Chap 026

Chapter 26 - Mergers and Acquisitions
Chapter 26
Mergers and Acquisitions

Multiple Choice Questions

1. Last month, Keyser Design acquired all o the assets and lia!ilities o "enor Machine
#or$s. "he com!ined irm is $no%n as Keyser Design. "enor Machine #or$s no longer
e&ists as a separate entity. "his acquisition is !est descri!ed as a'
A. merger.
(. consolidation.
C. tender oer.
D. spino.
). di*estiture.

2. "he Cat (o& acquired "he Dog +ouse. As part o this transaction, !oth irms ceased to
e&ist in their prior orm and com!ined to create an all-ne% entity, Animal #orld. #hich one
o the ollo%ing terms !est descri!es this transaction,
A. di*estiture
(. consolidation
C. tender oer
D. spino
). conglomeration

-. "he Daily .e%s pu!lished an ad today %herein it announced its desire to purchase shares
o a competing ne%spaper, the /il "o%n 0ossip. #hich one o the ollo%ing terms is !est
descri!ed !y this announcement,
A. merger request
(. consolidation
C. tender oer
D. spino
). di*estiture

26-1
1. 2ome 3reight Line )&press shareholders are *ery dissatisied %ith the perormance o the
irm4s current management team. "hese shareholders %ant to gain control o the !oard o
directors so they can ha*e the po%er to oust current management. As a means o gaining
control, these shareholders ha*e select candidates or all o the open positions on the irm4s
!oard o directors. 2ince they ha*e insuicient *otes to guarantee the election o these
indi*iduals, they are contacting other shareholders and as$ing them to *ote %ith them on this
important matter. / course, the current management team is encouraging shareholders to
*ote or their candidates or the !oard. #hich one o the ollo%ing terms is !est illustrated !y
this situation,
A. tender oer
(. pro&y contest
C. going-pri*ate transaction
D. le*eraged !uyout
). consolidation

5. A group o indi*idual in*estors is in the process o acquiring all o the pu!licly-traded
shares o /M /utitters. /nce the shares are acquired, they %ill no longer !e pu!licly traded.
#hich o the ollo%ing terms applies to this process,
A. tender oer
(. pro&y contest
D. le*eraged !uyout
). consolidation

6. "he current president and *ice-presidents o Mountain "op Consulting ha*e decided to
orm a pri*ate in*estment group %ith the sole purpose o purchasing Mountain "op
Consulting. "hese indi*iduals ha*e ound a lender %ho %ill lend them 65 percent o the
purchase cost i they pledge their personal assets as collateral or the loan. "he current oicers
agree to this arrangement, !orro% the unds, and purchase Mountain "op Consulting. "he
purchase o this irm is reerred to as a'
A. conglomeration.
(. pro&y contest.
C. merger.
D. le*eraged !uyout.
). consolidation.

26-2
7. 8ohnson Manuacturers and 9ea!ody )nterprises are !oth manuacturers o plastic
products, such as plastic plates and sil*er%are. "hese t%o irms ha*e decided to %or$ together
to ind a more eicient %ay to recycle re:ected products so that any re:ected material can !e
reused. "hus, each company is going to assign t%o o its engineers to this pro:ect and ha*e
agreed to share any and all costs incurred in this process. "his pro:ect is an e&ample o a'
A. consolidation.
(. merged alliance.
C. :oint *enture.
D. ta$eo*er pro:ect.
). strategic alliance.

6. Diet 2oda and +igh Caeine are t%o irms that compete in the sot drin$ mar$et. "hese
t%o competitors ha*e decided to in*est ;1< million to orm a ne% company, 3ruit "ea, %hich
%ill manuacture la*ored teas. "his ne% irm is deined as a'
A. consolidation.
(. strategic alliance.
C. :oint *enture.
D. merged alliance.
). ta$eo*er pro:ect.

=. Alliance Chemicals recently acquired 2%enson >ndustries in a transaction that produced a
.9? o ;1.- million. "his .9? is reerred to as'
A. the agency eect.
(. the consolidating *alue.
C. di*ersiication.
D. the consolidation eect.
). synergy.

26--
1<. @oger is a ma:or shareholder in @( >ndustrial 2upply. Currently, @oger is quite unhappy
%ith the direction the irm is headed and is rumored to !e considering an attempt to ta$e o*er
the irm !y soliciting the *otes o other shareholders. "o head o this potential attempt, the
!oard o @( >ndustrial 2upply has decided to oer @oger ;-5 a share or all the shares he
o%ns in the irm. "he current mar$et *alue per share is ;-2. "his oer to purchase @oger4s
shares is commonly reerred to as'
A. a golden parachute.
(. standstill payments.
C. greenmail.
D. a poison pill.
). a %hite $night.

11. #hich one o the ollo%ing generally has a lip-in pro*ision that signiicantly increases
the cost to a shareholder %ho is attempting to gain control o*er a irm,
A. golden parachute
(. standstill agreement
C. greenmail
D. poison pill
). %hite $night

12. Mel*in %as attempting to gain control o #estern #ood 9roducts until he realiAed that the
e&isting shareholders in the irm had the right to purchase additional shares at a !elo%-mar$et
price gi*en his hostile ta$eo*er attempt. "hus, Mel*in decided to orego in*esting in this irm.
#hat term applies to the tactic used !y #estern #ood 9roducts to sta*e o this ta$eo*er
attempt,
A. pac-man deense
(. shar$ repellent plan
C. golden parachute pro*ision
D. greenmail pro*ision
). share rights plan

26-1
1-. .ieger Mills engages in arming, truc$ing o arm products, and the milling and retailing
o arm grains. "he irm has decided to sell its arming operations to 8asper 3arms. "his sale
is reerred to as aBnC'
A. liquidation.
(. di*estiture.
C. merger.
D. allocation.
). restructuring.

11. 9rinceton )nterprises is a di*ersiied company. >n addition to its primary !usiness
operations, the irm is also the sole shareholder o a %holly o%ned su!sidiary. As part o its
restructuring plan, 9rinceton has decided to implement an >9/ oering or shares in the
su!sidiary. "his oering is equi*alent to a 25 percent o%nership sta$e in the su!sidiary. #hat
is the distri!ution o these shares called,
A. split-up
(. equity car*e-out
C. countertender oer
D. %hite $night transaction
). loc$up transaction

15. 3amily "ra*el 9lans is the sole shareholder in its su!sidiary, "ra*eler4s >nsurance Co.
3amily "ra*el 9lans has decided to di*est itsel o its insurance operations and does so !y
distri!uting the shares in the su!sidiary to the shareholders o 3amily "ra*el 9lans. "his
distri!ution o shares is called aBnC'
A. loc$up transaction.
(. !ear hug.
C. equity car*e-out.
D. spin-o.
). split-up.

26-5
16. (lasco Distri!utors has !ecome a large conglomerate. >ts !oard o directors recently
concluded that the irm has !ecome so large that it has lost its eiciency. "he !oard urther
concluded that the irm could !e !oth more eicient and more proita!le i it %ere di*ided
into three distinct and separate irms. "he !oard presented this suggested to the irm4s
shareholders and those shareholders *oted and agreed to di*ide the irm. Di*iding this irm
into separate entities is reerred to as aBnC'
(. di*estiture.
D. spin-o.
). split-up.

17. #hich one o the ollo%ing statements correctly applies to a legally deined merger,
A. "he acquiring irm retains its identity and a!sor!s only the assets o the acquired irm.
(. "he acquired irm is completely a!sor!ed and ceases to e&ist as a separate legal entity.
C. A ne% irm is created %hich includes all the assets and lia!ilities o the acquiring irm plus
the assets only o the acquired irm.
D. A ne% irm is created rom the assets and lia!ilities o !oth the acquiring and acquired
irms.
). A merger reclassiies the acquired irm into a ne% entity %hich !ecomes a su!sidiary o the
acquiring irm.

16. #hich o the ollo%ing statements correctly apply to a merger,
>. "he titles to indi*idual assets o the acquired irm must !e transerred into the acquiring
irm4s name.
>>. "he merged irm %ill retain the use o the acquiring company4s name.
>>>. "he acquiring irm does not ha*e to see$ appro*al or the merger rom its shareholders.
>?. "he shareholders o the acquired company must appro*e the merger.
A. > and >>> only
(. >> and >? only
C. >, >>, and >>> only
D. >, >>, and >? only
). >, >>, >>>, and >?

26-6
1=. >n a merger the'
A. legal status o !oth the acquiring irm and the target irm is terminated.
(. acquiring irm retains its pre-merger legal status.
C. acquiring irm acquires the assets, !ut not the lia!ilities, o the target irm.
D. shareholders o the target irm ha*e little, i any, say as to %hether or not the merger
occurs.
). target irm continues to e&ist !ut %ill !e a %holly o%ned su!sidiary o the acquiring irm.

