Q&A Hero

Q: A leveraged lease is a: A) lease where the lessee is the owner of the asset for tax purposes. B) sale and leaseback arrangement. C) type of operating lease. D) lease paid with money borrowed by the lessee. E) lease where the lessor borrows on a nonrecourse basis.

Q: A financial lease: A) is generally called a capital lease by accountants. B) requires the lessor to maintain the asset. C) is a partially amortized lease. D) is often called a single net lease. E) can generally be cancelled without penalty.

Q: An operating lease has which one of the following characteristics? A) The economic life of the asset equals the lease term. B) The lessee has responsibility for the maintenance and insurance. C) The lease payments recover the full cost of the asset. D) The lessee can cancel the lease prior to the expiration date. E) The lease term is relatively long term.

Q: In a direct lease, the: A) lessor is the end user of the leased asset. B) lessee rents the asset from the manufacturer. C) lessor is generally an independent leasing company. D) lessee owns the asset. E) lessee purchases the asset from the manufacturer.

Q: Which one of the following statements is correct? A) The lessor is primarily concerned with returning the asset at the end of the lease term without incurring any additional charges. B) The lessor is primarily concerned about the use of the asset. C) If a computer manufacturer leased computers it built to others, it would be engaging in leveraged leasing. D) A firm should always purchase, rather than lease, any asset that has a projected positive salvage value at the end of the relevant period of use. E) Lessors provide a source of financing for lessees.

Q: Brentwood Industries is selling its tool and die equipment to Upward Financial and then leasing that equipment from Upward for a period of 10 years, which is the useful remaining life of the equipment. Which type of lease arrangement is this? A) Leveraged lease B) Sale and leaseback C) Operating lease D) Tax-oriented lease E) Straight lease

Q: Ajax Rentals borrows money to purchase equipment which it then leases to customers. Ajax must pay its loan payments on this equipment even if the lessees fail to pay their lease payments. Which one of the following terms best describes one of these leases? A) Single-investor lease B) Sale and leaseback arrangement C) Operating lease D) Perpetual lease E) Straight lease

Q: Equipment Rentals borrows money on a nonrecourse basis to fund its purchases of construction equipment. This equipment is then leased to contractors. The leases are classified as tax-oriented leases. Which one of the following terms best describes one of these leases? A) Leveraged lease B) Sale and leaseback arrangement C) Single-investor lease D) Perpetual lease E) Straight lease

Q: A financial lease in which the lessor is the owner for tax purposes is called a(n) ________ lease. A) open B) straight C) operating D) tax-oriented E) tax-exempt

Q: Maria has a fully amortized 10-year lease on an industrial-grade sewing machine which requires her to pay all taxes, maintenance costs, and insurance premiums related to this lease. Which type of lease is this? A) Open B) Straight C) Operating D) Financial E) Tax-oriented

Q: Kate is leasing some equipment from Ajax Leasing for a period of one year. Ajax pays the maintenance, taxes, and insurance costs for this equipment. The life of the equipment is seven years. Which type of lease does Kate have? A) Open B) Straight C) Operating D) Financial E) Tax-oriented

Q: The party who uses a leased asset is called the: A) lessee. B) lessor. C) guarantor. D) trustee. E) manager.

Q: Ron leases a car from Uptown Motors and pays $225 a month as a lease payment. Which one of the following terms applies to Uptown Motors? A) Lessee B) Lessor C) Guarantor D) Trustee E) Manager

Q: Lucas Motors is considering the acquisition of TM Repair. Lucas has 43,000 shares outstanding at a market price of $32 a share. TM has 12,800 shares outstanding priced at $44 a share. The acquisition is expected to create $5,400 of synergy. What is the maximum amount of cash Lucas should pay for this acquisition? A) $568,600 B) $1,376,000 C) $446,073 D) $563,200 E) $1,381,400

Q: The bidding firm (Firm B) has 2,300 premerger shares outstanding at $43 a share. The target firm (Firm T) has 1,100 premerger shares outstanding at $24 a share. Assume neither firm has any debt outstanding. Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $2,600. What is the NPV of the merger assuming that Firm T is willing to be acquired for $26 per share in cash? A) $400 B) $100 C) $800 D) $2,200 E) $2,600

