Chapter 025 Mergers and Acquisitions

Transcription

1 Multiple Choice Questions 1. 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. TOPIC: MERGER TYPE: DEFINITIONS 2. 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. TOPIC: CONSOLIDATION TYPE: DEFINITIONS 3. 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. TOPIC: TENDER OFFER TYPE: DEFINITIONS 25-1

2 4. An attempt to gain control of a firm by soliciting a sufficient number of stockholder votes to replace existing management is called a: a. tender offer. B. proxy contest. c. going-private transaction. d. leveraged buyout. e. consolidation. TOPIC: PROXY CONTEST TYPE: DEFINITIONS 5. 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. leveraged buyout. e. consolidation. TOPIC: GOING-PRIVATE TRANSACTION TYPE: DEFINITIONS 6. Going-private transactions 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. TOPIC: LEVERAGED BUYOUT TYPE: DEFINITIONS 25-2

3 7. An agreement between firms to cooperate in pursuit of a joint goal is called a: a. consolidation. b. merged alliance. c. joint venture. d. takeover project. E. strategic alliance. TOPIC: STRATEGIC ALLIANCE TYPE: DEFINITIONS 8. An agreement between firms to create a separate, co-owned entity established to pursue a joint goal is called a: a. consolidation. b. strategic alliance. C. joint venture. d. merged alliance. e. takeover project. TOPIC: JOINT VENTURE TYPE: DEFINITIONS 9. 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. SECTION: 25.4 TOPIC: SYNERGY TYPE: DEFINITIONS 25-3

4 10. 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. SECTION: 25.7 TOPIC: GREENMAIL TYPE: DEFINITIONS 11. A financial device designed to make unfriendly takeover attempts unappealing, if not impossible, is called: a. a golden parachute. b. a standstill agreement. c. greenmail. D. a poison pill. e. a white knight. SECTION: 25.7 TOPIC: POISON PILL TYPE: DEFINITIONS 12. Corporate charter provisions allowing existing stockholders to purchase stock at some fixed price in the event of a hostile outside takeover attempt are called: a. pac-man defenses. b. shark repellent plans. c. golden parachute provisions. d. greenmail provisions. E. share rights plans. SECTION: 25.7 TOPIC: SHARE RIGHTS PLANS TYPE: DEFINITIONS 25-4

5 13. The sale of a portion of a firm's assets, operations, or divisions to a third party is referred to as a: a. liquidation. B. divestiture. c. merger. d. allocation. e. restructuring. SECTION: 25.9 TOPIC: DIVESTITURE TYPE: DEFINITIONS 14. 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. SECTION: 25.9 TOPIC: EQUITY CARVE-OUT TYPE: DEFINITIONS 15. 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. SECTION: 25.9 TOPIC: SPIN-OFF TYPE: DEFINITIONS 25-5

6 16. The division of a firm into two or more separate companies is called a(n): a. lockup transaction. b. divestiture. c. equity carve-out. d. spin-off. E. split-up. SECTION: 25.9 TOPIC: SPLIT-UP TYPE: DEFINITIONS 17. Which one of the following statements correctly applies to a legally defined merger? a. The acquiring firm retains its identity and absorbs only the assets of the acquired firm. B. The acquired firm is completely absorbed and ceases to exist as a separate legal entity. c. A new firm is created which includes all the assets and liabilities of the acquiring firm plus the assets only of the acquired firm. d. A new firm is created from the assets and liabilities of both the acquiring and acquired firms. e. A merger reclassifies the acquired firm into a new entity which becomes a subsidiary of the acquiring firm. TOPIC: ACQUISITIONS 18. With a merger, the individual assets of: a. the acquired firm must be retitled to the name of the acquiring firm. b. the acquiring firm must be retitled to the name of the acquired firm. c. both the acquiring and the acquired firm must be retitled to the new firm's name. d. both the acquiring and the acquired firm's assets must be retitled to the firm's joint name. E. neither firm have to be retitled. TOPIC: ACQUISITIONS 25-6

7 19. 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 continues to exist as a subsidiary of the acquiring firm. TOPIC: MERGER 20. Which one of the following is a key disadvantage of a merger? a. As a general rule, percent of the shareholders of both the acquiring and the acquired firms must approve of the merger. B. As a general rule, at least two-thirds of the shareholders of both the acquiring and the acquired firms must approve of the merger. c. The shareholders of only the acquired firm must approve the merger. d. The shareholders of only the acquiring firm must approve the merger. e. Neither the shareholders of the acquiring nor the acquired firm have to approve of the merger. TOPIC: MERGER 25-7

