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Q:
A statutory merger is a combination of two corporations in which only one corporation survives and the merged corporation goes out of existence. True or False
Q:
A stronger dollar benefits ________ and hurts ________
A) American businesses; American consumers.
B) American businesses; foreign businesses.
C) American consumers; American businesses.
D) foreign businesses; American consumers.
Q:
Although there is substantial evidence that mergers pay off for target firm shareholders around the time the takeover is announced, shareholder wealth creation in the 3-5 years following a takeover is often limited.
True or False
Q:
The price of one country's currency in terms of another's is called
A) the foreign exchange rate.
B) the interest rate.
C) the Dow Jones industrial average.
D) none of the above.
Q:
Takeover attempts are likely to increase when the market value of a firms assets is more than their replacement value. True or False
Q:
(I) A bond is a debt security that promises to make payments periodically for a specified period of time.
(II) A stock is a security that is a claim on the earnings and assets of a corporation.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Q:
Overpayment is the leading factor contributing to the failure of M&As to meet expectations. True or False
Q:
(I) Debt markets are often referred to generically as the bond market.
(II) A bond is a security that is a claim on the earnings and assets of a corporation.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Q:
Post-merger returns to shareholders often do not meet expectations. However, this is also true of such alternatives to M&As as joint ventures, alliances, and new product introductions. True or False
Q:
Changes in stock prices
A) affect people's wealth and their willingness to spend.
B) affect firms' decisions to sell stock to finance investment spending.
C) are characterized by considerable fluctuations.
D) all of the above.
E) only A and B of the above.
Q:
Pre-merger returns to target firm shareholders average about 30% around the announcement date of the transaction. True or False
Q:
Mergers and acquisitions rarely pay off for target firm shareholders, but they are usually beneficial to acquiring firm shareholders. True or False
Q:
A declining stock market index due to lower share prices
A) reduces people's wealth and as a result may reduce their willingness to spend.
B) increases people's wealth and as a result may increase their willingness to spend.
C) decreases the amount of funds that business firms can raise by selling newly issued stock.
D) both A and C of the above.
E) both B and C of the above.
Q:
The largest one-day drop in the history of the American stock markets occurred in
A) 1929.
B) 1987.
C) 2000.
D) 2001.
Q:
Market power is a theory that suggests that firms merge to improve their ability to set product and service selling prices. True or False
Q:
Tax benefits, such as tax credits and net operating loss carry-forwards of the target firm, are often considered the primary reason for the acquisition of that firm. True or False
Q:
Stock prices since the 1980s have been
A) relatively stable, trending upward at a steady pace.
B) relatively stable, trending downward at a moderate rate.
C) extremely volatile.
D) unstable, trending downward at a moderate rate.
Q:
During periods of high inflation, the market value of assets is often less than their book value. This often creates an attractive M&A opportunity. True or False
Q:
The stock market is important because
A) it is where interest rates are determined.
B) it is the most widely followed financial market in the United States.
C) it is where foreign exchange rates are determined.
D) all of the above.
Q:
Because of hubris, managers of acquiring firms often believe their valuation of a target firm is superior to the markets valuation. Consequently, they often end up overpaying for the firm. True and False
Q:
Compared to interest rates on long-term U.S. government bonds, interest rates on three-month Treasury bills fluctuate ________ and are ________ on average.
A) more; lower
B) less; lower
C) more; higher
D) less; higher
Q:
Compared to interest rates on long-term U.S. government bonds, interest rates on ________ fluctuate more and are lower on average.
A) medium-quality corporate bonds
B) low-quality corporate bonds
C) high-quality corporate bonds
D) three-month Treasury bills
E) none of the above
Q:
Deregulated industries often experience an upsurge in M&A activity shortly after regulations are removed. True or False
Q:
Typically, increasing interest rates
A) discourages individuals from saving.
B) discourages corporate investments.
C) encourages corporate expansion.
D) encourages corporate borrowing.
E) none of the above.
Q:
Most empirical studies support the conclusion that unrelated diversification benefits a firms shareholders. True or False
Q:
Interest rates are important to financial institutions since an interest rate increase ________ the cost of acquiring funds and ________ the income from assets.
A) decreases; decreases
B) increases; increases
C) decreases; increases
D) increases; decreases
Q:
Operating synergy consists of economies of scale and scope. Economies of scale refer to the spreading of variable costs over increasing production levels, while economies of scope refer to the use of a specific asset to produce multiple related products or services. True or False
Q:
The bond markets are important because
A) they are easily the most widely followed financial markets in the United States.
B) they are the markets where interest rates are determined.
C) they are the markets where foreign exchange rates are determined.
D) all of the above.