2<. #hich o the ollo%ing increase the costs associated %ith a merger,
A. changing the title to all the com!ined irm4s assets
(. dis!anding the operations o the target irm
C. hiring an under%riter to distri!ute the >9/ shares
D. issue costs associated %ith %arrants that must !e oered to the shareholders o the
acquiring irm
). see$ing appro*al o the shareholders o !oth the acquiring and the acquired irm

21. Do%n @i*er Mar$ets has decided to acquire a controlling interest in (lue 8ays !y
purchasing shares o stoc$ in the pu!lic mar$ets. #hich o the ollo%ing statements correctly
apply to this acquisition,
>. "he purchase o pu!licly-traded shares may !e more e&pensi*e than an outright merger %ith
(lue 8ays %ould ha*e !een.
>>. Do%n @i*er Mar$ets can a*oid dealing %ith the !oard o directors o (lue 8ays !y
purchasing shares in this manner.
>>>. > Do%n @i*er Mar$ets is successul in acquiring at least 6< percent o the outstanding
shares o (lue 8ays, the remaining shareholders in (lue 8ays %ill !e orced to also sell their
shares to Do%n @i*er Mar$ets.
>?. #hether or not Do%n @i*er Mar$ets gains control o (lue 8ays depends upon the
%illingness o (lue 8ays shareholders to sell their shares.
A. > and >>> only
(. >> and >? only
C. >, >>, and >? only
D. >, >>, and >>> only
). >, >>, >>>, and >?

26-7
22. (ilt%ell +otels is acquiring all o the assets o 0reen @oo >nns. As a result, 0reen @oo
>nns'
A. %ill !ecome a ully o%ned su!sidiary o (ilt%ell +otels.
(. %ill remain as a shell corporation unless the shareholders opt to dissol*e it.
C. %ill !e ully merged into (ilt%ell +otels and %ill no longer e&ist as a separate entity.
D. and (ilt%ell +otels %ill !oth cease to e&ist and a ne% irm %ill !e ormed.
). %ill automatically !e dissol*ed.

2-. An auto ma$er recently acquired a %indshield manuacturer. #hich type o an acquisition
%as this,
A. horiAontal
(. longitudinal
C. conglomerate
D. *ertical
). indirect

21. > 0eneral )lectric, a highly di*ersiied company, %ere to acquire /cean 3reight Limited,
the acquisition %ould !e classiied as a DDDDD acquisition.
A. horiAontal
(. longitudinal
C. conglomerate
D. *ertical
). integrated

25. > 9aul4s +ard%are %ere to acquire 2u!ur!an +ard%are, the acquisition %ould !e
classiied as a DDDDD acquisition.
A. horiAontal
(. longitudinal
C. conglomerate
D. *ertical
). integrated

26-6
26. #hich o the ollo%ing is a orm o a ta$eo*er,
>. tender oer
>>. merger
>>>. pro&y contest
>?. going pri*ate transaction
A. > and >> only
(. >>> and >? only
C. >>, >>>, and >? only
D. >, >>, and >>> only
). >, >>, >>>, and >?

27. 3irms A and ( ormally agree to each put up ;25 million to create irm C. 3irm C %ill
perorm en*ironmental testing on the products produced !y !oth 3irm A and 3irm (. #hich
one o the ollo%ing terms descri!es 3irm C,
A. :oint *enture
(. going-pri*ate transaction
C. conglomerate
D. su!sidiary
). le*eraged !uyout

26. Di&ie and ten o her %ealthy riends ormed a group and !orro%ed the unds necessary to
acquire 1<< percent o the outstanding shares o 2outhern 3ried Chic$en. "his transaction is
$no%n as a'
A. pro&y contest.
(. management !uyout.
C. *ertical acquisition.
). unriendly ta$eo*er.

2=. >n a ta&-ree acquisition, the shareholders o the target irm'
A. recei*e income %hich is considered to !e ta&-e&empt.
(. git their shares to a ta&-e&empt organiAation and thereore ha*e no ta&a!le gain.
C. are *ie%ed as ha*ing e&changed shares on a dollar-or-dollar !asis.
D. sell their shares to a qualiying entity there!y a*oiding !oth income and capital gains ta&es.
). sell their shares at cost there!y a*oiding the capital gains ta&.

26-=
-<. #hich o the ollo%ing are required or an acquisition to !e considered ta&-ree,
>. continuity o equity interest
>>. a !usiness purpose, other than a*oiding ta&es, or the acquisition
>>>. payment in the orm o equity shares or the acquired irm
>?. cash payment or the equity o the acquired irm
A. > and >> only
(. >> and >>> only
C. >> and >? only
D. >, >>, and >>> only
). >, >>, and >? only

-1. #hich one o the ollo%ing statements is correct,
A. "he shareholders o an acquired irm are generally gi*en a choice o accepting either cash
or shares o stoc$ %hen the acquisition is ta&-ree.
(. "o !e a ta&-ree acquisition, the shareholders o an acquired irm must recei*e shares in the
acquiring irm that are equal to =5 percent or less o the *alue o the shares held in the
acquired irm.
C. "he assets o an acquired irm are recorded on the !oo$s o the acquiring irm at their
current !oo$ *alue regardless o the ta& status o the acquisition.
D. "arget irm shareholders demand a higher selling price %hen an acquisition is a non-
ta&a!le e*ent.
). > the assets o a irm are %ritten up as part o the acquisition process, the increase in *alue
is considered to !e a ta&a!le gain.

-2. "he purchase accounting method requires that'
A. the e&cess o the purchase price o*er the air mar$et *alue o the target irm !e recorded as
a one-time e&pense on the income statement o the acquiring irm.
(. good%ill !e amortiAed on a yearly !asis or inancial statement purposes.
C. the equity o the acquiring irm !e reduced !y the e&cess o the purchase price o*er the air
mar$et *alue o the target irm.
D. the assets o the target irm !e recorded at their air mar$et *alue on the !alance sheet o
the acquiring irm.
). the e&cess amount paid or the target irm !e recorded as a tangi!le asset on the !oo$s o
the acquiring irm.

26-1<
--. 3or inancial statement purposes, good%ill created !y an acquisition'
A. must !e amortiAed on a straight-line !asis o*er 1< years.
(. must !e re*ie%ed each year and amortiAed to the e&tent that it has lost *alue.
C. is e&pensed e*enly o*er a 2<-year period.
D. ne*er aects the proits o the acquiring irm.
). is recorded in an amount equal to the air mar$et *alue o the assets o the target irm.

-1. "he pooling o interests method o accounting'
>. creates an account called good%ill %hich is recorded on the !alance sheet o the merged
irm.
>>. consists o simply com!ining the !alance sheets o the acquiring and the target irm.
>>>. is currently the accounting method required !y 3A2( or all cash acquisitions.
>?. recogniAes the e&cess o the purchase price o*er the air mar$et *alue and records that
e&cess as an asset o the acquiring irm.
A. > only
(. >> only
C. > and >? only
D. >> and >>> only
). >, >>, and >? only

-5. "he incremental cash lo%s o a merger can relate to changes in %hich o the ollo%ing,
>. re*enue
>>. capital requirements
>>>. operating costs
>?. income ta&es
A. > and >> only
(. >>, >>>, and >? only
C. >, >>>, and >? only
D. >, >>, and >>> only
). >, >>, >>>, and >?

26-11
-6. #hich o the ollo%ing are e&amples o cost reductions that can result rom an
acquisition,
>. allocating i&ed o*erhead across a %ider range o products
>>. lo%ering oice payroll costs !y com!ining :o! unctions
>>>. !eneiting rom economies o scale %hen purchasing ra% materials
>?. reducing the num!er o management personnel required
A. > and >>> only
(. >> and >? only
C. >, >>, and >? only
D. >>, >>>, and >? only
). >, >>, >>>, and >?

-7. A potential merger %hich produces synergy'
A. should !e re:ected due to the pro:ected negati*e cash lo%s.
(. should !e re:ected !ecause the synergy %ill dilute the !eneits o the merger.
C. has a net present *alue o Aero.
D. creates *alue and thereore should !e pursued.
). reduces the anticipated net income rom the target irm.

-6. A proposed acquisition may create synergy !y'
>. increasing the mar$et po%er o the com!ined irm.
>>. impro*ing the distri!ution net%or$ o the acquiring irm.
>>>. pro*iding the com!ined irm %ith a strategic ad*antage.
>?. reducing the utiliAation o the acquiring irm4s assets.
A. > and >>> only
(. >> and >>> only
C. > and >? only
D. >, >>, and >>> only
). >, >>, >>>, and >?

26-12
-=. #hich o the ollo%ing represent potential ta& !eneits that can directly result rom an
acquisition,
>. an increase in depreciation e&pense
>>. an increase in surplus unds
>>>. the use o net operating losses
>?. an increased use o le*erage
A. > and >? only
(. >> and >>> only
C. >, >>>, and >? only
D. >>, >>>, and >? only
). >, >>, >>>, and >?