8 21. An acquisition of a firm through the purchase of shares of the outstanding stock: I. is frequently more expensive than if the two firms had just merged. II. can be accomplished without the involvement of the target firm's board of directors. III. can be accomplished without having the shareholders vote on the acquisition. IV. may be dependent upon the maximum amount of shares made available for sale to the acquiring firm. a. I and III only b. II and IV only c. I, III, and IV only d. I, II, and III only E. I, II, III, and IV TOPIC: ACQUISITION OF STOCK 22. Ridge Vents is acquiring all of the assets of Roofs, Inc. As a result, Roofs, Inc.: a. will become a fully owned subsidiary of Ridge Vents. B. will remain as a shell corporation unless the shareholders opt to dissolve it. c. will be fully merged into Ridge Vents and will no longer exist as a separate entity. d. and Ridge Vents will both cease to exist and a new firm will be formed. e. will automatically be dissolved. TOPIC: ACQUISITION OF ASSETS 23. If a roof installer acquired a shingle manufacturer they would be doing a acquisition. a. horizontal b. longitudinal c. conglomerate D. vertical e. complementary resources TOPIC: VERTICAL ACQUISITION 25-8

9 24. If General Electric were to acquire New Start Airways, the acquisition would be classified as a acquisition. a. horizontal b. longitudinal C. conglomerate d. vertical e. integrated TOPIC: CONGLOMERATE ACQUISITION 25. If Children's Wear were to acquire Kid's Clothing, the acquisition would be classified as a acquisition. A. horizontal b. longitudinal c. conglomerate d. vertical e. integrated TOPIC: HORIZONTAL ACQUISITION 26. Takeovers can take which of the following forms? I. tender offer II. merger III. proxy contest IV. going private transaction a. I and II only b. III and IV only c. II, III, and IV only d. I, II, and III only E. I, II, III, and IV TOPIC: TAKEOVERS 25-9

10 27. Assume both firm A and firm B formally agree to each put up $10 million to form firm C. The operations of firm C are restricted to conducting research and development activities for the benefit of both firm A and firm B. Firm C is classified as a: A. joint venture. b. going-private transaction. c. conglomerate. d. subsidiary. e. leveraged buyout. TOPIC: TAKEOVERS 28. A small group of investors banded together and borrowed the funds necessary to acquire all of the shares of stock of a publicly-traded firm. This transaction is known as a: a. proxy contest. b. management buyout. c. vertical acquisition. D. leveraged buyout. e. unfriendly takeover. TOPIC: LEVERAGED BUYOUT 29. In a tax-free acquisition, the shareholders of the target firm: a. receive income which 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. SECTION: 25.2 TOPIC: TAXES AND ACQUISITIONS 25-10

11 30. Which of the following is required for an acquisition to be considered tax-free? I. continuity of equity interest II. a business purpose, other than avoiding taxes, for the acquisition III. payment in the form of equity shares for the acquired firm IV. cash payment for the equity of the acquired firm a. I and II only b. II and III only c. II and IV only D. I, II, and III only e. I, II, and IV only SECTION: 25.2 TOPIC: TAX-FREE ACQUISITION 31. 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. The increase in value from writing up assets is considered a taxable gain. d. Target firm shareholders demand a higher selling price when an acquisition is a nontaxable event. e. Acquisitions based on legitimate business purposes are not taxable transactions regardless of the means of financing used. SECTION: 25.2 TOPIC: CASH VERSUS STOCK ACQUISITION 25-11

12 32. 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. 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. SECTION: 25.3 TOPIC: PURCHASE ACCOUNTING METHOD 33. Goodwill created by an acquisition: a. affects the cash flows of the acquiring firm on an annual basis for a period of years. B. must be reviewed each year to determine its current value to the firm. c. reduces the taxable income of the firm as it is expensed. d. has no effect on the reported earnings of a firm when it is expensed. e. is recorded in an amount equal to the fair market value of the assets of the target firm. SECTION: 25.3 TOPIC: PURCHASE ACCOUNTING METHOD 25-12

