's: Analysis Difficulty: 9ntermediate


Section: "#&o(ic: 3ffects of ac4uisitions

5


59/83


51. > a irm sells its cro%n :e%els %hen threatened %ith a ta$eo*er attempt, the irm isemploying a strategy commonly reerred to as a strategy.A. scorched earth(. shar$ repellent

C. !ear hugD. %hite $night). loc$up


AACSB: N/A

Bloom's: Knowledge

Difficulty: Basic

Learning Obecti!e: "#$.Section: "#&0

o(ic: Defensi!e tactics

52. #hich one o the ollo%ing deensi*e tactics is designed to pre*ent a Gt%o-tierG ta$eo*eroerA. !ear hug(. poison putC. shar$ repellentD. dual class capitaliationE. air price pro*ision


AACSB: N/A

Bloom's: Knowledge


Section: "#&0

o(ic: Defensi!e tactics

26-5=


60/83


5. #hich o the ollo%ing ha*e !een suggested as reasons %hy the stoc$holders in acquiringirms may not !eneit to any signiicant degree rom an acquisition>. the price paid or the target irm might equal the target irm4s total *alue>>. management may ha*e priorities other than the interest o the stoc$holders

>>>. the ta$eo*er mar$et may not !e competiti*e>?. anticipated merger gains may not !e ully achie*edA. > and >>> only(. >> and >? onlyC. >, >>>, and >? onlyD. >, >>, and >? only). >, >>, >>>, and >?

@eer to section 26.

AACSB: N/A

Bloom's: Knowledge


Section: "#&;

o(ic: Ac4uisition effects on stoc51olders

5. #hich o the ollo%ing are reasons %hy a irm may %ant to di*est itsel o some o itsassets>. to raise cash>>. to unload unproita!le operations>>>. to impro*e the strategic it o a irm4s *arious di*isions

>?. to comply %ith antitrust regulationsA. > and >> only(. >, >>, and >>> onlyC. >, >>>, and >? onlyD. >>, >>>, and >? onlyE. >, >>, >>>, and >?



Difficulty: Basic


Section: "#&2

o(ic: Di!estitures and restructurings

26-6


61/83


55. #hich one o the ollo%ing statements is correctA. A spin-o requently ollo%s an equity car*e-out.(. A split-up requently ollo%s a spin-o.C. An equity car*e-out is a speciic type o acquisition.

D. A spin-o in*ol*es an initial pu!lic oering.). A di*estiture means that the original irm ceases to e&ist.



Difficulty: Basic


Section: "#&2

o(ic: Di!estitures and restructurings

56. elson4s >nteriors has ;2.1 million in net %or$ing capital. "he irm has i&ed assets %itha !oo$ *alue o ;2.2 million and a mar$et *alue o ;26.16 million. "he irm has no long-term de!t. "he +ome Centre is !uying elson4s >nteriors or ;2=.5 million in cash. "heacquisition %ill !e recorded using the purchase accounting method. #hat is the amount ogood%ill that "he +ome Centre %ill record on its !alance sheet as a result o this acquisitionA. ;1.21 million(. ;. millionC. ;. millionD. ;.1 million). ;6.27 million

0ood%ill E ;2=.5m - ;2.1m - ;26.16m E ;1.21m

AACSB: Analytic

Bloom's: A((lication

Difficulty: Basic


Section: "#&.o(ic: ,oodwill

26-61


62/83


57. "royer Mar$ets and De!4s 0rocery are all-equity irms. "royer Mar$ets has 2,


63/83


5=. @osie4s has 1,


64/83


61. "he 3loral hoppe and Maggie4s 3lo%ers are all-equity irms. "he 3loral hoppe has2,5