Q: Al's is analyzing the possible acquisition of Baker's. Both firms have no debt. Al's believes the acquisition will increase its total aftertax annual cash flows by $2.8 million indefinitely. The current market value of Baker's is $91 million, and that of Al's is $143.6 million. The appropriate discount rate for the incremental cash flows is 11 percent. Al's is trying to decide whether it should offer 40 percent of its stock or $104 million in cash to Baker's shareholders. The cost of the cash alternative is ________, while the cost of the stock alternative is ________. A) $91,000,000; $90,824,141 B) $91,000,000; $104,000,000 C) $91,000,000; $91,338,092 D) $104,000,000; $104,021,818 E) $104,000,000; $103,837,209

Q: George's Equipment is planning on merging with Nelson Machinery. George's will pay Nelson's shareholders the current value of their stock in shares of George's Equipment. George's currently has 4,600 shares of stock outstanding at a market price of $31 a share. Nelson's has 1,600 shares outstanding at a price of $38 a share. What is the value per share of the merged firm assuming there is no synergy? A) $30.77 B) $31.00 C) $31.29 D) $31.74 E) $32.06

Q: Alpha is planning on merging with Beta. Alpha will pay Beta's shareholders the current value of their stock in shares of Alpha. Alpha currently has 6,500 shares of stock outstanding at a market price of $44 a share. Beta has 2,100 shares outstanding at a price of $22 a share. The post-merger earnings will be $10,400. What will the earnings per share be after the merger? A) $1.43 B) $1.38 C) $1.25 D) $1.51 E) $1.16

Q: VC is merging with DRW. VC will pay DRW's shareholders the current value of their shares in shares of VC stock. VC currently has 15,200 shares of stock outstanding at a market price of $28 a share. DRW has 2,500 shares outstanding at a price of $20 a share. How many shares of stock will be outstanding in the merged firm? A) 16,840 shares B) 17,061 shares C) 17,200 shares D) 16,986 shares E) 18,609 shares

Q: Mercantile Exchange is being acquired by National Sales. The incremental value of the acquisition is $2,500. Mercantile Exchange has 1,200 shares of stock outstanding at a price of $26 a share. National Sales has 6,500 shares of stock outstanding at a price of $54 a share. What is the net present value of the acquisition given that the actual cost of the acquisition using company stock is $32,780? A) $887 B) $1,011 C) $920 D) $367 E) $1,046

Q: Firm A is being acquired by Firm B for $62,000 worth of Firm B stock. The incremental value of the acquisition is $4,300. Firm A has 2,700 shares of stock outstanding at a price of $22 a share. Firm B has 10,400 shares of stock outstanding at a price of $31 a share. What is the actual cost of the acquisition using company stock? A) $62,000 B) $62,076 C) $62,274 D) $63,780 E) $62,620

Q: Firm B is being acquired by Firm A for $166,000 worth of Firm A stock. The incremental value of the acquisition is $5,200. Firm A has 11,500 shares of stock outstanding at a price of $40 a share. Firm B has 6,500 shares of stock outstanding at a price of $25 a share. What is the value per share of Firm A after the acquisition? A) $39.97 B) $40.22 C) $40.00 D) $40.11 E) $40.04

Q: Glendale Marine is being acquired by Inland Motors for $60,000 worth of Inland Motors stock. Inland Motors has 8,200 shares of stock outstanding at a price of $51 a share. Glendale Marine has 1,600 shares outstanding with a market value of $36 a share. The incremental value of the acquisition is $3,200. What is the total number of shares in the new firm? A) 9,229 B) 9,376 C) 9,529 D) 9,852 E) 9,900

Q: Hanover Tires is being acquired by Better Tires for $85,000 worth of Better Tires stock. Hanover Tires has 2,600 shares of stock outstanding at a price of $32 a share. Better Tires has 7,500 shares outstanding with a market value of $29 a share. The incremental value of the acquisition is $2,200. How many new shares of stock will be issued to complete this acquisition? A) 2,872 B) 3,016 C) 3,133 D) 2,931 E) 2,987