Q:
Synergy is the notion that the combination of two or more firms will create value exceeding what either firm could have achieved if they had remained independent. True or False
Q:
The price paid for the rental of borrowed funds (usually expressed as a percentage of the rental of $100 per year) is commonly referred to as the
A) inflation rate.
B) exchange rate.
C) interest rate.
D) aggregate price level.
Q:
When investment bankers are paid by a firms board to evaluate a proposed takeover bid, their opinions are given in a so-called fairness letter. True or False
Q:
Markets in which funds are transferred from those who have excess funds available to those who have a shortage of available funds are called
A) commodity markets.
B) funds markets.
C) derivative exchange markets.
D) financial markets.
Q:
Financial market activities affect
A) personal wealth.
B) spending decisions by individuals and business firms.
C) the economy's location in the business cycle.
D) all of the above.
Q:
A joint venture rarely takes the legal form of a corporation. True or False
Q:
Financial markets and institutions
A) involve the movement of huge quantities of money.
B) affect the profits of businesses.
C) affect the types of goods and services produced in an economy.
D) do all of the above.
E) do only A and B of the above.
Q:
Only interest payments on ESOP loans are tax deductible by the firm sponsoring the ESOP. True or False
Q:
Holding companies can gain effective control of other companies by owning significantly less than 100% of their outstanding voting stock. True or False
Q:
Most M&A transactions in the United States are hostile or unfriendly takeover attempts. True or False
Q:
The merger of Exxon Oil Company and Mobil Oil Company was considered a horizontal merger. True or False
Q:
The acquisition of a coal mining business by a steel manufacturing company is an example of a vertical merger. True or False
Q:
A conglomerate merger is one in which a firm acquires other firms, which are highly related to its current core business. True or False
Q:
A horizontal merger occurs between two companies within the same industry. True or False
Q:
In a consolidation, two or more companies join together to form a new firm. True or False
Q:
In a statutory merger, the acquiring company assumes the assets and liabilities of the target firm in accordance with the prevailing federal government statutes. True or False
Q:
In a statutory merger, both the acquiring and target firms survive. True or False
Q:
A leveraged buyout is the purchase of a company using as much equity as possible. True or False
Q:
An acquisition occurs when one firm takes a controlling interest in another firm, a legal subsidiary of another firm, or selected assets of another firm. The acquired firm often remains a subsidiary of the acquiring company. True or False
Q:
Financial restructuring generally refers to actions taken by the firm to change total debt and equity structure. True or False
Q:
Large investment banks invariably provide higher quality service and advice than smaller, so-called boutique investment banks. True or False
Q:
Investment bankers offer strategic and tactical advice and acquisition opportunities, screen potential buyers and sellers, make initial contact with a seller or buyer, and provide negotiation support for their clients.
True or False
Q:
Holding companies and their shareholders may be subject to triple taxation. True or False
Q:
The primary advantage of a holding company structure is the potential leverage that can be achieved by gaining effective control of other companies assets at a lower overall cost than would be required if the firm were to acquire 100 percent of the targets outstanding stock. True or False
Q:
Operational restructuring refers to the outright or partial sale of companies or product lines or to downsizing by closing unprofitable or non-strategic facilities. True or False
Q:
Joint ventures are cooperative business relationships formed by two or more separate parties to achieve common strategic objectives True or False
Q:
A vertical merger is one in which the merger participants are usually competitors. True or False
Q:
A merger of equals is a merger framework usually applied whenever the merger participants are comparable in size, competitive position, profitability, and market capitalization. True or False
Q:
The target company is the firm being solicited by the acquiring company. True or False
Q:
A divestiture is the sale of all or substantially all of a company or product line to another party for cash or securities. True or False
Q:
Recent Japanese experience has been characterized by tight monetary policy, as indicated by
A) falling interest rates.
B) short-term interest rates near zero.
C) falling asset prices.
D) low real interest rates.
Q:
In the late 1990s and early 2000s, the Japanese economy has experienced
A) easy monetary policy as indicated by falling nominal interest rates.
B) easy monetary policy as indicated by short-term interest rates near zero.
C) tight monetary policy as indicated by falling asset prices.
D) tight monetary policy as indicated by short-term interest rates near zero.
Q:
Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a central bank's conduct of monetary policy. Which of the following is not one of these lessons?
A) Rising interest rates indicate a tightening of monetary policy, whereas falling interest rates indicate an easing of monetary policy.
B) Monetary policy can be highly effective in reviving a weak economy even if short-term interest rates are already near zero.
C) Avoiding unanticipated fluctuations in the price level is an important objective of monetary policy, thus providing a rationale for price stability as the primary long-run goal for monetary policy.