65/83


6. 3irm A is acquiring 3irm ( or ;75,


66/83


65. leep "ight is acquiring @estul >nns or ;52,5


67/83


67. Moore >ndustries has agreed to !e acquired !y cott )nterprises or ;22,


68/83


6=. +ano*er "ires is !eing acquired !y (etter "ires or ;=,


69/83


71. 3irm ( is !eing acquired !y 3irm A or ;162,


70/83


7. Merchantile )&change is !eing acquired !y ational ales. "he incremental *alue o theacquisition is ;1,


71/83


75. Alpha is planning on merging %ith (eta. Alpha %ill pay (eta4s shareholders the current*alue o their stoc$ in shares o Alpha. Alpha currently has ,2


72/83


77. 0eorge4s )quipment is planning on merging %ith elson Machinery. 0eorge4s %ill pay elson4s shareholders the current *alue o their stoc$ in shares o 0eorge4s )quipment.0eorge4s currently has ,6


73/83


7=. >dentiy the three !asic legal procedures that one irm can use to acquire another and !riely discuss the ad*antages and disad*antages o each.

"he three orms are merger, acquisition o stoc$, and acquisition o assets. A merger has the

ad*antage that it is legally simple and thereore lo% cost !ut it has the disad*antage that itmust !e appro*ed !y the shareholders o !oth irms. Acquisition !y stoc$ requires noshareholder meetings and management o the target irm can !e !ypassed. +o%e*er, it can !ea costly orm o acquisition and minority shareholders may hold out, there!y raising the costo the purchase. An acquisition o assets requires the *ote o the target irm4s shareholders.+o%e*er, it can !ecome quite costly to transer title to all o the assets.

3eed!ac$' @eer to section 26.1

AACSB:


74/83


1. 3irms can requently create synergy !y merging and sharing complementary resources%ith another irm. 0i*e t%o e&amples o situations %here this %ould most li$ely occur.

tudent e&amples %ill *ary !ut should display an understanding o ho% complementary

resources can !e shared in a manner that %ill reduce costs. A common e&ample %ould !e t%oseasonal irms such as a gol course and a s$i resort %here assets such as the administrati*eunctions, the hospitality sta, the dining areas, and the resort areas %ould all !e consideredcomplementary resources.

3eed!ac$' @eer to section 26.

AACSB: : "#$% Learning Obecti!e: "#$.

Section: "#&o(ic: Calculating synergy

26-7


75/83


. Consider the ollo%ing premerger inormation a!out 3irm H and 3irm I'

Assume that 3irm H acquires 3irm I !y paying cash or all the shares outstanding at a merger premium o ; per share. Also assume that neither irm has any de!t !eore or ater themerger. #hat is the *alue o the total equity o the com!ined irm, HI, i the purchase methodo accounting is usedA. ;1,27,


76/83


. Assume the ollo%ing !alance sheets are stated at !oo$ *alue.

#hat %ill !e the *alue o the equity account on the postmerger !alance sheet assuming thatMeat Co. purchases Loa, >nc. and the pooling o interests method o accounting is used.A. ;26,7


77/83


5. Assume the ollo%ing !alance sheets are stated at !oo$ *alue.

uppose the air mar$et *alue o Loa4s i&ed assets is ;7,2


78/83



Assume the merger is treated as a pooling o interests or accounting purposes. "he totalassets are and the total equity is on the post-merger !alance sheet.A. ;2,5


79/83



Assume the merger is treated as a purchase or accounting purposes. "he mar$et *alue o All0old Mining4s i&ed assets is ;,


80/83


. 9enn Corp. is analying the possi!le acquisition o "eller Company. (oth irms ha*e node!t. 9enn !elie*es the acquisition %ill increase its total aterta& annual cash lo%s !y ;.7million indeinitely. "he current mar$et *alue o "eller is ;1


81/83


82/83


=: "#$2


Section: "# o(ic: )erger N*6

26-2


83/83


=1. Consider the ollo%ing premerger inormation a!out 3irm A and 3irm ('

Assume that 3irm A acquires 3irm ( *ia an e&change o stoc$ at a price o ;25 or each shareo (4s stoc$. (oth A and ( ha*e no de!t outstanding. #hat %ill the earnings per share o 3irmA !e ater the mergerA. ;1.6<(. ;1.6C. ;1.=5D. ;2.

Documents

Corporate Finance Chapter 26