Q: Aardvark Enterprises has agreed to be acquired by Lawson Products in exchange for $30,000 worth of Lawson Products stock. Lawson has 3,000 shares of stock outstanding at a price of $28 a share. Aardvark has 1,100 shares outstanding with a market value of $23 a share. The incremental value of the acquisition is $1,400. What is the value of Lawson Products after the merger? A) $79,400 B) $83,000 C) $111,600 D) $110,700 E) $143,000

Q: Moore Industries has agreed to be acquired by Scott Enterprises for 800 shares of Scott Enterprises stock. Scott Enterprises currently has 7,500 shares of stock outstanding at a price of $28 a share. Moore Industries has 1,800 shares outstanding at a price of $12 a share. The incremental value of the acquisition is $1,100. What is the value per share of Scott Enterprises stock after the acquisition? A) $27.52 B) $27.96 C) $28.04 D) $28.47 E) $31.03

Q: Outdoor Living has agreed to be acquired by New Adventures for $100,000 worth of New Adventures stock. New Adventures currently has 12,000 shares of stock outstanding at a price of $27 a share. Outdoor Living has 2,000 shares outstanding at a price of $46 a share. The incremental value of the acquisition is $12,000. What is the value of the merged firm? A) $285,500 B) $328,000 C) $437,000 D) $320,500 E) $428,000

Q: Sleep Tight is acquiring Restful Inns for $52,500 in cash. Sleep Tight has 3,000 shares of stock outstanding at a market price of $38 a share. Restful Inns has 2,100 shares of stock outstanding at a market price of $24 a share. Neither firm has any debt. The incremental value of the acquisition is $1,700. What is the price per share of Sleep Tight after the acquisition? A) $36.92 B) $37.30 C) $37.87 D) $39.19 E) $39.29

Q: The Cookie Shoppe and Sweet Treats are all-equity firms. The Cookie Shoppe has 3,400 shares outstanding at a market price of $31 a share. Sweet Treats has 6,100 shares outstanding at a price of $42 a share. Sweet Treats is acquiring the Cookie Shoppe for $107,500 in cash. The incremental value of the acquisition is $2,900. What is the net present value of the acquisition? A) $1,600 B) $800 C) $700 D) −$2,100 E) −$300

Q: Firm A is acquiring Firm B for $69,000 in cash. Firm A has 4,300 shares of stock outstanding at a market value of $32 a share. Firm B has 2,100 shares of stock outstanding at a market price of $32 a share. Neither firm has any debt. The incremental value of the acquisition is $2,200. What is the price per share of Firm A's stock after the acquisition? A) $31.98 B) $31.45 C) $32.09 D) $32.16 E) $32.33

Q: Taylor's Hardware is acquiring The Corner Store for $27,400 in cash. Taylor's has 1,500 shares of stock outstanding at a market value of $44 a share. The Corner Store has 2,100 shares of stock outstanding at a market price of $12 a share. Neither firm has any debt. The incremental value of the acquisition is $1,700. What is the value of Taylor's Hardware after the acquisition? A) $49,000 B) $50,300 C) $57,300 D) $65,500 E) $72,400

Q: Rural Markets and Flo's Flowers are all-equity firms. Rural Markets has 2,300 shares outstanding at a market price of $16.50 a share. Flo's Flowers has 5,000 shares outstanding at a price of $17 a share. Flo's Flowers is acquiring Rural Markets for $39,000 in cash. The incremental value of the acquisition is $1,800. What is the net present value of acquiring Rural Markets to Flo's Flowers? A) $750 B) −$1,050 C) −$250 D) $400 E) $1,800

Q: The Cycle Stop has 1,400 shares outstanding at a market price per share of $10.80. Kate's Wheels has 1,750 shares outstanding at a market price of $13 a share. Neither firm has any debt. Kate's Wheels is acquiring The Cycle Stop for $16,500 in cash. What is the merger premium per share? A) $.27 B) $.46 C) $.99 D) $1.21 E) $2.20