13 34. The pooling of interests method of accounting: I. creates an account called goodwill which is recorded on the balance sheet of the merged firm. II. consists of simply combining the balance sheets of the acquiring and the target firm. III. is no longer permitted by FASB. IV. acknowledges the excess of the purchase price over the fair market value and records this amount on the balance sheet of the acquiring firm. a. I and III only b. I and IV only c. II and IV only D. II and III only e. I, II, and IV only SECTION: 25.3 TOPIC: POOLING OF INTERESTS 35. The incremental cash flows of a merger can relate to changes in which of the following? I. revenue II. capital needs III. costs IV. taxes a. I and II only b. II, III, and IV only c. I, III, and IV only d. I, II, and III only E. I, II, III, and IV SECTION: 25.4 TOPIC: INCREMENTAL CASH FLOWS 25-13

14 36. Which of the following are examples of cost reductions which can result from an acquisition? I. spreading overhead II. eliminating duplicate back office functions by sharing central facilities III. buying raw materials in larger quantities at a lower per unit cost IV. gaining economies of scale a. I and III only b. II and IV only c. I, II, and IV only d. II, III, and IV only E. I, II, III, and IV SECTION: 25.4 TOPIC: COST REDUCTIONS 37. A potential merger which has synergy: a. should be rejected due to the projected negative cash flows. b. should be rejected because synergy destroys firm value. c. has a net present value of zero and thus returns the minimal required rate of return. D. creates value and therefore should be pursued. e. reduces the anticipated net income of the acquiring firm. SECTION: 25.4 TOPIC: SYNERGY 25-14

15 38. 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 SECTION: 25.4 TOPIC: SYNERGY 39. Which of the following represents 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 SECTION: 25.4 TOPIC: ACQUISITION GAINS 40. 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. SECTION: 25.4 TOPIC: ACQUISTION CONSIDERATIONS 25-15

16 41. Which of the following can produce tax gains as a result of an acquisition? I. reduction in debt capacity II. use of tax losses III. use of surplus funds IV. write up of depreciable assets a. I and III only b. II and IV only c. I, II, and III only D. II, III, and IV only e. I, II, III, and IV SECTION: 25.4 TOPIC: TAX GAINS 42. Which one of the following statements is correct? a. Acquiring firms tend to avoid firms with large net operating losses when they are seeking a target firm to acquire. b. If an acquisition increases the debt level of a firm then the tax liability of the firm tends to increase as a result. C. If either an increase or a decrease in the level of production causes the average cost per unit to increase then the firm is currently operating at its optimal size. d. Firms can always benefit from economies of scale if they increase the size of their firm through acquisitions. e. If a firm uses it surplus cash to acquire another firm then the shareholders of the acquiring firm immediately incur a tax liability related to the transaction. SECTION: 25.4 TOPIC: ACQUISITION EFFECTS 25-16

17 43. 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 maid service e. trucking company and lawn service SECTION: 25.4 TOPIC: COMPLEMENTARY RESOURCES 44. 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. the 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. the current management team of the target firm is technologically knowledgeable but yet ineffective. SECTION: 25.4 TOPIC: INEFFICIENT MANAGEMENT 45. Which of the following represent potential gains from an acquisition? I. increased use of debt II. lower costs per unit produced III. strategic beachhead IV. diseconomies of scale a. II and III only b. I and IV only C. I, II, and III only d. I, III, and IV only e. I, II, III, and IV SECTION: 25.4 TOPIC: ACQUISITION GAINS 25-17

18 46. The value of a target firm to the acquiring firm is equal to: A. the value of the target firm as a separate entity plus the incremental value derived from the acquisition. b. the purchase cost of the target firm. c. the value of the merged firm minus the value of the target firm as a separate entity. d. the purchase cost plus the incremental value derived from the acquisition. e. the incremental value derived from the acquisition. SECTION: 25.4 TOPIC: COST OF AN ACQUISITION 47. 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. SECTION: 25.5 TOPIC: ACQUISITIONS AND EARNINGS PER SHARE 48. 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. SECTION: 25.5 TOPIC: DIVERSIFICATION 25-18

19 49. 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 will remain constant as a result of an acquisition which 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. If no value is created when firm A acquires firm B, then the total value of AB will equal the value of A plus the value of B. e. Diversification is one of the greatest benefits derived from an acquisition. SECTION: 25.5 TOPIC: EFFECTS OF ACQUISITIONS 50. 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. SECTION: 25.7 TOPIC: DEFENSIVE TACTICS 51. 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 SECTION: 25.7 TOPIC: DEFENSIVE TACTICS 25-19

