Finance Ch. 6 Quiz

Book value is based on historical cost.

True

Market capitalization is obtained by multiplying the number of shares outstanding by the price per share.

True

The book value of the firm is a similar concept to the net worth of the individual.

True

There is a difference between cash flow and operating cash flow.

True

Which of the following items would have the greatest impact on the book value of the firm ? a. depreciation of the assets b. current value of the assets c. current value of the liabilities d. none of the above

a. depreciation of the assets Correct

The target firm determines its liquidation value and the present value of its relevant stand alone cash flows and selects the higher value. This is the target's a. maximum acceptable price b. minimum acceptable price Correct c. neither A nor B

b. minimum acceptable price

Net worth is equal to

book value, net assets

Company A has unused production capacity and makes a product similar to Company B. Company B acquires Company A to obtain the unused production capacity. This is an example of a. vertical integration downstream b. vertical integration upstream c. horizontal integration Correct d. none of the above

c. horizontal integration

The appropriate discount rate to use in discounting the cash flow of the target is a. the acquiring firm's cost of debt. b. the acquiring firm's weighted average cost of capital. c. the target's cost of equity. d. the acquiring firm's cost of equity.

c. the target's cost of equity

Discounting the terminal value of the target involves a discount rate that is

the target's cost of equity