Q: TJ's and Corner Grocery are all-equity firms. TJ's has 2,500 shares outstanding at a market price of $16.70 a share. Corner Grocery has 3,000 shares outstanding at a price of $22.50 a share. Corner Grocery is acquiring TJ's for $45,000 in cash. What is the merger premium per share? A) $0 B) $1.30 C) $1.11 D) $1.28 E) $.32

Q: The shareholders of Jolie Company have voted in favor of a buyout offer from Pitt Corporation. Jolie has a price-earnings ratio of 6, earnings of $230,000, and 60,000 shares outstanding. Pitt has a price-earnings ratio of 12, earnings of $660,000, and 125,000 shares outstanding. Jolie's shareholders will receive one share of Pitt stock for every three shares they hold in Jolie. Assume the NPV of the acquisition is zero. What will the post-merger PE ratio be for Pitt? A) 10.76 B) 9.20 C) 9.84 D) 10.32 E) 11.21

Q: Prior to the merger, Firm A has $1,250 in total earnings with 750 shares outstanding at a market price per share of $42. Firm B has $740 in total earnings with 220 shares outstanding at $18 per share. Assume Firm A acquires Firm B via an exchange of stock at a price of $20 for each share of B's stock. Both A and B have no debt outstanding. What will the earnings per share of Firm A be after the merger? A) $2.10 B) $1.86 C) $1.95 D) $2.02 E) $2.33

Q: Pearl, Inc. has offered $218 million cash for all of the common stock in Jam Corporation. Based on recent market information, Jam is worth $215 million as an independent operation. If the merger makes economic sense for Pearl, what is the minimum estimated value of the synergistic benefits from the merger? A) $0 B) $5 million C) $3 million D) $1 million E) $4 million

Q: News Express has 26,200 shares outstanding at a market price of $33.30 a share. Nu-News has 15,000 shares outstanding at a price of $54 a share. The News Express is acquiring Nu-News. Both firms are all-equity financed. The incremental value of the acquisition is $2,500. What is the value of Nu-News to News Express? A) $874,960 B) $804,960 C) $869,960 D) $807,500 E) $812,500

Q: Sue's Bakery is planning on merging with Ted's Deli. Sue's will pay Ted's shareholders the current value of their stock in shares of Sue's Bakery. Sue's currently has 6,500 shares of stock outstanding at a market price of $26 a share. Ted's has 2,300 shares outstanding at a price of $18 a share. What is the value of the merged firm if the synergy created by the merger is $3,200? A) $206,500 B) $210,400 C) $225,400 D) $213,600 E) $231,300

Q: Rosie's has 2,200 shares outstanding at a market price per share of $28.15. Sandy's has 4,500 shares outstanding at a market price of $38 a share. Neither firm has any debt. Sandy's is acquiring Rosie's. The incremental value of the acquisition is $1,800. What is the value of Rosie's to Sandy's? A) $107,270 B) $48,770 C) $54,300 D) $68,700 E) $63,730

Q: Nadine's Home Fashions has $2.12 million in net working capital. The firm has fixed assets with a book value of $31.64 million and a market value of $33.9 million. The firm has no long-term debt. The Home Centre is buying Nadine's for $37.5 million in cash. The acquisition will be recorded using the purchase accounting method. What is the amount of goodwill that The Home Centre will record on its balance sheet as a result of this acquisition? A) $1.48 million B) $3.34 million C) $3.74 million D) $4.14 million E) $5.86 million

Q: Silver Enterprises has acquired All Gold Mining in a merger transaction. The pre-merger balance sheet for Silver Enterprises has current assets of $1,500, other assets of $400, net fixed assets of $2,300, current liabilities of $1,000, long-term debt of $500 and owners' equity of $,2700. The pre-merger balance sheet for All Gold Mining shows current assets of $600, other assets of $210, net fixed assets of $1,600, current liabilities of $500, and equity of $1,910. Assume the merger is treated as a purchase for accounting purposes. The market value of All Gold Mining's fixed assets is $2,900; the market values for current and other assets are the same as the book values. Assume that Silver Enterprises issues $4,000 in new long-term debt to finance the acquisition. The post-merger balance sheet will reflect goodwill of ________ and total equity of ________. A) $640; $2,700 B) $790; $4,610 C) $790; $2,700 D) $890; $4,610 E) $890; $2,700