1<. #hen e*aluating an acquisition you should'
A. concentrate on !oo$ *alues and ignore mar$et *alues.
(. ocus on the total cash lo%s o the merged irm.
C. apply the rate o return that is rele*ant to the incremental cash lo%s.
D. ignore any one-time acquisition ees or transaction costs.
). ignore any potential changes in management.

11. #hich one o the ollo%ing !est deines synergy gi*en the ollo%ing,
?A E ?alue o irm A
?( E ?alue o irm (
?A( E ?alue o merged irm A(
A. B?A F ?(C - ?A(
(. ?A( - B?A F ?(C
C. greater o < or B?A F ?(C - ?A(
D. greater o < or ?A( - B?A F ?(C
). greater o < or ?A(

26-1-
12. #hich one o the ollo%ing statements is correct,
A. 3irms %ith large net operating losses tend to !e acquiring irms rather than target irms.
(. "he le*erage associated %ith an acquisition increases the ta& lia!ility o the acquiring irm.
C. > either an increase or a decrease in the le*el o production causes the a*erage cost per unit
to increase then the irm is currently operating at its optimal production le*el.
D. 3irms can al%ays !eneit rom economies o scale i they increase the siAe o their irm
through acquisitions.
). > a irm uses it surplus cash to acquire another irm then the shareholders o the acquiring
irm immediately incur a ta& lia!ility related to the transaction.

1-. #hich one o the ollo%ing pairs o !usinesses could pro!a!ly !eneit the most !y sharing
complementary resources,
A. rooer and architect
(. tennis court and pharmacy
C. s$i resort and gol course
D. dry cleaner and maid ser*ice
). truc$ing company and la%n ser*ice

11. Assume the shareholders o a target irm !eneit rom !eing acquired in a stoc$
transaction. 0i*en this, these shareholders are most apt to realiAe the largest !eneit i the'
A. acquiring irm has the !etter management team and replaces the target irm4s managers.
(. management o the target irm is more eicient than the management o the acquiring irm
%hich replaces them.
C. management o !oth the acquiring irm and the target irm are as equi*alent as possi!le.
D. current management team o the target irm is $ept in place e*en though the managers o
the acquiring irm are more suited to manage the target irm4s situation.
). current management team o the target irm is technologically $no%ledgea!le !ut yet
ineecti*e.

26-11
15. #hich o the ollo%ing represent potential gains rom an acquisition,
>. increased use o de!t
>>. lo%er costs per unit produced
>>>. strategic !eachhead
>?. diseconomies o scale
A. >> and >>> only
(. > and >? only
C. >, >>, and >>> only
D. >, >>>, and >? only
). >, >>, >>>, and >?

16. "he *alue o a target irm to the acquiring irm is equal to'
A. the *alue o the target irm as a separate entity plus the incremental *alue deri*ed rom the
acquisition.
(. the purchase cost o the target irm.
C. the *alue o the merged irm minus the *alue o the target irm as a separate entity.
D. the purchase cost plus the incremental *alue deri*ed rom the acquisition.
). the incremental *alue deri*ed rom the acquisition.

17. > an acquisition does not create *alue and the mar$et is smart, then the'
A. earnings per share o the acquiring irm must !e the same !oth !eore and ater the
acquisition.
(. earnings per share can change !ut the stoc$ price o the acquiring irm should remain
constant.
C. price per share o the acquiring irm should increase !ecause o the gro%th o the irm.
D. earnings per share %ill most li$ely increase %hile the price-earnings ratio remains constant.
). price-earnings ratio should remain constant regardless o any changes in the earnings per
share.

16. An acquisition completed simply to di*ersiy a irm %ill'
A. create e&cessi*e synergy in almost all situations.
(. lo%er systematic ris$ and increase the *alue o the irm.
C. !eneit the irm !y eliminating unsystematic ris$.
D. !eneit the shareholders !y pro*iding other%ise uno!taina!le di*ersiication.
). generally not add any *alue to the irm.

26-15
1=. #hich one o the ollo%ing statements is correct,
A. An increase in the earnings per share as a result o an acquisition %ill increase the price per
share o the acquiring irm.
(. "he price-earnings ratio %ill remain constant as a result o an acquisition %hich ails to
create *alue.
C. > irm A acquires irm ( then the num!er o shares in A( %ill equal the num!er o shares
o A plus the num!er o shares o (.
D. > no *alue is created %hen irm A acquires irm (, then the total *alue o A( %ill equal
the *alue o A plus the *alue o (.
). Di*ersiication is one o the greatest !eneits deri*ed rom an acquisition.

5<. "he primary purpose o a lip-in pro*ision is to'
A. increase the num!er o shares outstanding %hile also increasing the *alue per share.
(. dilute a corporate raider4s o%nership position.
C. reduce the mar$et *alue o each share o stoc$.
D. gi*e the e&isting corporate directors the sole right to remo*e a poison pill.
). pro*ide additional compensation to any senior manager %ho loses his or her :o! as a result
o a corporate ta$eo*er.

51. > a irm sells its cro%n :e%els %hen threatened %ith a ta$eo*er attempt, the irm is
employing a strategy commonly reerred to as a DDDDD strategy.
A. scorched earth
(. shar$ repellent
C. !ear hug
D. %hite $night
). loc$up

52. #hich one o the ollo%ing deensi*e tactics is designed to pre*ent a Gt%o-tierG ta$eo*er
oer,
A. !ear hug
(. poison put
C. shar$ repellent
D. dual class capitaliAation
). air price pro*ision

26-16
5-. #hich o the ollo%ing ha*e !een suggested as reasons %hy the stoc$holders in acquiring
irms may not !eneit to any signiicant degree rom an acquisition,
>. the price paid or the target irm might equal the target irm4s total *alue
>>. management may ha*e priorities other than the interest o the stoc$holders
>>>. the ta$eo*er mar$et may not !e competiti*e
>?. anticipated merger gains may not !e ully achie*ed
A. > and >>> only
(. >> and >? only
C. >, >>>, and >? only
D. >, >>, and >? only
). >, >>, >>>, and >?

51. #hich o the ollo%ing are reasons %hy a irm may %ant to di*est itsel o some o its
assets,
>. to raise cash
>>. to unload unproita!le operations
>>>. to impro*e the strategic it o a irm4s *arious di*isions
>?. to comply %ith antitrust regulations
A. > and >> only
(. >, >>, and >>> only
C. >, >>>, and >? only
D. >>, >>>, and >? only
). >, >>, >>>, and >?

A. A spin-o requently ollo%s an equity car*e-out.
(. A split-up requently ollo%s a spin-o.
C. An equity car*e-out is a speciic type o acquisition.
D. A spin-o in*ol*es an initial pu!lic oering.
). A di*estiture means that the original irm ceases to e&ist.

26-17
56. .elson4s >nteriors has ;2.1- million in net %or$ing capital. "he irm has i&ed assets %ith
a !oo$ *alue o ;2-.2- million and a mar$et *alue o ;26.16 million. "he irm has no long-
term de!t. "he +ome Centre is !uying .elson4s >nteriors or ;2=.5 million in cash. "he
acquisition %ill !e recorded using the purchase accounting method. #hat is the amount o
good%ill that "he +ome Centre %ill record on its !alance sheet as a result o this acquisition,
A. ;1.21 million
(. ;-.-1 million
C. ;-.66 million
D. ;1.11 million
). ;6.27 million

57. "royer Mar$ets and De!4s 0rocery are all-equity irms. "royer Mar$ets has 2,1<< shares
outstanding at a mar$et price o ;11.6< a share. De!4s 0rocery has -,2<< shares outstanding at
a price o ;26 a share. De!4s 0rocery is acquiring "royer Mar$ets or ;-7,5<< in cash. #hat is
the merger premium per share,
A. ;<
(. ;<.625
C. ;1.1<6
D. ;1.216
). ;1.-2<

56. "he Cycle 2top has 1,5<< shares outstanding at a mar$et price per share o ;6.16. Kate4s
#heels has 1,75< shares outstanding at a mar$et price o ;1- a share. .either irm has any
de!t. Kate4s #heels is acquiring "he Cycle 2top or ;15,<<< in cash. #hat is the merger
premium per share,
A. ;1.27
(. ;1.16
C. ;1.52
D. ;1.1-
). ;1.52

26-16
5=. @osie4s has 1,6<< shares outstanding at a mar$et price per share o ;2-.5<. 2andy4s has
2,5<< shares outstanding at a mar$et price o ;21 a share. .either irm has any de!t. 2andy4s
is acquiring @osie4s. "he incremental *alue o the acquisition is ;1,2<<. #hat is the *alue o
@osie4s to 2andy4s,
A. ;11,1<<
(. ;11,=<<
C. ;12,-<<
D. ;12,7<<
). ;1-,5<<

