Chapter 29

____ can provide a potential tax gain from an acquisition. A. A reduction in the level of debt B. An increase in surplus funds C. The use of net operating losses D. A decreased use of leverage E. Increased diseconomies of scale

C. The use of net operating losses

For the acquiring firm, diversification: A. will automatically produce gains. B. will reduce both risk and debt capacity. C. may provide financial benefits. D. will provide risk reduction for all shareholders' portfolios. E. may result in a risk-free firm.

C. may provide financial benefits.

A dissident group solicits votes in an attempt to replace existing management. This is called a: A. tender offer. B. shareholder derivative action. C. proxy contest. D. management freeze-out. E. shareholder's revenge.

C. proxy contest.

The IRS is most apt to disallow an acquisition if it: A. moves the foreign operations of the acquired firm to the U.S. B. is totally financed with debt. C. is designed primarily to reduce federal taxes. D. is designed to transfer technology in a tax-free transfer. E. allows shareholders to avoid currently realizing their gains from a stock acquisition.

C. is designed primarily to reduce federal taxes.

A public offer by one firm to directly buy the shares of another firm is called a: A. merger. B. consolidation. C. tender offer. D. spinoff. E. divestiture.

C. tender offer.

The distribution of shares in a subsidiary to existing parent company stockholders is called a(n): A. lockup transaction. B. bear hug C. equity carve-out. D. spin-off. E. split-up.

D. spin-off.

Firm A and Firm B join to create Firm AB. This is an example of: A. a tender offer. B. an acquisition of assets. C. an acquisition of stock. D. a consolidation. E. a merger.

D. a consolidation.

A financial device designed to make unfriendly takeover attempts financially unappealing, if not impossible, is called: A. a golden parachute. B. a standstill agreement. C. greenmail. D. a poison pill. E. a white knight.

D. a poison pill.

Suppose that General Motors makes an offer to acquire General Mills. Ignoring potential antitrust problems, this merger would be classified as a: A. monopolistic merger. B. horizontal merger. C. vertical merger. D. conglomerate merger. E. equity carve-out merger.

D. conglomerate merger.

A key reason for acquisitions is synergy. Synergy includes all of the following except: A. revenue enhancements. B. cost reductions. C. decreased taxes. D. decreased cash flows. E. increased efficiency.

D. decreased cash flows.

When the officers of a firm purchase all of the equity shares and the shares of the firm are delisted and no longer publicly available, this action is known as a(n): A. consolidation. B. vertical acquisition. C. proxy contest. D. going-private transaction. E. equity carve-out.

D. going-private transaction.

The acquisition of a firm in the same industry as the bidder is called a _____ acquisition. A. conglomerate B. forward C. backward D. horizontal E. vertical

D. horizontal

A going-private transaction in which a large percentage of the money used to buy the outstanding stock is borrowed is called a: A. tender offer. B. proxy contest. C. merger. D. leveraged buyout. E. consolidation.

D. leveraged buyout.

A proposed acquisition may create synergy by doing all of the following except: A. increasing the market power of the combined firm. B. improving the distribution network of the acquiring firm. C. reducing the acquiring firm's distribution costs. D. reducing the utilization of the acquiring firm's assets. E. providing the combined firm with a strategic advantage.

D. reducing the utilization of the acquiring firm's assets.

Which one of the following statements is correct? A. An equity carve-out generates cash for the parent firm. 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.

A. An equity carve-out generates cash for the parent firm.

Which one of the following statements concerning mergers and acquisitions is correct? A. Generally, two-thirds of the shareholders in each firm must approve a merger. B. Acquisitions always result in at least one firm being dissolved. C. The net present value of an acquisition should have no bearing on whether or not the acquisition occurs. D. Acquisitions of assets are generally quite simple and inexpensive from a legal and accounting perspective. E. At least one-half of the shareholders must vote to approve an acquisition of stock.

A. Generally, two-thirds of the shareholders in each firm must approve a merger.

Which one of the following is most likely a good candidate for an acquisition that could benefit from the use of complementary resources? A. a sports arena that is home only to an indoor hockey team B. a hotel in a busy downtown business district of a major city C. a day care center located near a major route into the main business district of a large city D. an amusement park located in a centralized Florida location E. a fast food restaurant located near a major transportation hub

A. a sports arena that is home only to an indoor hockey team

The shareholders of a target firm benefit the most when: A. an acquiring firm has the better management team and replaces the target firm's managers. B. the management of the target firm is more efficient than the management of the acquiring firm which replaces them. C. the management of both the acquiring firm and the target firm are as equivalent as possible. D. their current management team is kept in place even though the managers of the acquiring firm are more suited to manage the target firm's situation. E. their management team is technologically knowledgeable yet ineffective.