Q: The balance sheet of Meat Co. reflects current assets of $6,000, net fixed assets of $8,400, current liabilities of $1,800, long-term debt of $1,100, and equity of $11,500. The balance sheet of Loaf Inc. shows current assets of $2,000, net fixed assets of $3,300, current liabilities of $900, long-term debt of $500, and equity of $3,900. Suppose the fair market value of Loaf's fixed assets is $4,100 versus the $3,300 book value shown. Meat pays $5,200 for Loaf and raises the needed funds through an issue of long-term debt. Assume the purchase method of accounting is used. The post-merger balance sheet of Meat Co. will have total debt of ________ and total equity of ________. A) $1,600; $11,500 B) $1,600; $15,400 C) $10,200; $15,400 D) $9,500; $11,500 E) $14,500; $15,400

Q: The balance sheet of MT Co. shows current assets of $14,000, net fixed assets of $21,800, current liabilities of $4,300, long-term debt of $2,600, and equity of $28,900. The balance sheet of LF Inc. has current assets of $4,700, net fixed assets of $8,100, current liabilities of $2,200, long-term debt of $1,200, and equity of $9,400. The market value of LF's fixed assets is $14,100. MT purchases LF for $20,000 and raises the funds through an issue of long-term debt. What will be the value of the equity account on the post- merger balance sheet assuming the purchase accounting method is used? A) $29,600 B) $33,600 C) $28,900 D) $39,600 E) $43,000

Q: Firm X has total earnings of $49,000, a market value per share of $64, a book value per share of $38, and has 25,000 shares outstanding. Firm Y has total earnings of $34,000, a market value per share of $21, a book value per share of $12, and has 22,000 shares outstanding. Assume Firm X acquires Firm Y by paying cash for all the shares outstanding at a merger premium of $2 per share. Also assume neither firm has any debt before or after the merger. What is the value of the total equity of the combined firm, XY, if the purchase method of accounting is used? A) $1,274,000 B) $1,316,000 C) $1,456,000 D) $1,412,000 E) $1,427,000

Q: Which one of the following statements is correct? A) An equity carve-out frequently follows a spin-off. 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) Split-ups may unlock value within a firm.

Q: Which one of these is the least probable reason why a firm may want to divest itself of some of its assets? A) To cash out a profitable operation B) To raise cash C) To improve the strategic fit of its various divisions D) To comply with antitrust regulations E) To increase market share

Q: Davidson Global proposed splitting itself into four separate firms and its shareholders agreed. This split is referred to as a(n): A) lockup transaction. B) divestiture. C) equity carve-out. D) spin-off. E) split-up.

Q: Family Travel is the sole shareholder in its subsidiary, FT Insurance. Family Travel has decided to divest itself of its insurance operations and does so by distributing the shares in the subsidiary to the shareholders of Family Travel. This distribution of shares is called a(n): A) lockup transaction. B) bear hug. C) equity carve-out. D) spin-off. E) split-up.

Q: Nationwide Markets is a diversified company with many divisions. It is also the sole shareholder of a wholly owned subsidiary. Management has decided to implement an IPO offering for 25 percent of the ownership of the subsidiary. Which one of these terms applies to this offering? A) Split-up B) Equity carve-out C) Tender offer D) White knight transaction E) Lockup transaction

Q: Global Distributors has decided to sell its manufacturing operations and concentrate solely on its global distribution operations. This sale is referred to as a(n): A) liquidation. B) divestiture. C) merger. D) allocation. E) restructuring.

Q: Studies conducted on mergers and acquisitions have generally concluded that: A) both acquiring and target firm's shareholders benefit approximately equally in most situations. B) all involved shareholders tend to neither gain nor lose much as a result of these transactions. C) only highly leveraged acquisitions produce any shareholder gains. D) these transactions are financially beneficial to target shareholders. E) acquiring firm's shareholders gain at the expense of the target firm's shareholders.