6<. "he "o%n Crier and "he .e%s )&press are all-equity irms. "he "o%n Crier has 11,5<<
shares outstanding at a mar$et price o ;26 a share. "he .e%s )&press has 15,<<< shares
outstanding at a price o ;-1 a share. "he .e%s )&press is acquiring "he "o%n Crier. "he
incremental *alue o the acquisition is ;-,6<<. #hat is the *alue o "he "o%n Crier to "he
.e%s )&press,
A. ;57,5<<
(. ;75,<<<
C. ;67,<<<
D. ;2==,<<<
). ;-<2,6<<

61. "he 3loral 2hoppe and Maggie4s 3lo%ers are all-equity irms. "he 3loral 2hoppe has
2,5<< shares outstanding at a mar$et price o ;16.5< a share. Maggie4s 3lo%ers has 5,<<<
shares outstanding at a price o ;17 a share. Maggie4s 3lo%ers is acquiring "he 3loral 2hoppe
or ;12,=<< in cash. "he incremental *alue o the acquisition is ;1,2<<. #hat is the net
present *alue o acquiring "he 3loral 2hoppe to Maggie4s 3lo%ers,
A. -;15<
(. ;275
C. ;5<<
D. ;2,1<<
). ;-,7<<

26-1=
62. "aylor4s +ard%are is acquiring "he Corner 2tore or ;2<,<<< in cash. "aylor4s has 1,5<<
shares o stoc$ outstanding at a mar$et *alue o ;16 a share. "he Corner 2tore has 2,2<<
shares o stoc$ outstanding at a mar$et price o ;6 a share. .either irm has any de!t. "he
incremental *alue o the acquisition is ;-,5<<. #hat is the *alue o "aylor4s +ard%are ater
the acquisition,
A. ;1=,<<<
(. ;5<,-<<
C. ;67,-<<
D. ;7<,1<<
). ;72,1<<

6-. 3irm A is acquiring 3irm ( or ;75,<<< in cash. 3irm A has 1,5<< shares o stoc$
outstanding at a mar$et *alue o ;27 a share. 3irm ( has 2,5<< shares o stoc$ outstanding at
a mar$et price o ;2= a share. .either irm has any de!t. "he incremental *alue o the
acquisition is ;2,2<<. #hat is the price per share o 3irm A4s stoc$ ater the acquisition,
A. ;25.=6
(. ;26.15
C. ;26.=-
D. ;27.<<
). ;27.--

61. "he 2%eet 2hoppe and Candy Land are all-equity irms. "he 2%eet 2hoppe has 5<<
shares outstanding at a mar$et price o ;=6 a share. Candy Land has 2,5<< shares outstanding
at a price o ;21 a share. "he 2%eet 2hoppe is acquiring Candy Land or ;62,<<< in cash. "he
incremental *alue o the acquisition is ;-,6<<. #hat is the net present *alue o acquiring
Candy Land to "he 2%eet 2hoppe,
A. ;1,1<<
(. ;1,6<<
C. ;2,7<<
D. ;1,2<<
). ;5,7<<

26-2<
65. 2leep "ight is acquiring @estul >nns or ;52,5<< in cash. 2leep "ight has -,<<< shares o
stoc$ outstanding at a mar$et price o ;-6 a share. @estul >nns has 2,1<< shares o stoc$
outstanding at a mar$et price o ;21 a share. .either irm has any de!t. "he incremental *alue
o the acquisition is ;1,7<<. #hat is the price per share o 2leep "ight ater the acquisition,
A. ;-6.=2
(. ;-7.-<
C. ;-7.67
D. ;-=.1=
). ;-=.2=

66. /utdoor Li*ing has agreed to !e acquired !y .e% Ad*entures or ;16,<<< %orth o .e%
Ad*entures stoc$. .e% Ad*entures currently has 6,<<< shares o stoc$ outstanding at a price
o ;-2 a share. /utdoor Li*ing has 1,5<< shares outstanding at a price o ;1- a share. "he
incremental *alue o the acquisition is ;21,<<<. #hat is the *alue o the merged irm,
A. ;65,5<<
(. ;256,<<<
C. ;277,<<<
D. ;-2<,5<<
). ;-11,5<<

67. Moore >ndustries has agreed to !e acquired !y 2cott )nterprises or ;22,<<< %orth o
2cott )nterprises stoc$. 2cott )nterprises currently has 7,5<< shares o stoc$ outstanding at a
price o ;26 a share. Moore >ndustries has 1,6<< shares outstanding at a price o ;12 a share.
"he incremental *alue o the acquisition is ;1,1<<. #hat is the *alue per share o 2cott
)nterprises stoc$ ater the acquisition,
A. ;27.52
(. ;27.=6
C. ;26.<6
D. ;26.17
). ;-1.<-

26-21
66. Aard*ar$ )nterprises has agreed to !e acquired !y La%son 9roducts in e&change or
;-<,<<< %orth o La%son 9roducts stoc$. La%son has -,<<< shares o stoc$ outstanding at a
price o ;26 a share. Aard*ar$ has 1,2<< shares outstanding %ith a mar$et *alue o ;2- a
share. "he incremental *alue o the acquisition is ;1,1<<. #hat is the *alue o La%son
9roducts ater the merger,
A. ;7=,1<<
(. ;6-,<<<
C. ;111,6<<
D. ;11-,<<<
). ;11-,<<<

6=. +ano*er "ires is !eing acquired !y (etter "ires or ;6=,<<< %orth o (etter "ires stoc$.
+ano*er "ires has 2,5<< shares o stoc$ outstanding at a price o ;-6 a share. (etter "ires has
6,<<< shares outstanding %ith a mar$et *alue o ;2- a share. "he incremental *alue o the
acquisition is ;1,2<<. +o% many ne% shares o stoc$ %ill !e issued to complete this
acquisition,
A. 2,172 shares
(. -,<16 shares
C. -,1-- shares
D. -,67< shares
). -,=67 shares

7<. 0lendale Marine is !eing acquired !y >nland Motors or ;5-,<<< %orth o >nland Motors
stoc$. >nland Motors has 6,2<< shares o stoc$ outstanding at a price o ;51 a share. 0lendale
Marine has 1,7<< shares outstanding %ith a mar$et *alue o ;-< a share. "he incremental
*alue o the acquisition is ;2,6<<. #hat is the total num!er o shares in the ne% irm,
A. 6,2<< shares
(. 7,161 shares
C. 7,22= shares
D. 7,652 shares
). 7,=<< shares

26-22
71. 3irm ( is !eing acquired !y 3irm A or ;162,<<< %orth o 3irm A stoc$. "he incremental
*alue o the acquisition is ;1,6<<. 3irm A has 6,5<< shares o stoc$ outstanding at a price o
;-6 a share. 3irm ( has 5,=<< shares o stoc$ outstanding at a price o ;27 a share. #hat is
the *alue per share o 3irm A ater the acquisition,
A. ;-5.26
(. ;-5.71
C. ;-6.<<
D. ;-6.15
). ;-7.<1

72. 3irm A is !eing acquired !y 3irm ( or ;51,<<< %orth o 3irm ( stoc$. "he incremental
;21 a share. 3irm ( has 2,7<< shares o stoc$ outstanding at a price o ;5< a share. #hat is
the actual cost o the acquisition using company stoc$,
A. ;5<,5<=
(. ;52,276
C. ;51,571
D. ;56,76<
). ;6<,6<<

7-. Merchantile )&change is !eing acquired !y .ational 2ales. "he incremental *alue o the
acquisition is ;1,6<<. Merchantile )&change has 1,5<< shares o stoc$ outstanding at a price
o ;16 a share. .ational 2ales has -,5<< shares o stoc$ outstanding at a price o ;51 a share.
#hat is the net present *alue o the acquisition gi*en that the actual cost o the acquisition
using company stoc$ is ;26,76<,
A. ;6
(. ;11
C. ;2<
D. ;-7
). ;16

26-2-
71. Dressler, >nc., is planning on merging %ith #eston 3oods. Dressler %ill pay #eston4s
shareholders the current *alue o its stoc$ in shares o Dressler stoc$. Dressler4s currently has
6,2<< shares o stoc$ outstanding at a mar$et price o ;-< a share. #eston4s has 2,2<< shares
outstanding at a price o ;26 a share. +o% many shares o stoc$ %ill !e outstanding in the
merged irm,
A. 6,61< shares
(. 7,<61 shares
C. 7,2<< shares
D. 6,25- shares
). 6,6<= shares

75. Alpha is planning on merging %ith (eta. Alpha %ill pay (eta4s shareholders the current
*alue o their stoc$ in shares o Alpha. Alpha currently has 1,2<< shares o stoc$ outstanding
at a mar$et price o ;1< a share. (eta has 2,5<< shares outstanding at a price o ;16 a share.
"he ater-merger earnings %ill !e ;6,6<<. #hat %ill the earnings per share !e ater the
merger,
A. ;1.61
(. ;1.65
C. ;1.75
D. ;1.61
). ;1.66