20 52. 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 SECTION: 25.7 TOPIC: DEFENSIVE TACTICS 53. Which of the following have been suggested as reasons why the stockholders in acquiring firms may not benefit to any significant degree from an acquisition? I. the price paid for the target firm might equal the target firm's total value II. management may have priorities other than the interest of the stockholders III. the takeover market may not be competitive IV. anticipated merger gains may not be fully achieved 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 SECTION: 25.8 TOPIC: ACQUISITION EFFECTS ON STOCKHOLDERS 25-20

21 54. Which of the following are reasons why a firm may want to divest itself of some of its assets? I. to raise cash II. to unload unprofitable operations III. to improve the strategic fit of a firm's various divisions IV. to comply with antitrust regulations a. I and II only b. I, II, and III only c. I, III, and IV only d. II, III, and IV only E. I, II, III, and IV SECTION: 25.9 TOPIC: DIVESTITURES AND RESTRUCTURINGS 55. Which one of the following statements is correct? A. A spin-off frequently follows an equity carve-out. 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. SECTION: 25.9 TOPIC: DIVESTITURES AND RESTRUCTURINGS 25-21

22 56. Carsen's Centre, Inc. has $2.85 million in net working capital. The firm has fixed assets with a book value of $31.67 million and a market value of $33.98 million. Krystal's is buying Carsen's Centre, Inc. for $38.4 million in cash. The acquisition will be recorded using the purchase accounting method. What is the amount of goodwill that Krystal's will record on their balance sheet as a result of this acquisition? A. $1.57 million b. $2.67 million c. $3.88 million d. $4.13 million e. $6.73 million Goodwill = $38.4m $2.85m $33.98m = $1.57m SECTION: 25.3 TOPIC: GOODWILL 57. Capitol Stores and The Back Corner are all-equity firms. Capitol Stores has 1,750 shares outstanding at a market price of $18.40 a share. The Back Corner has 2,100 shares outstanding at a price of $34 a share. The Back Corner is acquiring Capitol Stores for $34,900 in cash. What is the merger premium per share? a. $0.46 b. $0.89 C. $1.54 d. $1.65 e. $2.00 Merger premium per share = ($34,900 / 1,750) $18.40 = $1.54 SECTION: 25.3 TOPIC: MERGER PREMIUM 25-22

23 58. Bob's Bait Shop has 1,200 shares outstanding at a market price per share of $13. Ed's Fish Shop has 2,800 shares outstanding at a market price of $29 a share. Neither firm has any debt. Ed's Fish Shop is acquiring Bob's Bait Shop for $19,500 in cash. What is the merger premium per share? a. $1.13 b. $1.20 c. $2.75 d. $2.88 E. $3.25 Merger premium per share = ($19,500 / 1,200) $13 = $3.25 SECTION: 25.3 TOPIC: MERGER PREMIUM 59. The Sandwich Shoppe has 1,600 shares outstanding at a market price per share of $11. Joe's Slop Hut has 1,800 shares outstanding at a market price of $14 a share. Neither firm has any debt. Joe's Slop Hut is acquiring The Sandwich Shoppe. The incremental value of the acquisition is $1,600. What is the value of The Sandwich Shoppe to Joe's Slop Hut? a. $1,600 b. $2,200 c. $17,600 D. $19,200 e. $22,500 Value of The Sandwich Shoppe to Joe's Slop Hut = (1,600 $11) + $1,600 = $19,200 SECTION: 25.4 TOPIC: VALUE OF FIRM B TO A 25-23

24 60. Tuesday's and Thursday's are all-equity firms. Tuesday's has 5,600 shares outstanding at a market price of $28 a share. Thursday's has 4,500 shares outstanding at a price of $42 a share. Thursday's is acquiring Tuesday's. The incremental value of the acquisition is $4,200. What is the value of Tuesday's to Thursday's? a. $130,200 b. $152,600 c. $156,800 D. $161,000 e. $165,400 Value of Tuesday's to Thursday's = (5,600 $28) + $4,200 = $161,000 SECTION: 25.4 TOPIC: VALUE OF FIRM B TO A 61. Guido's and Elrod's are all-equity firms. Guido's has 2,200 shares outstanding at a market price of $37 a share. Elrod's has 3,100 shares outstanding at a price of $46 a share. Elrod's is acquiring Guido's for $82,500 in cash. The incremental value of the acquisition is $4,400. What is the net present value of acquiring Guido's to Elrod's? a. $1,100 b. $2,200 C. $3,300 d. $4,400 e. $7,700 NPV = (2,200 $37) + $4,400 $82,500 = $3,300 SECTION: 25.6 TOPIC: CASH ACQUISITION 25-24