Q: The shareholders in the acquiring firm may not realize any significant gains from an acquisition. Which one of the following has not been suggested as a reason for this lack of gain? A) Management may have priorities other than the interests of the stockholders. B) The price paid for the target firm might equal the target firm's total value to the acquirer. C) Any synergy produced was paid to the target firm's shareholders. D) Target firm shares were exchanged for an equal value of acquiring firm shares. E) Anticipated merger gains may not be fully achieved.

Q: Which one of the following defensive tactics is designed to prevent a "two-tier" takeover offer? A) Bear hug B) Poison put C) Shark repellent D) Dual class capitalization E) Fair price provision

Q: If a firm sells its crown jewels when threatened with a takeover attempt, the firm is employing a strategy commonly referred to as a ________ strategy. A) scorched earth B) shark repellent C) bear hug D) white knight E) lockup

Q: The primary purpose of a flip-in provision is to: A) increase the number of shares outstanding while also increasing the value per share. B) dilute a corporate raider's ownership position. C) reduce the market value of each share of stock. D) give the existing corporate directors the sole right to remove a poison pill. E) provide additional compensation to any senior manager who loses his or her job as a result of a corporate takeover.

Q: Melvin was attempting to gain control of Western Wood Products until he realized that the existing shareholders in the firm had the right to purchase additional shares at a below-market price given his hostile takeover attempt. Thus, Melvin decided to forgo investing in this firm. What term applies to the tactic used by Western Wood Products to stave off this takeover attempt? A) "Pac-man" defense B) Bear hug C) Golden parachute provision D) Greenmail provision E) Share rights plan

Q: Which one of the following generally has a flip-in provision that significantly increases the cost to a shareholder who is attempting to gain control over a firm? A) Golden parachute B) Standstill agreement C) Greenmail D) Poison pill E) White knight

Q: Roger is a major shareholder in RB Industrial Supply. Currently, Roger is quite unhappy with the direction the firm is headed and is rumored to be considering an attempt to take over the firm by soliciting the votes of other shareholders. To head off this potential attempt, the board of RB Industrial Supply has decided to offer Roger $36 a share for all the shares he owns in the firm. The current market value per share is $32. This offer to purchase Roger's shares is commonly referred to as: A) a golden parachute. B) standstill payments. C) greenmail. D) a poison pill. E) a white knight.

Q: Which one of these statements is correct regarding acquisitions? A) The cost of a cash acquisition to the acquiring firm is equal to the cash paid minus the taxes incurred by the target firm's shareholders. B) Neither cash nor share acquisitions affect the control of the acquiring firm. C) Share financing is generally more common than cash financing for smaller acquisitions. D) Target firm shareholders share in both the gains and losses resulting from a stock acquisition. E) Cash acquisitions create a tax liability for the acquiring firm's shareholders.

Q: Which one of the following statements is correct? A) An increase in the earnings per share as a result of an acquisition will increase the price per share of the acquiring firm. B) The price-earnings ratio must remain constant as a result of an acquisition that fails to create value. C) If firm A acquires firm B then the number of shares in AB will equal the number of shares of A plus the number of shares of B. D) The price-earnings ratio can decrease even when the net present value of a merger is equal to zero. E) Diversification is one of the greatest benefits derived from an acquisition.

Q: An acquisition completed simply to diversify a firm will: A) create excessive synergy in almost all situations. B) lower systematic risk and increase the value of the firm. C) benefit the firm by eliminating unsystematic risk. D) benefit the shareholders by providing otherwise unobtainable diversification. E) generally not add any value to the firm.

Q: If an acquisition does not create value and the market is smart, 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.

Q: Which one of the following does not represent a potential tax gain from an acquisition? A) The use of surplus funds B) The use of tax loss carryforwards C) The write-up of depreciable assets D) The use of unused debt capacity E) The increase in taxable income

Q: Black Teas recently acquired Green Teas in a transaction that had a net present value of $1.23 million. The $1.23 million is referred to as: A) the agency effect. B) the consolidating value. C) the diversification benefit. D) the consolidation effect. E) synergy.

Q: 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 incremental value 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.

Q: All of the following represent potential gains from an acquisition except the: A) tax loss carryforwards acquired in the acquisition. B) lower costs per unit realized. C) diseconomies of scale related to increased labor demand. D) use of surplus funds. E) obtainment of a beachhead.