A. an acquiring firm has the better management team and replaces the target firm's managers.

The acquisition of a firm whose business is not related to that of the bidder is called a _____ acquisition. A. conglomerate B. forward C. backward D. horizontal E. vertical

A. conglomerate

In a merger or acquisition, an asset should be acquired if it: A. generates a positive net present value to the shareholders of the acquiring firm. B. is a firm in the same line of business in which the acquirer has expertise. C. is a firm in a totally different line of business which will diversify the firm. D. pays a large dividend which will provide a cash pass through to the acquirer. E. increases the firm's market share.

A. generates a positive net present value to the shareholders of the acquiring firm.

Generous compensation packages paid to a firm's top management in the event of a takeover are referred to as: A. golden parachutes. B. poison puts. C. white knights. D. shark repellents. E. bear hugs.

A. golden parachutes.

Suppose that Ford and General Motors were to merge. Ignoring potential antitrust problems, this merger would be classified as a(n): A. horizontal merger. B. vertical merger. C. conglomerate merger. D. tax inversion merger. E. equity carve-out merger.

A. horizontal merger.

The complete absorption of one company by another, wherein the acquiring firm retains its identity and the acquired firm ceases to exist as a separate entity, is called a: A. merger. B. consolidation. C. tender offer. D. spinoff. E. divestiture.

A. merger.

A change in the corporate charter making it more difficult for the firm to be acquired by increasing the percentage of shareholders that must approve a merger offer is called a: A. supermajority amendment. B. standstill agreement. C. greenmail provision. D. poison pill amendment. E. white knight provision.

A. supermajority amendment.

The value of a target firm to the acquiring firm is equal to the: A. value of the target firm as a separate entity plus the synergy derived from the acquisition. B. purchase cost of the target firm. C. value of the merged firm minus the value of the target firm as a separate entity. D. purchase cost plus the incremental value derived from the acquisition. E. incremental value derived from the acquisition.

A. value of the target firm as a separate entity plus the synergy derived from the acquisition.

In a tax-free acquisition, the shareholders of the target firm: A. receive income that 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 their shares. 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.

C. are viewed as having exchanged their shares.

Which one of the following combinations of firms would benefit the most through the use of complementary resources? A. a ski resort and a travel trailer sales outlet B. a golf resort and a ski resort C. a hotel and a home improvement center D. a swimming pool distributor and a kitchen designer E. a fast food restaurant and a dry cleaner

B. a golf resort and a ski resort

In a merger the: A. legal status of both the acquiring firm and the target firm is terminated. B. acquiring firm retains its name and legal status. C. acquiring firm acquires the assets but not the liabilities of the target firm. D. stockholders of the target firm have little, if any, say as to whether or not the merger occurs. E. target firm always continues to exist as a subsidiary of the acquiring firm.

B. acquiring firm retains its name and legal status.

One company wishes to acquire another. Which one of the following does not require a formal vote by the shareholders of the acquired firm? A. merger B. acquisition of stock C. horizontal acquisition of assets D. consolidation E. vertical acquisition of assets

B. acquisition of stock

Assume a merger of two levered firms produced no synergy. In this case, the: A. acquiring firm shareholders would neither gain nor lose any value. B. bondholders probably benefit at shareholders' expense. C. diversification effect would only benefit the acquired firm's shareholders. D. combined shareholders would benefit at the expense of all debt holders. E. shareholders and bondholders would fail to realize any benefits or losses.

B. bondholders probably benefit at shareholders' expense.

A merger in which an entirely new firm is created and both the acquired and acquiring firms cease to exist is called a: A. divestiture. B. consolidation. C. tender offer. D. spinoff. E. conglomeration.

B. consolidation.

If an acquisition does not create value, 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 company should remain constant. C. price per share of the acquiring company 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.

B. earnings per share can change but the stock price of the acquiring company should remain constant.

The sale of stock in a wholly owned subsidiary via an initial public offering is referred to as a(n): A. split-up. B. equity carve-out. C. counter-tender offer. D. white knight transaction. E. lockup transaction.

B. equity carve-out.

An attempt to gain control of a firm by soliciting a sufficient number of stockholder votes to replace the current board of directors is called a: A. tender offer. B. proxy contest. C. going-private transaction. D. leveraged buyout. E. consolidation.