25 62. Calipers, Inc. is acquiring Johnson Warehouse for $47,000 in cash. Calipers has 2,700 shares of stock outstanding at a market value of $32 a share. Johnson Warehouse has 3,200 shares of stock outstanding at a market price of $14 a share. Neither firm has any debt. The net present value of the acquisition is $1,800. What is the value of Caliper's after the acquisition? a. $84,600 B. $86,000 c. $110,000 d. $124,800 e. $133,000 Value of Caliper's = (2,700 $32) + (3,200 $14) + $1,800 $47,000 = $86,000 SECTION: 25.6 TOPIC: CASH ACQUISITION 63. Firm A is acquiring Firm B for $37,000 in cash. Firm A has 3,400 shares of stock outstanding at a market value of $15 a share. Firm B has 2,200 shares of stock outstanding at a market price of $37 a share. Neither firm has any debt. The net present value of the acquisition is $2,100. What is the price per share of Firm A's stock after the acquisition? a. $15.62 b. $16.07 C. $28.68 d. $34.18 e. $39.56 Price per share of A = [(3,400 $15) + (2,200 $37) + $2,100 $37,000] / 3,400 = $28.68 SECTION: 25.6 TOPIC: CASH ACQUISITION 25-25

26 64. Andre's Breads and Butter Top are all-equity firms. Andre's has 800 shares outstanding at a market price of $56 a share. Butter Top has 2,400 shares outstanding at a price of $37 a share. Butter Top is acquiring Andre's Breads for $47,500 in cash. The incremental value of the acquisition is $4,200. What is the net present value of acquiring Andre's Breads to Butter Top? a. $950 B. $1,500 c. $2,700 d. $4,200 e. $5,700 NPV = (800 $56) + $4,200 $47,500 = $1,500 SECTION: 25.6 TOPIC: CASH ACQUISITION 65. Palace Inns is acquiring Sequoia for $38,000 in cash. Palace Inns has 1,500 shares of stock outstanding at a market price of $26 a share. Sequoia has 1,800 shares of stock outstanding at a market price of $18 a share. Neither firm has any debt. The net present value of the acquisition is $1,400. What is the price per share of Palace Inns after the acquisition? A. $23.20 b. $26.93 c. $35.47 d. $44.93 e. $47.26 Price per share = [(1,500 $26) + (1,800 $18) + $1,400 $38,000] / 1,500 = $23.20 SECTION: 25.6 TOPIC: CASH ACQUISITION 25-26

27 66. Watson's Office Supply has agreed to be acquired by New Concepts for $30,000 worth of New Concepts stock. New Concepts currently has 2,300 shares of stock outstanding at a price of $24 a share. Watson's has 1,300 shares outstanding at a price of $21. The incremental value of the acquisition is $1,200. What is the valued of the merged firm? a. $55,200 b. $56,400 c. $81,500 D. $83,700 e. $91,900 Value of merged firm = (2,300 $24) + (1,300 $21) + $1,200 = $83,700 SECTION: 25.6 TOPIC: STOCK ACQUISITION 67. Cavalier Enterprises has agreed to be acquired by The Fox Hunt for $65,000 worth of The Fox Hunt stock. The Fox Hunt currently has 3,300 shares of stock outstanding at a price of $32 a share. Cavalier Enterprises has 2,400 shares outstanding at a price of $26 a share. The incremental value of the acquisition is $2,800. What is the value per share of The Fox Hunt stock after the acquisition? A. $32.04 b. $36.18 c. $48.28 d. $51.76 e. $54.20 Value per share = [(3,300 $32) + (2,400 $26) + $2,800] / [3,300 + ($65,000 / $32)] = $32.04 SECTION: 25.6 TOPIC: STOCK ACQUISITION 25-27