76. 2ue4s (a$ery is planning on merging %ith "ed4s Deli. 2ue4s %ill pay "ed4s shareholders the
current *alue o their stoc$ in shares o 2ue4s (a$ery. 2ue4s currently has 1,5<< shares o stoc$
outstanding at a mar$et price o ;1= a share. "ed4s has 2,1<< shares outstanding at a price o
;2< a share. #hat is the *alue o the merged irm,
A. ;1<6,5<<
(. ;1<7,6<<
C. ;125,1<<
D. ;127,5<<
). ;1-1,6<<

26-21
77. 0eorge4s )quipment is planning on merging %ith .elson Machinery. 0eorge4s %ill pay
.elson4s shareholders the current *alue o their stoc$ in shares o 0eorge4s )quipment.
0eorge4s currently has 1,6<< shares o stoc$ outstanding at a mar$et price o ;-1 a share.
.elson4s has 1,6<< shares outstanding at a price o ;-6 a share. #hat is the *alue per share o
the merged irm,
A. ;-<.77
(. ;-1.<<
C. ;-1.2=
D. ;-1.71
). ;-2.<6

Essay Questions

76. )mpirical e*idence indicates that the returns to shareholders o the target irm *ary
signiicantly rom the returns to the shareholders o the acquiring irm. >dentiy the
shareholders that tend to realiAe the smaller return and pro*ide some possi!le e&planation or
these lo% returns.

7=. >dentiy the three !asic legal procedures that one irm can use to acquire another and
!riely discuss the ad*antages and disad*antages o each.

26-25
6<. Deensi*e merger tactics are designed to th%art un%anted ta$eo*ers and mergers. Do such
acti*ities %or$ to the ad*antage o shareholders all o the time, Are these types o acti*ities
ethical, #ho do you thin$ !eneits the most rom these acti*ities,

61. 3irms can requently create synergy !y merging and sharing complementary resources
%ith another irm. 0i*e t%o e&amples o situations %here this %ould most li$ely occur.


62. 9earl, >nc. has oered ;66< million cash or all o the common stoc$ in 8am Corporation.
(ased on recent mar$et inormation, 8am is %orth ;71< million as an independent operation.
3or the merger to ma$e economic sense or 9earl, %hat %ould the minimum estimated *alue
o the synergistic !eneits rom the merger ha*e to !e,
A. ;<
(. ;75 million
C. ;15< million
D. ;71< million
). ;66< million

26-26
6-. Consider the ollo%ing premerger inormation a!out 3irm H and 3irm I'

Assume that 3irm H acquires 3irm I !y paying cash or all the shares outstanding at a merger
premium o ;- per share. Also assume that neither irm has any de!t !eore or ater the
merger. #hat is the *alue o the total equity o the com!ined irm, HI, i the purchase method
o accounting is used,
A. ;1,271,<<<
(. ;1,-16,<<<
C. ;1,-52,<<<
D. ;1,122,<<<
). ;1,127,<<<

26-27
61. Assume the ollo%ing !alance sheets are stated at !oo$ *alue.

#hat %ill !e the *alue o the equity account on the postmerger !alance sheet assuming that
Meat Co. purchases Loa, >nc. and the pooling o interests method o accounting is used.
A. ;26,7<<
(. ;--,6<<
C. ;-5,6<<
D. ;-6,2<<
). ;16,1<<

26-26

2uppose the air mar$et *alue o Loa4s i&ed assets is ;7,2<< *ersus the ;-,-<< !oo$ *alue
sho%n. Meat pays ;1<,2<< or Loa and raises the needed unds through an issue o long-term
de!t. Assume the purchase method o accounting is used. "he post-merger !alance sheet o
Meat Co. %ill ha*e total de!t o DDDDDD and total equity o DDDDDD.
A. ;1,6<<J ;11,5<<
(. ;1,6<<J ;15,1<<
C. ;1<,2<<J ;15,1<<
D. ;11,5<<J ;11,5<<
). ;11,5<<J ;15,1<<

26-2=
66. 2il*er )nterprises has acquired All 0old Mining in a merger transaction. "he ollo%ing
!alance sheets represent the premerger !oo$ *alues or !oth irms.

Assume the merger is treated as a pooling o interests or accounting purposes. "he total
assets are DDDDD and the total equity is DDDDD on the post-merger !alance sheet.
A. ;21,5<<J ;1<,5<<
(. ;21,5<<J ;16,2<<
C. ;26,-<<J ;1<,5<<
D. ;26,-<<J ;16,6<<
). ;26,-<<J ;16,2<<

26--<

Assume the merger is treated as a purchase or accounting purposes. "he mar$et *alue o All
0old Mining4s i&ed assets is ;-,6<<J the mar$et *alues or current and other assets are the
same as the !oo$ *alues. Assume that 2il*er )nterprises issues ;5,<<< in ne% long-term de!t
to inance the acquisition. "he post-merger !alance sheet %ill relect good%ill o DDDDD and
total equity o DDDDD.
A. ;61<J ;2,7<<
(. ;61<J ;1,61<
C. ;6=<J ;2,7<<
D. ;6=<J ;1,61<
). ;6=<J ;5,5<<

66. 9enn Corp. is analyAing the possi!le acquisition o "eller Company. (oth irms ha*e no
de!t. 9enn !elie*es the acquisition %ill increase its total aterta& annual cash lo%s !y ;-.7
million indeinitely. "he current mar$et *alue o "eller is ;1<- million, and that o 9enn is
;151.7 million. "he appropriate discount rate or the incremental cash lo%s is = percent.
9enn is trying to decide %hether it should oer 11 percent o its stoc$ o ;1-- million in cash
to "eller4s shareholders. "he cost o the cash alternati*e is DDDDD, %hile the cost o the stoc$
alternati*e is DDDDD.
A. ;1<-,<<<,<<<J ;1-<,156,66=
(. ;1<-,<<<,<<<J ;1--,<<<,<<<
C. ;1--,<<<,<<<J ;1<-,<<<,<<<
D. ;1--,<<<,<<<J ;1-<,156,66=
). ;2-6,<<<,<<<J ;1<-,<<<,<<<

26--1
6=. "he shareholders o 8olie Company ha*e *oted in a*or o a !uyout oer rom 9itt
Corporation. >normation a!out each irm is gi*en here'

8olie4s shareholders %ill recei*e one share o 9itt stoc$ or e*ery three shares they hold in
8olie. Assume the .9? o the acquisition is Aero. #hat %ill the post-merger 9) ratio !e or
9itt,
A. 6.1
(. =.2
C. =.6
D. 1<.5
). 11.2

=<. Consider the ollo%ing premerger inormation a!out a !idding irm B3irm (C and a target
irm B3irm "C. Assume that neither irm has any de!t outstanding.

3irm ( has estimated that the *alue o the synergistic !eneits rom acquiring 3irm " is
;2,6<<. #hat is the .9? o the merger assuming that 3irm " is %illing to !e acquired or ;26
per share in cash,
A. ;1<<
(. ;6<<
C. ;1,6<<
D. ;2,2<<
). ;2,6<<

26--2
=1. Consider the ollo%ing premerger inormation a!out 3irm A and 3irm ('

Assume that 3irm A acquires 3irm ( *ia an e&change o stoc$ at a price o ;25 or each share
o (4s stoc$. (oth A and ( ha*e no de!t outstanding. #hat %ill the earnings per share o 3irm
A !e ater the merger,
A. ;1.6<
(. ;1.66
C. ;1.=5
D. ;2.<2
). ;2.1<

26---
Chapter 26 Mergers and Acquisitions Ans%er Key


1. Last month, Keyser Design acquired all o the assets and lia!ilities o "enor Machine
#or$s. "he com!ined irm is $no%n as Keyser Design. "enor Machine #or$s no longer
e&ists as a separate entity. "his acquisition is !est descri!ed as a'
A. merger.
(. consolidation.
C. tender oer.
D. spino.
). di*estiture.
@eer to section 26.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Obecti!e: "#$%
Section: "#&%
'o(ic: )erger

2. "he Cat (o& acquired "he Dog +ouse. As part o this transaction, !oth irms ceased to
e&ist in their prior orm and com!ined to create an all-ne% entity, Animal #orld. #hich one
o the ollo%ing terms !est descri!es this transaction,
A. di*estiture
B. consolidation
C. tender oer
D. spino
). conglomeration

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%
'o(ic: Consolidation

26--1
-. "he Daily .e%s pu!lished an ad today %herein it announced its desire to purchase shares
o a competing ne%spaper, the /il "o%n 0ossip. #hich one o the ollo%ing terms is !est
descri!ed !y this announcement,
A. merger request
(. consolidation
C. tender oer
D. spino
). di*estiture

