Practise test - Multiple choice

A consolidation is the combining of firms such that:

A new firm is created and both the acquired and the acquiring firms cease to exist.

In the financial world, the term poison pill refers to:

A tactic to make unfriendly takeover attempts unappealing.

What one of the following shareholders is most likely to prefer a low payout ratio?

An individual investor who is in the highest tax bracket

The acquisition of a firm whose business is not related to that of the bidder is called a:

Conglomerate acquisition.

Which of the following is the correct chronology of a dividend payment?

Declaration date, Ex-dividend date, Date of record, Date of payment

A tender offer must be approved by a vote of the shareholders of the target firm, while a merger does not.

False

In a typical merger, only the target firm retains its individual identity.

False

In general, the evidence indicates that mergers create relatively greater wealth for the stockholders of the acquiring firm than for the shareholders of the target.

False

When one firm acquires another solely for the purpose of diversification, the merger is called a horizontal merger.

False

The static theory of capital structure states that firms borrow up to the point where the tax benefit of one additional dollar of debt is equal to the marginal cost of:

Financial distress.

he extent to which a firm relies on debt is referred to as:

Financial leverage.

A targeted stock repurchase of the firm directed at a potential bidder to discourage an unfriendly takeover attempt is called (a):

Greenmail.

The use of personal borrowing to change the overall amount of financial leverage to which the individual is exposed is called:

Homemade leverage.

The acquisition of a firm in the same industry as the bidder is called a:

Horizontal acquisition.

Which of the following statements is/are true regarding corporate borrowing when EBIT is positive? I. Increasing financial leverage increases the sensitivity of EPS and ROE to changes in EBIT II. The effect of financial leverage depends on the company's EBIT, that is, leverage is unfavourable when EBIT is relatively high, and leverage is favourable when EBIT is relatively low III. High leverage decreases the returns to shareholders (as measured by ROE)

I only

The tax savings of the firm derived from the deductibility of interest expense is called the:

Interest tax shield.

A cash payment made by a firm to its owners when some of the firm's assets are sold off is called a(n):

Liquidating dividend.

The proposition that the value of the firm is independent of its capital structure is called:

M&M Proposition I (without taxes).

According to _________, the value of the firm is independent of its capital structure.

M&M Proposition I without taxes

The amount paid by an acquirer to the shareholders of the acquired firm that exceeds the stand-alone value is called the:

Merger premium.

A financial contract that gives its owner the right, but not the obligation, to buy or sell a specified asset at an agreed-upon price on or before a given future date is called a(n):

Option contract.

The weighted average cost of capital can also be defined as the:

Required return on a firm's overall assets.

The issuance of one new share of stock to replace three outstanding shares is called a:

Reverse stock split.

An alternative to a cash dividend payment by the firm from its earnings to the shareholders, achieved by the firm buying some of its outstanding stock on the open market, is a:

Share repurchase.

The market's reaction to the announcement of a change in the firm's dividend payout is the:

Signaling effect.

Once it is declared, a common stock dividend becomes a legal financial obligation (liability) of the firm.

True

The acquisition of a firm in a different production process stage than the bidder is called a:

Vertical acquisition.

Eat M Up is considering a hostile takeover of the Everyday Company. To prevent such an event, the Everyday Company scrambles to get the Good Guys Network to buy them. The Good Guys Network is referred to as the:

White Knight.

Which one of the following is most likely to convey some negative information of the firm?

an unexpected decrease in dividends

he equity risk derived from the firm's operating activities is called ____________ risk.

business

The date before which a new purchaser of stock is entitled to receive a declared dividend, but on or after which she does not receive the dividend, is called the ____________ date.

ex-dividend

The act where an owner of an option buys or sells the underlying asset, as is their right, is called _____________ the option.

exercising

The equity risk derived from the firm's capital structure policy is called ___________ risk.

financial

Generous compensation plans paid to a firm's top management in the event of a takeover are called ____________.

golden parachutes

The positive incremental net gain associated with the combination of two firms through a merger or acquisition is called (the) ___________.

merger gain or synergy

An agreement to trade currencies based on today's exchange rate, with the trade being settled within two business days, is called a _________________.

spot trade

An increase in the firm's number of shares outstanding without any change in owners' equity is called a ________________.

stock split

A public offer by one firm to directly buy the shares of another firm is called a

tender offer

In a reverse stock split, ________________.

the number of shares outstanding decreases, but owners' equity is unchanged