B. proxy contest.

A contract wherein the bidding firm agrees to limit its holdings in the target firm is called a: A. supermajority amendment. B. standstill agreement. C. greenmail provision. D. poison pill amendment E. white knight provision.

B. standstill agreement.

Suppose that Arby's acquired a meat packing house. This merger would be classified as a: A. monopolistic merger. B. vertical merger. C. conglomerate merger. D. horizontal merger. E. spin off.

B. vertical merger.

If Microsoft were to acquire an airline, the acquisition would be classified as a _____ acquisition. A. horizontal B. longitudinal C. conglomerate D. vertical E. complementary resources

C. conglomerate

Which one of the following statements is correct? A. If an acquisition is made with cash, then the cost of that acquisition is dependent upon the acquisition gains. B. Acquisitions made by exchanging shares of stock are normally taxable transactions. C. Shareholders of the acquired firm must realize capital gains/losses in a cash acquisition. D. The stockholders of the acquiring firm will be better off when an acquisition results in losses if the acquisition was made with cash rather than with stock. E. Acquisitions based on legitimate business purposes are not taxable transactions regardless of the means of financing used.

C. Shareholders of the acquired firm must realize capital gains/losses in a cash acquisition.

A classified board is: A. a communication network that identifies firms that are willing to be acquired. B. the inclusion a super majority provision to prevent a small number of directors from exerting total control over the board's decisions. C. a board where only a portion of the directors are elected in any one year. D. a communication network that distributes resumes for potential board candidates. E. a listing of criteria that a firm is seeking for a targeted purchase.

C. a board where only a portion of the directors are elected in any one year.

All of the following represent potential gains from an acquisition except: A. the replacement of ineffective managers. B. lower costs per unit produced. C. an increase in production size such that diseconomies of scale are realized. D. increased asset utilization. E. spreading of overhead costs.

C. an increase in production size such that diseconomies of scale are realized.

Assume Uptown Markets just made a tender offer to purchase shares of its own stock. This offer was made to all its shareholders except for the largest outside shareholder. This offer is referred to as a(n): A. limited recapitalization. B. white knight offer. C. exclusionary self-tender. D. asset restructuring. E. greenmail offer.

C. exclusionary self-tender.

A business deal in which all publicly owned stock in a firm is replaced with complete equity ownership by a private group is called a: A. tender offer. B. proxy contest. C. going-private transaction. D. acquisition. E. consolidation.

C. going-private transaction.

The payments made by a firm to repurchase shares of its outstanding stock from an individual investor in an attempt to eliminate a potential unfriendly takeover attempt are referred to as: A. a golden parachute. B. standstill payments. C. greenmail. D. a poison pill. E. a white knight.

C. greenmail.

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. include synergies. D. ignore any one-time acquisition fees or transaction costs. E. ignore any potential changes in management.

C. include synergies.

If the All-Star Fuel Filling Company, a chain of gasoline stations, acquires the Mid-States Refining Company, a refiner of oil products, this would be an example of a: A. conglomerate acquisition. B. white knight. C. vertical acquisition. D. going-private transaction. E. horizontal acquisition.

C. vertical acquisition.

A friendly suitor that a target firm turns to as an alternative to a hostile bidder is called a: A. golden suitor. B. poison put. C. white knight. D. shark repellent. E. crown jewel.

C. white knight.

The purchase accounting method for mergers 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. 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 acquired 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.

D. the assets of the acquired firm be recorded at their fair market value on the balance sheet of the acquiring firm.

When a building supply store acquires a lumber mill it is making a ______ acquisition. A. horizontal B. longitudinal C. conglomerate D. vertical E. complementary resources

D. vertical

A firm may want to divest itself of some of its assets for all of these reasons except to: A. raise cash. B. eliminate unprofitable operations. C. eliminate some recently acquired assets. D. cash in on profitable operations. E. eliminate some synergy.

E. eliminate some synergy.

Which one of these is least associated with takeovers? A. leveraged buyouts B. management buyouts C. proxy contests D. acquisition of assets E. spin-offs

E. spin-offs

The positive incremental net gain associated with the combination of two firms through a merger or acquisition is called: A. the agency conflict. B. goodwill. C. the merger cost. D. the consolidation effect. E. synergy.

E. synergy.

The acquisition of a firm involved with a different production process stage than the bidder is called a _____ acquisition. A. conglomerate B. forward C. backward D. horizontal E. vertical

E. vertical