28 68. Babson Industrial has agreed to merge with Dailey Iron for $32,000 worth of Dailey Iron stock. Babson has 2,000 shares of stock outstanding at a price of $34 a share. Dailey has 2,600 shares outstanding with a market value of $13 a share. The incremental value of the acquisition is $900. What is the value of Dailey Iron after the merger? a. $34,700 b. $68,900 c. $97,300 d. $101,800 E. $102,700 Value after merger = (2,000 $34) + (2,600 $13) + $900 = $102,700 SECTION: 25.6 TOPIC: STOCK ACQUISITION 69. Gillison Markets is being acquired by Bakersfield Ltd. for $129,000 worth of Bakersfield Ltd. stock. Bakersfield Ltd. has 7,500 shares of stock outstanding at a price of $54 a share. Gillison Markets has 1,500 shares outstanding with a market value of $27 a share. The incremental value of the acquisition is $3,700. How many new shares of stock will be issued to complete this acquisition? A. 2,389 shares b. 3,186 shares c. 4,778 shares d. 7,209 shares e. 8,063 shares Number of shares issued = $129,000 / $54 = 2,389 shares SECTION: 25.6 TOPIC: STOCK ACQUISITION 25-28

29 70. Hallaman's Auto is being acquired by Macy's Trucking for $32,000 worth of Macy's Trucking stock. Macy's Trucking has 5,500 shares of stock outstanding at a price of $73 a share. Hallaman's Auto has 1,200 shares outstanding with a market value of $25 a share. The incremental value of the acquisition is $12,600. What is the total number of shares in the new firm? a. 5,827 shares B. 5,938 shares c. 6,351 shares d. 6,700 shares e. 6,780 shares Total number of shares = 5,500 + ($32,000 / $73) = 5,938 shares SECTION: 25.6 TOPIC: STOCK ACQUISITION 71. Firm A is being acquired by Firm B for $38,000 worth of Firm B stock. The incremental value of the acquisition is $7,400. Firm A has 2,500 shares of stock outstanding at a price of $22 a share. Firm B has 7,400 shares of stock outstanding at a price of $48 a share. What is the value per share of Firm B after the acquisition? a. $48.91 B. $50.98 c. $52.27 d. $55.43 e. $56.43 Value per share = [(7,400 $48) + (2,500 $22) + $7,400] / [7,400 + ($38,000 / $48)] = $417,600 / 8, = $50.98 SECTION: 25.6 TOPIC: STOCK ACQUISITION 25-29

30 72. Firm A is being acquired by Firm B for $35,000 worth of Firm B stock. The incremental value of the acquisition is $2,500. Firm A has 2,000 shares of stock outstanding at a price of $16 a share. Firm B has 1,200 shares of stock outstanding at a price of $40 a share. What is the actual cost of the acquisition using company stock? a. $34,750 B. $34,789 c. $35,000 d. $35,289 e. $35,500 Number of shares issued = $35,000 $40 = 875 shares; Value per share after merger = [(1,200 $40) + (2,000 $16) + $2,500] [1, ] = $82,500 2,075 = $ ; Actual cost of acquisition = 875 $ = $34, = $34,789 SECTION: 25.6 TOPIC: STOCK ACQUISITION 73. Delta is being acquired by Gamma. The incremental value of the acquisition is $1,600. Delta has 1,200 shares of stock outstanding at a price of $22 a share. Gamma has 3,100 shares of stock outstanding at a price of $50 a share. What is the net present value of the acquisition given that the actual cost of the acquisition using company stock is $27,575? a. $289 b. $377 c. $407 D. $425 e. $436 Net present value = [(1,200 $22) + $1,600] $27,575 = $28,000 $27,575 = $425 SECTION: 25.6 TOPIC: STOCK ACQUISITION 25-30