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%
'o(ic: 'ender offer

1. 2ome 3reight Line )&press shareholders are *ery dissatisied %ith the perormance o the
irm4s current management team. "hese shareholders %ant to gain control o the !oard o
directors so they can ha*e the po%er to oust current management. As a means o gaining
control, these shareholders ha*e select candidates or all o the open positions on the irm4s
!oard o directors. 2ince they ha*e insuicient *otes to guarantee the election o these
indi*iduals, they are contacting other shareholders and as$ing them to *ote %ith them on this
important matter. / course, the current management team is encouraging shareholders to
*ote or their candidates or the !oard. #hich one o the ollo%ing terms is !est illustrated !y
this situation,
A. tender oer
B. pro&y contest
D. le*eraged !uyout
). consolidation

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%
'o(ic: *ro+y contest

26--5
5. A group o indi*idual in*estors is in the process o acquiring all o the pu!licly-traded
shares o /M /utitters. /nce the shares are acquired, they %ill no longer !e pu!licly traded.
#hich o the ollo%ing terms applies to this process,
A. tender oer
(. pro&y contest
D. le*eraged !uyout
). consolidation

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%
'o(ic: ,oing$(ri!ate transaction

6. "he current president and *ice-presidents o Mountain "op Consulting ha*e decided to
orm a pri*ate in*estment group %ith the sole purpose o purchasing Mountain "op
Consulting. "hese indi*iduals ha*e ound a lender %ho %ill lend them 65 percent o the
purchase cost i they pledge their personal assets as collateral or the loan. "he current oicers
agree to this arrangement, !orro% the unds, and purchase Mountain "op Consulting. "he
purchase o this irm is reerred to as a'
A. conglomeration.
(. pro&y contest.
C. merger.
). consolidation.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%
'o(ic: Le!eraged buyout

26--6
7. 8ohnson Manuacturers and 9ea!ody )nterprises are !oth manuacturers o plastic
products, such as plastic plates and sil*er%are. "hese t%o irms ha*e decided to %or$ together
to ind a more eicient %ay to recycle re:ected products so that any re:ected material can !e
reused. "hus, each company is going to assign t%o o its engineers to this pro:ect and ha*e
agreed to share any and all costs incurred in this process. "his pro:ect is an e&ample o a'
A. consolidation.
(. merged alliance.
C. :oint *enture.
D. ta$eo*er pro:ect.
E. strategic alliance.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%
'o(ic: Strategic alliance

6. Diet 2oda and +igh Caeine are t%o irms that compete in the sot drin$ mar$et. "hese
t%o competitors ha*e decided to in*est ;1< million to orm a ne% company, 3ruit "ea, %hich
%ill manuacture la*ored teas. "his ne% irm is deined as a'
A. consolidation.
(. strategic alliance.
C. :oint *enture.
D. merged alliance.
). ta$eo*er pro:ect.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%
'o(ic: -oint !enture

26--7
=. Alliance Chemicals recently acquired 2%enson >ndustries in a transaction that produced a
.9? o ;1.- million. "his .9? is reerred to as'
A. the agency eect.
(. the consolidating *alue.
C. di*ersiication.
D. the consolidation eect.
E. synergy.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Obecti!e: "#$.
Section: "#&/
'o(ic: Synergy

1<. @oger is a ma:or shareholder in @( >ndustrial 2upply. Currently, @oger is quite unhappy
%ith the direction the irm is headed and is rumored to !e considering an attempt to ta$e o*er
the irm !y soliciting the *otes o other shareholders. "o head o this potential attempt, the
!oard o @( >ndustrial 2upply has decided to oer @oger ;-5 a share or all the shares he
o%ns in the irm. "he current mar$et *alue per share is ;-2. "his oer to purchase @oger4s
shares is commonly reerred to as'
A. a golden parachute.
(. standstill payments.
C. greenmail.
D. a poison pill.
). a %hite $night.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&0
'o(ic: ,reenmail

26--6
11. #hich one o the ollo%ing generally has a lip-in pro*ision that signiicantly increases
the cost to a shareholder %ho is attempting to gain control o*er a irm,
A. golden parachute
(. standstill agreement
C. greenmail
D. poison pill
). %hite $night

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&0
'o(ic: *oison (ills

12. Mel*in %as attempting to gain control o #estern #ood 9roducts until he realiAed that the
e&isting shareholders in the irm had the right to purchase additional shares at a !elo%-mar$et
price gi*en his hostile ta$eo*er attempt. "hus, Mel*in decided to orego in*esting in this irm.
#hat term applies to the tactic used !y #estern #ood 9roducts to sta*e o this ta$eo*er
attempt,
A. pac-man deense
(. shar$ repellent plan
C. golden parachute pro*ision
D. greenmail pro*ision
E. share rights plan

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&0
'o(ic: S1are rig1ts (lans

26--=
1-. .ieger Mills engages in arming, truc$ing o arm products, and the milling and retailing
o arm grains. "he irm has decided to sell its arming operations to 8asper 3arms. "his sale
is reerred to as aBnC'
A. liquidation.
B. di*estiture.
C. merger.
D. allocation.
). restructuring.
@eer to section 26.=

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&2
'o(ic: Di!estiture

11. 9rinceton )nterprises is a di*ersiied company. >n addition to its primary !usiness
operations, the irm is also the sole shareholder o a %holly o%ned su!sidiary. As part o its
restructuring plan, 9rinceton has decided to implement an >9/ oering or shares in the
su!sidiary. "his oering is equi*alent to a 25 percent o%nership sta$e in the su!sidiary. #hat
is the distri!ution o these shares called,
A. split-up
B. equity car*e-out
C. countertender oer
D. %hite $night transaction
). loc$up transaction

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&2
'o(ic: 34uity car!e$out

26-1<
15. 3amily "ra*el 9lans is the sole shareholder in its su!sidiary, "ra*eler4s >nsurance Co.
3amily "ra*el 9lans has decided to di*est itsel o its insurance operations and does so !y
distri!uting the shares in the su!sidiary to the shareholders o 3amily "ra*el 9lans. "his
distri!ution o shares is called aBnC'
(. !ear hug.
D. spin-o.
). split-up.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&2
'o(ic: S(in$off

16. (lasco Distri!utors has !ecome a large conglomerate. >ts !oard o directors recently
concluded that the irm has !ecome so large that it has lost its eiciency. "he !oard urther
concluded that the irm could !e !oth more eicient and more proita!le i it %ere di*ided
into three distinct and separate irms. "he !oard presented this suggested to the irm4s
shareholders and those shareholders *oted and agreed to di*ide the irm. Di*iding this irm
into separate entities is reerred to as aBnC'
(. di*estiture.
D. spin-o.
E. split-up.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&2
'o(ic: S(lit$u(

26-11
17. #hich one o the ollo%ing statements correctly applies to a legally deined merger,
A. "he acquiring irm retains its identity and a!sor!s only the assets o the acquired irm.
B. "he acquired irm is completely a!sor!ed and ceases to e&ist as a separate legal entity.
C. A ne% irm is created %hich includes all the assets and lia!ilities o the acquiring irm plus
the assets only o the acquired irm.
D. A ne% irm is created rom the assets and lia!ilities o !oth the acquiring and acquired
irms.
). A merger reclassiies the acquired irm into a ne% entity %hich !ecomes a su!sidiary o the
acquiring irm.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%
'o(ic: )erger

16. #hich o the ollo%ing statements correctly apply to a merger,
>. "he titles to indi*idual assets o the acquired irm must !e transerred into the acquiring
irm4s name.
>>. "he merged irm %ill retain the use o the acquiring company4s name.
>>>. "he acquiring irm does not ha*e to see$ appro*al or the merger rom its shareholders.
>?. "he shareholders o the acquired company must appro*e the merger.
A. > and >>> only
B. >> and >? only
C. >, >>, and >>> only
D. >, >>, and >? only
). >, >>, >>>, and >?

