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Chapter 29 - Mergers and Acquisitions

17. 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. countertender offer.

D. white knight transaction. E. lockup transaction.

18. 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.

19. Which of the following statements concerning acquisitions are correct?

I. Being acquired by another firm is an effective method of replacing senior management. II. The net present value of an acquisition should have no bearing on whether or not the acquisition occurs.

III. Acquisitions are often relatively complex from an accounting and tax point of view. IV. The value of a strategic fit is easy to estimate using discounted cash flow analysis. A. I and III only B. II and IV only C. I and IV only D. I, III, and IV only E. I, II, III, and IV

20. 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.

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Chapter 29 - Mergers and Acquisitions

21. 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

22. If Microsoft were to acquire U.S. Airways, the acquisition would be classified as a _____ acquisition. A. horizontal B. longitudinal C. conglomerate D. vertical

E. complementary resources

23. Which of the following activities are commonly associated with takeovers? I. the acquisition of assets II. proxy contests

III. management buyouts IV. leveraged buyouts A. I and III only B. II and IV only C. I, III, and IV only D. I, II, and IV only E. I, II, III, and IV

24. 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.

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Chapter 29 - Mergers and Acquisitions

25. 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 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.

26. 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

27. Which of the following represent potential tax gains from an acquisition? I. a reduction in the level of debt 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. III and IV only D. I and III only

E. II, III, and IV only

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Chapter 29 - Mergers and Acquisitions

28. 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.

29. 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 firm should remain constant.

C. price per share of the acquiring firm 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.

30. 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

31. 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

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