Q: Assume the shareholders of a target firm benefit from being acquired in a stock transaction. Given this, these shareholders are most apt to realize the largest benefit if the: A) acquiring firm has the better management team and replaces the target firm's managers. B) management of the target firm is more efficient than the management of the acquiring firm which replaces them. C) management of both the acquiring firm and the target firm are as equivalent as possible. D) current management team of the target firm is kept in place even though the managers of the acquiring firm are more suited to manage the target firm's situation. E) new management team is technologically knowledgeable but yet ineffective.

Q: Which one of the following pairs of businesses could probably benefit the most by sharing complementary resources? A) Roofer and architect B) Tennis court and pharmacy C) Ski resort and golf course D) Dry cleaner and insurance office E) Trucking company and lawn service

Q: Which one of the following statements is correct? A) The IRS automatically approves acquisitions that are primarily designed to lower federal taxes. B) The leverage associated with an acquisition increases the tax liability of the acquiring firm. C) A firm may benefit from an acquisition if it can lower its capital requirements. D) Firms can always benefit from economies of scale if they increase the size of their firm through acquisitions. E) If a firm uses its surplus cash to acquire another firm, then the shareholders of the acquiring firm immediately incur a tax liability related to the transaction.

Q: Which one of the following best defines synergy given the following? VA= Value of Firm A VB= Value of Firm B VAB= Value of merged Firm AB A) (VA+ VB) − VAB B) VAB− (VA+ VB) C) Max[(VA+ VB) − VAB, 0] D) Max[VAB− (VA+ VB, 0] E) Max[VAB− VB, 0]

Q: 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 but ignore incremental cash flows. 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.

Q: All of the following represent potential tax benefits that can directly result from an acquisition except: A) increasing the depreciation expense. B) using tax losses. C) increasing surplus funds. D) increasing the use of leverage. E) increasing interest expense.

Q: A proposed acquisition is most apt to create synergy by: A) decreasing the market power of the combined firm. B) disbanding the distribution network of the combined firm. C) eliminating any strategic advantages of the target firm. D) increasing the utilization of the acquiring firm's assets. E) increasing the overhead costs.

Q: A potential merger that produces synergy: A) should be rejected due to the projected negative cash flows. B) should be rejected because the synergy will dilute the benefits of the merger. C) has a net present value of zero. D) creates value and therefore should be pursued. E) reduces the anticipated net income from the target firm.

Q: All of the following are examples of cost reductions that can result from an acquisition except: A) reducing the number of management personnel required. B) lowering office costs by combining job functions. C) allocating fixed overhead across a wider range of products. D) benefiting from economies of scale when purchasing raw materials. E) increasing the firm's market share.

Q: If a merger creates synergy, then the: A) merger is classified as a taxable transaction. B) acquiring firm's shareholders will receive a one-time cash payment. C) equity of the target firm will be increased by the amount of the synergy. D) value of the merged firm exceeds the combined value of the separate firms. E) price paid by the acquiring firm will be reduced by the amount of that synergy.

Q: For financial statement purposes, goodwill created by an acquisition: A) must be amortized on a straight-line basis over 10 years. B) must be reviewed each year and amortized to the extent that it has lost value. C) is expensed evenly over a 20-year period. D) never affects the profits of the acquiring firm. E) is recorded in an amount equal to the fair market value of the assets of the target firm.

Q: The purchase accounting method 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 for financial statement purposes. 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.

Q: Which one of the following statements is correct? A) The shareholders of an acquired firm are generally given a choice of accepting either cash or shares of stock when the acquisition is tax free. B) To be a tax-free acquisition, the shareholders of an acquired firm must receive shares in the acquiring firm that are equal to 25 percent or less of the value of the shares held in the acquired firm. C) The assets of an acquired firm are recorded on the books of the acquiring firm at their current book value regardless of the tax status of the acquisition. D) Target firm shareholders demand a higher selling price when an acquisition is a nontaxable event. E) If the assets of a firm are written up as part of the acquisition process, the increase in value is considered to be a taxable gain.