D) Other asset prices beside those on short-term debt instruments do not contain important information about the stance of monetary policy because they are important elements in various monetary policy transmission mechanisms.
Q:
Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a central bank's conduct of monetary policy. These lessons include:
A) Rising interest rates indicate a tightening of monetary policy, whereas falling interest rates indicate an easing of monetary policy.
B) Monetary policy can be highly effective in reviving a weak economy even if short-term interest rates are already near zero.
C) Avoiding fluctuations in the level of unemployment is an important objective of monetary policy, thus providing a rationale for interest-rate stability as the primary long-run goal for monetary policy.
D) Other asset prices beside those on short-term debt instruments do not contain important information about the stance of monetary policy because they are not important elements in various monetary policy transmission mechanisms.
Q:
Discuss three channels by which monetary policy affects stock prices and aggregate spending.
Q:
Explain how expansionary and contractionary monetary policies affect aggregate demand through the exchange rate channel.
Q:
Explain the traditional interest-rate channel for expansionary monetary policy. Explain how a tight monetary policy affects the economy through this channel.
Q:
The subprime financial crisis caused a recession because of the ________ in adverse selection and moral hazard problems and the ________ in housing prices.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Q:
According to the household liquidity effect, higher stock prices lead to increased consumption expenditures because consumers
A) feel more secure about their financial position.
B) want to sell stocks and spend the proceeds before stock prices fall.
C) believe that their wages will increase due to increased profitability of firms.
D) can now afford more expensive imports.
Q:
According to the household liquidity effect, an expansionary monetary policy causes a ________ in the value of households' financial assets, causing consumer durable expenditure to ________.
A) decline; rise
B) rise; rise
C) rise; fall
D) decline; fall
Q:
An expansionary monetary policy may cause asset prices to rise, thereby reducing the likelihood of financial distress and causing consumer durable and housing expenditures to rise. This monetary transmission mechanism is referred to as
A) the household liquidity effect.
B) the wealth effect.
C) Tobin's q theory.
D) the cash flow effect.
Q:
If a contractionary monetary policy lowers the price level by more than expected, it raises the real value of consumer debt. This reduces consumer expenditure through
A) the bank lending channel.
B) Tobin's q.
C) the traditional interest-rate channel.
D) the household liquidity effect.
Q:
An expansionary monetary policy raises firms' cash flows by ________ interest rates.
A) lowering real
B) lowering nominal
C) raising real
D) raising nominal
Q:
Due to asymmetric information in credit markets, monetary policy may affect economic activity through the balance sheet channel, where an increase in the money supply
A) raises stock prices, lowering the cost of new capital relative to firms' market value, thus increasing investment spending.
B) raises firms' net worth, decreasing adverse selection and moral hazard problems, thus increasing banks' willingness to lend to finance investment spending.
C) raises the level of bank reserves, deposits, and bank loans, thereby raising spending by those individuals who do not have access to credit markets.
D) lowers the value of the dollar, increasing net exports and aggregate demand.
Q:
Because of the presence of asymmetric information problems in credit markets, an expansionary monetary policy causes a ________ in net worth, which ________ the adverse selection problem, thereby ________ increased lending to finance investment spending.
A) decline; increases; encouraging
B) rise; increases; discouraging
C) rise; reduces; encouraging
D) decline; reduces; discouraging
Q:
A rise in stock prices ________ the net worth of firms and so leads to ________ investment spending because of the reduction in moral hazard.
A) raises; higher
B) raises; lower
C) reduces; higher
D) reduces; lower
Q:
Since Regulation Q has been abolished, there have been doubts raised about the size of the effect of the ________ channel.
A) balance sheet
B) bank lending
C) cash flow
D) unanticipated price level
Q:
Franco Modigliani has found that an expansionary monetary policy can cause stock market prices to ________ and consumption to ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
Q:
According to Tobin's q theory, when equity prices are high the market price of existing capital is ________ relative to new capital, so expenditure on fixed investment is ________.
A) cheap; low
B) dear; low
C) cheap; high
D) dear; high
Q:
According to Tobin's q theory, when equity prices are low the market price of existing capital is ________ relative to new capital, so expenditure on fixed investment is ________.
A) cheap; low
B) dear; low
C) cheap; high
D) dear; high
Q:
According to Tobin's q theory, if q is ________, new plant and equipment capital is ________ relative to the market value of business firms, so companies can buy a lot of new investment goods with only a ________ issue of stock.
A) high; dear; large
B) high; cheap; large
C) high; cheap; small
D) low; cheap; large
E) low; cheap; small
Q:
According to Tobin's q theory, when q is ________, firms will not purchase new investment goods because the market value of firms is ________ relative to the cost of capital.
A) low; low
B) low; high
C) high; low
D) high; high