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%
'o(ic: )erger

26-12
1=. >n a merger the'
A. legal status o !oth the acquiring irm and the target irm is terminated.
B. acquiring irm retains its pre-merger legal status.
C. acquiring irm acquires the assets, !ut not the lia!ilities, o the target irm.
D. shareholders o the target irm ha*e little, i any, say as to %hether or not the merger
occurs.
). target irm continues to e&ist !ut %ill !e a %holly o%ned su!sidiary o the acquiring irm.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%
'o(ic: )erger

2<. #hich o the ollo%ing increase the costs associated %ith a merger,
A. changing the title to all the com!ined irm4s assets
(. dis!anding the operations o the target irm
C. hiring an under%riter to distri!ute the >9/ shares
D. issue costs associated %ith %arrants that must !e oered to the shareholders o the
acquiring irm
E. see$ing appro*al o the shareholders o !oth the acquiring and the acquired irm

AACSB: N/A
Bloom's: Com(re1ension
Difficulty: Basic
Section: "#&%
'o(ic: )erger

26-1-
21. Do%n @i*er Mar$ets has decided to acquire a controlling interest in (lue 8ays !y
purchasing shares o stoc$ in the pu!lic mar$ets. #hich o the ollo%ing statements correctly
apply to this acquisition,
>. "he purchase o pu!licly-traded shares may !e more e&pensi*e than an outright merger %ith
(lue 8ays %ould ha*e !een.
>>. Do%n @i*er Mar$ets can a*oid dealing %ith the !oard o directors o (lue 8ays !y
purchasing shares in this manner.
>>>. > Do%n @i*er Mar$ets is successul in acquiring at least 6< percent o the outstanding
shares o (lue 8ays, the remaining shareholders in (lue 8ays %ill !e orced to also sell their
shares to Do%n @i*er Mar$ets.
>?. #hether or not Do%n @i*er Mar$ets gains control o (lue 8ays depends upon the
%illingness o (lue 8ays shareholders to sell their shares.
A. > and >>> only
(. >> and >? only
C. >, >>, and >? only
D. >, >>, and >>> only
). >, >>, >>>, and >?

AACSB: N/A
Difficulty: Basic
Section: "#&%
'o(ic: Stoc5 ac4uisition

22. (ilt%ell +otels is acquiring all o the assets o 0reen @oo >nns. As a result, 0reen @oo
>nns'
A. %ill !ecome a ully o%ned su!sidiary o (ilt%ell +otels.
B. %ill remain as a shell corporation unless the shareholders opt to dissol*e it.
C. %ill !e ully merged into (ilt%ell +otels and %ill no longer e&ist as a separate entity.
D. and (ilt%ell +otels %ill !oth cease to e&ist and a ne% irm %ill !e ormed.
). %ill automatically !e dissol*ed.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%
'o(ic: Asset ac4uisition

26-11
2-. An auto ma$er recently acquired a %indshield manuacturer. #hich type o an acquisition
%as this,
A. horiAontal
(. longitudinal
C. conglomerate
D. *ertical
). indirect

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%
'o(ic: 6ertical ac4uisition

21. > 0eneral )lectric, a highly di*ersiied company, %ere to acquire /cean 3reight Limited,
the acquisition %ould !e classiied as a DDDDD acquisition.
A. horiAontal
(. longitudinal
C. conglomerate
D. *ertical
). integrated

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%
'o(ic: Conglomerate ac4uisition

26-15
25. > 9aul4s +ard%are %ere to acquire 2u!ur!an +ard%are, the acquisition %ould !e
classiied as a DDDDD acquisition.
A. horiAontal
(. longitudinal
C. conglomerate
D. *ertical
). integrated

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%
'o(ic: 7ori8ontal ac4uisition

26. #hich o the ollo%ing is a orm o a ta$eo*er,
>. tender oer
>>. merger
>>>. pro&y contest
>?. going pri*ate transaction
A. > and >> only
(. >>> and >? only
C. >>, >>>, and >? only
D. >, >>, and >>> only
E. >, >>, >>>, and >?

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%
'o(ic: 'a5eo!ers

26-16
27. 3irms A and ( ormally agree to each put up ;25 million to create irm C. 3irm C %ill
perorm en*ironmental testing on the products produced !y !oth 3irm A and 3irm (. #hich
one o the ollo%ing terms descri!es 3irm C,
A. :oint *enture
(. going-pri*ate transaction
C. conglomerate
D. su!sidiary
). le*eraged !uyout

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%
'o(ic: -oint !enture

26. Di&ie and ten o her %ealthy riends ormed a group and !orro%ed the unds necessary to
acquire 1<< percent o the outstanding shares o 2outhern 3ried Chic$en. "his transaction is
$no%n as a'
A. pro&y contest.
(. management !uyout.
C. *ertical acquisition.
). unriendly ta$eo*er.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%
'o(ic: Le!eraged buyout

26-17
2=. >n a ta&-ree acquisition, the shareholders o the target irm'
A. recei*e income %hich is considered to !e ta&-e&empt.
(. git their shares to a ta&-e&empt organiAation and thereore ha*e no ta&a!le gain.
C. are *ie%ed as ha*ing e&changed shares on a dollar-or-dollar !asis.
D. sell their shares to a qualiying entity there!y a*oiding !oth income and capital gains ta&es.
). sell their shares at cost there!y a*oiding the capital gains ta&.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&"
'o(ic: 'a+es and ac4uisitions

-<. #hich o the ollo%ing are required or an acquisition to !e considered ta&-ree,
>. continuity o equity interest
>>. a !usiness purpose, other than a*oiding ta&es, or the acquisition
>>>. payment in the orm o equity shares or the acquired irm
>?. cash payment or the equity o the acquired irm
A. > and >> only
(. >> and >>> only
C. >> and >? only
D. >, >>, and >>> only
). >, >>, and >? only

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&"

26-16
-1. #hich one o the ollo%ing statements is correct,
A. "he shareholders o an acquired irm are generally gi*en a choice o accepting either cash
or shares o stoc$ %hen the acquisition is ta&-ree.
(. "o !e a ta&-ree acquisition, the shareholders o an acquired irm must recei*e shares in the
acquiring irm that are equal to =5 percent or less o the *alue o the shares held in the
acquired irm.
C. "he assets o an acquired irm are recorded on the !oo$s o the acquiring irm at their
current !oo$ *alue regardless o the ta& status o the acquisition.
D. "arget irm shareholders demand a higher selling price %hen an acquisition is a non-
ta&a!le e*ent.
E. > the assets o a irm are %ritten up as part o the acquisition process, the increase in *alue
is considered to !e a ta&a!le gain.

AACSB: N/A
Difficulty: Basic
Section: "#&"

-2. "he purchase accounting method requires that'
A. the e&cess o the purchase price o*er the air mar$et *alue o the target irm !e recorded as
a one-time e&pense on the income statement o the acquiring irm.
(. good%ill !e amortiAed on a yearly !asis or inancial statement purposes.
C. the equity o the acquiring irm !e reduced !y the e&cess o the purchase price o*er the air
mar$et *alue o the target irm.
D. the assets o the target irm !e recorded at their air mar$et *alue on the !alance sheet o
the acquiring irm.
). the e&cess amount paid or the target irm !e recorded as a tangi!le asset on the !oo$s o
the acquiring irm.
@eer to section 26.-

AACSB: N/A
Difficulty: Basic
Learning Obecti!e: "#$"
Section: "#&.
'o(ic: *urc1ase accounting met1od

26-1=
--. 3or inancial statement purposes, good%ill created !y an acquisition'
A. must !e amortiAed on a straight-line !asis o*er 1< years.
B. must !e re*ie%ed each year and amortiAed to the e&tent that it has lost *alue.
C. is e&pensed e*enly o*er a 2<-year period.
D. ne*er aects the proits o the acquiring irm.
). is recorded in an amount equal to the air mar$et *alue o the assets o the target irm.

AACSB: N/A
Difficulty: Basic
Section: "#&.
'o(ic: *urc1ase accounting met1od

-1. "he pooling o interests method o accounting'
>. creates an account called good%ill %hich is recorded on the !alance sheet o the merged
irm.
>>. consists o simply com!ining the !alance sheets o the acquiring and the target irm.
>>>. is currently the accounting method required !y 3A2( or all cash acquisitions.
>?. recogniAes the e&cess o the purchase price o*er the air mar$et *alue and records that
e&cess as an asset o the acquiring irm.
A. > only
B. >> only
C. > and >? only
D. >> and >>> only
). >, >>, and >? only

AACSB: N/A
Difficulty: Basic
Section: "#&.
'o(ic: *ooling of interests

26-5<
-5. "he incremental cash lo%s o a merger can relate to changes in %hich o the ollo%ing,
>. re*enue
>>. capital requirements
>>>. operating costs
>?. income ta&es
A. > and >> only
(. >>, >>>, and >? only
C. >, >>>, and >? only
D. >, >>, and >>> only
E. >, >>, >>>, and >?

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&/
'o(ic: 9ncremental cas1 flows

-6. #hich o the ollo%ing are e&amples o cost reductions that can result rom an
acquisition,
>. allocating i&ed o*erhead across a %ider range o products
>>. lo%ering oice payroll costs !y com!ining :o! unctions
>>>. !eneiting rom economies o scale %hen purchasing ra% materials
>?. reducing the num!er o management personnel required
A. > and >>> only
(. >> and >? only
C. >, >>, and >? only
D. >>, >>>, and >? only
E. >, >>, >>>, and >?

AACSB: N/A
Difficulty: Basic
Section: "#&/
'o(ic: Cost reductions

26-51
-7. A potential merger %hich produces synergy'
A. should !e re:ected due to the pro:ected negati*e cash lo%s.
(. should !e re:ected !ecause the synergy %ill dilute the !eneits o the merger.
C. has a net present *alue o Aero.
D. creates *alue and thereore should !e pursued.
). reduces the anticipated net income rom the target irm.