31 74. Jane's Footwear is planning on merging with Trailer Shoes. Jane's Footwear will pay Trailer Shoes' shareholders the current value of their stock in shares of Jane's Footwear stock. Jane's Footwear currently has 4,700 shares of stock outstanding at a market price of $25 a share. Trailer Shoes has 2,500 shares outstanding at a price of $31 a share. How many shares of stock will be outstanding in the merged firm? a. 3,100 shares b. 4,700 shares c. 7,200 shares D. 7,800 shares e. 10,300 shares Number of shares = 4,700 + [(2,500 $31) / $25] = 7,800 shares SECTION: 25.5 TOPIC: EARNINGS AND VALUATION 75. Firm X is planning on merging with Firm Y. Firm X will pay Firm Y's stockholders the current value of their stock in shares of Firm X. Firm X currently has 3,900 shares of stock outstanding at a market price of $40 a share. Firm Y has 2,200 shares outstanding at a price of $17 a share. The after-merger earnings will be $7,800. What will the earnings per share be after the merger? A. $1.61 b. $1.67 c. $1.75 d. $1.81 e. $1.86 Number of shares = 3,900 + [(2,200 $17) / $40] = 4,835; Earnings per share = $7,800 / 4,835 = $1.61 SECTION: 25.5 TOPIC: EARNINGS AND VALUATION 25-31

32 76. Firm S is planning on merging with Firm T. Firm S will pay Firm T's stockholders the current value of their stock in shares of Firm S. Firm S currently has 5,100 shares of stock outstanding at a market price of $15 a share. Firm T has 2,600 shares outstanding at a price of $19 a share. What is the value of the merged firm? a. $76,500 b. $87,200 C. $125,900 d. $128,400 e. $131,600 Value of merged firm = (5,100 $15) + (2,600 $19) = $125,900 SECTION: 25.5 TOPIC: EARNINGS AND VALUATION 77. Firm A is planning on merging with Firm B. Firm A will pay Firm B's stockholders the current value of their stock in shares of Firm A. Firm A currently has 1,800 shares of stock outstanding at a market price of $40 a share. Firm B has 1,200 shares outstanding at a price of $47 a share. What is the value per share of the merged firm? a. $38.70 B. $40.00 c. $42.10 d. $44.40 e. $45.60 Value per share = [(1,800 $40) + (1,200 $47)] / {[1,800 + (1,200 $47)] / $40)} = $128,400 / 3,210 = $40 SECTION: 25.5 TOPIC: EARNINGS AND VALUATION 25-32

33 Essay Questions 78. The empirical evidence strongly indicates that the stockholders of the target firm realize large wealth gains as a result of a takeover bid but the stockholders in the acquiring firm gain little, if anything. Although there exists no definitive answer as to why this is the case, several possible explanations have been proposed. List and explain three of these possible explanations for the minimal returns to the acquiring firm's stockholders. Size differentials, competition in the takeover market, lack of achieving merger gains, management goals other than the best interests of the shareholders, and early announcements of corporate acquisition intent are all presented as possible explanations. AACSB TOPIC: REFLECTIVE THINKING SECTION: 25.8 TOPIC: MERGER GAINS 79. Describe the three basic legal procedures that one firm can use to acquire another and briefly discuss the advantages and disadvantages of each. The three forms are merger, acquisition of stock, and acquisition of assets. A merger has the advantage that it is legally simple and therefore low cost but it has the disadvantage that it must be approved by the shareholders of both firms. Acquisition by stock requires no shareholder meetings and management of the target firm can be bypassed. However, it can be a costly form of acquisition and minority shareholders may hold out, thereby raising the cost of the purchase. An acquisition of assets requires the vote of the target firm's shareholders. However, it can become quite costly to transfer title to all of the assets. AACSB TOPIC: REFLECTIVE THINKING TOPIC: FORMS OF ACQUISITION 25-33

34 80. Defensive merger tactics are designed to thwart unwanted takeovers and mergers. Do such activities work to the advantage of stockholders all of the time? Are these types of activities ethical? Who do you think benefits most from these activities? Good students will recognize that defensive tactics "insulate" existing management from the vagaries of the marketplace and may allow ineffective management to remain in charge. Obviously, defensive maneuvers do not always act in the best interest of shareholders and many students will argue that management benefits most from these activities. The ethics debate about these issues is always an interesting one. AACSB TOPIC: REFLECTIVE THINKING SECTION: 25.7 TOPIC: POISON PILLS 81. Firms can frequently create synergy by merging and sharing complementary resources with another firm. Give two examples of situations where this would most likely occur. Student examples will vary but should display an understanding of how complementary resources can be shared in a manner that will reduce costs. A common example would be two seasonal firms such as a golf course and a ski resort where assets such as the administrative functions, the hospitality staff, the dining areas, and the resort areas would all be considered complementary resources. AACSB TOPIC: REFLECTIVE THINKING SECTION: 25.4 TOPIC: COMPLEMENTARY RESOURCES 25-34