AACSB: N/A
Difficulty: Basic
Section: "#&/
'o(ic: Synergy

-6. A proposed acquisition may create synergy !y'
>. increasing the mar$et po%er o the com!ined irm.
>>. impro*ing the distri!ution net%or$ o the acquiring irm.
>>>. pro*iding the com!ined irm %ith a strategic ad*antage.
>?. reducing the utiliAation o the acquiring irm4s assets.
A. > and >>> only
(. >> and >>> only
C. > and >? only
D. >, >>, and >>> only
). >, >>, >>>, and >?

AACSB: N/A
Difficulty: Basic
Section: "#&/
'o(ic: Synergy

26-52
-=. #hich o the ollo%ing represent potential ta& !eneits that can directly result rom an
acquisition,
>. an increase in depreciation e&pense
>>. an increase in surplus unds
>>>. the use o net operating losses
>?. an increased use o le*erage
A. > and >? only
(. >> and >>> only
C. >, >>>, and >? only
D. >>, >>>, and >? only
). >, >>, >>>, and >?

AACSB: N/A
Bloom's: Analysis
Difficulty: 9ntermediate
Section: "#&/
'o(ic: Ac4uisition gains

1<. #hen e*aluating an acquisition you should'
A. concentrate on !oo$ *alues and ignore mar$et *alues.
(. ocus on the total cash lo%s o the merged irm.
C. apply the rate o return that is rele*ant to the incremental cash lo%s.
D. ignore any one-time acquisition ees or transaction costs.
). ignore any potential changes in management.

AACSB: N/A
Difficulty: Basic
Section: "#&/
'o(ic: Ac4uisition considerations

26-5-
11. #hich one o the ollo%ing !est deines synergy gi*en the ollo%ing,
?A E ?alue o irm A
?( E ?alue o irm (
?A( E ?alue o merged irm A(
A. B?A F ?(C - ?A(
(. ?A( - B?A F ?(C
C. greater o < or B?A F ?(C - ?A(
D. greater o < or ?A( - B?A F ?(C
). greater o < or ?A(

AACSB: N/A
Difficulty: Basic
Section: "#&/
'o(ic: 'a+ gains

A. 3irms %ith large net operating losses tend to !e acquiring irms rather than target irms.
(. "he le*erage associated %ith an acquisition increases the ta& lia!ility o the acquiring irm.
C. > either an increase or a decrease in the le*el o production causes the a*erage cost per
unit to increase then the irm is currently operating at its optimal production le*el.
D. 3irms can al%ays !eneit rom economies o scale i they increase the siAe o their irm
through acquisitions.
). > a irm uses it surplus cash to acquire another irm then the shareholders o the acquiring
irm immediately incur a ta& lia!ility related to the transaction.

AACSB: N/A
Section: "#&/
'o(ic: Ac4uisition effects

26-51
1-. #hich one o the ollo%ing pairs o !usinesses could pro!a!ly !eneit the most !y sharing
complementary resources,
A. rooer and architect
(. tennis court and pharmacy
C. s$i resort and gol course
D. dry cleaner and maid ser*ice
). truc$ing company and la%n ser*ice

AACSB: N/A
Difficulty: Basic
Section: "#&/
'o(ic: Com(lementary resources

11. Assume the shareholders o a target irm !eneit rom !eing acquired in a stoc$
transaction. 0i*en this, these shareholders are most apt to realiAe the largest !eneit i the'
A. acquiring irm has the !etter management team and replaces the target irm4s managers.
(. management o the target irm is more eicient than the management o the acquiring irm
%hich replaces them.
C. management o !oth the acquiring irm and the target irm are as equi*alent as possi!le.
D. current management team o the target irm is $ept in place e*en though the managers o
the acquiring irm are more suited to manage the target irm4s situation.
). current management team o the target irm is technologically $no%ledgea!le !ut yet
ineecti*e.

AACSB: N/A
Difficulty: Basic
Section: "#&/
'o(ic: 9nefficient management

26-55
15. #hich o the ollo%ing represent potential gains rom an acquisition,
>. increased use o de!t
>>. lo%er costs per unit produced
>>>. strategic !eachhead
>?. diseconomies o scale
A. >> and >>> only
(. > and >? only
C. >, >>, and >>> only
D. >, >>>, and >? only
). >, >>, >>>, and >?

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&/
'o(ic: Ac4uisition gains

16. "he *alue o a target irm to the acquiring irm is equal to'
A. the *alue o the target irm as a separate entity plus the incremental *alue deri*ed rom the
acquisition.
(. the purchase cost o the target irm.
C. the *alue o the merged irm minus the *alue o the target irm as a separate entity.
D. the purchase cost plus the incremental *alue deri*ed rom the acquisition.
). the incremental *alue deri*ed rom the acquisition.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&/
'o(ic: Cost of an ac4uisition

26-56
17. > an acquisition does not create *alue and the mar$et is smart, then the'
A. earnings per share o the acquiring irm must !e the same !oth !eore and ater the
acquisition.
B. earnings per share can change !ut the stoc$ price o the acquiring irm should remain
constant.
C. price per share o the acquiring irm should increase !ecause o the gro%th o the irm.
D. earnings per share %ill most li$ely increase %hile the price-earnings ratio remains constant.
). price-earnings ratio should remain constant regardless o any changes in the earnings per
share.

AACSB: N/A
Bloom's: Analysis
Section: "#&:
'o(ic: Ac4uisitions and earnings (er s1are

16. An acquisition completed simply to di*ersiy a irm %ill'
A. create e&cessi*e synergy in almost all situations.
(. lo%er systematic ris$ and increase the *alue o the irm.
C. !eneit the irm !y eliminating unsystematic ris$.
D. !eneit the shareholders !y pro*iding other%ise uno!taina!le di*ersiication.
E. generally not add any *alue to the irm.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&:
'o(ic: Di!ersification

26-57
1=. #hich one o the ollo%ing statements is correct,
A. An increase in the earnings per share as a result o an acquisition %ill increase the price per
share o the acquiring irm.
(. "he price-earnings ratio %ill remain constant as a result o an acquisition %hich ails to
create *alue.
C. > irm A acquires irm ( then the num!er o shares in A( %ill equal the num!er o shares
o A plus the num!er o shares o (.
D. > no *alue is created %hen irm A acquires irm (, then the total *alue o A( %ill equal
the *alue o A plus the *alue o (.
). Di*ersiication is one o the greatest !eneits deri*ed rom an acquisition.

AACSB: N/A
Bloom's: Analysis
Section: "#&:
'o(ic: 3ffects of ac4uisitions

5<. "he primary purpose o a lip-in pro*ision is to'
A. increase the num!er o shares outstanding %hile also increasing the *alue per share.
B. dilute a corporate raider4s o%nership position.
C. reduce the mar$et *alue o each share o stoc$.
D. gi*e the e&isting corporate directors the sole right to remo*e a poison pill.
). pro*ide additional compensation to any senior manager %ho loses his or her :o! as a result
o a corporate ta$eo*er.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&0
'o(ic: Defensi!e tactics

26-56
51. > a irm sells its cro%n :e%els %hen threatened %ith a ta$eo*er attempt, the irm is
employing a strategy commonly reerred to as a DDDDD strategy.
A. scorched earth
(. shar$ repellent
C. !ear hug
D. %hite $night
). loc$up

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&0

52. #hich one o the ollo%ing deensi*e tactics is designed to pre*ent a Gt%o-tierG ta$eo*er
oer,
A. !ear hug
(. poison put
C. shar$ repellent
D. dual class capitaliAation
E. air price pro*ision

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&0

26-5=
5-. #hich o the ollo%ing ha*e !een suggested as reasons %hy the stoc$holders in acquiring
irms may not !eneit to any signiicant degree rom an acquisition,
>. the price paid or the target irm might equal the target irm4s total *alue
>>. management may ha*e priorities other than the interest o the stoc$holders
>>>. the ta$eo*er mar$et may not !e competiti*e
>?. anticipated merger gains may not !e ully achie*ed
A. > and >>> only
(. >> and >? only
C. >, >>>, and >? only
D. >, >>, and >? only
). >, >>, >>>, and >?

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&;
'o(ic: Ac4uisition effects on stoc51olders

51. #hich o the ollo%ing are reasons %hy a irm may %ant to di*est itsel o some o its
assets,
>. to raise cash
>>. to unload unproita!le operations
>>>. to impro*e the strategic it o a irm4s *arious di*isions
>?. to comply %ith antitrust regulations
A. > and >> only
(. >, >>, and >>> only
C. >, >>>, and >? only
D. >>, >>>, and >? only
E. >, >>, >>>, and >?

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&2
'o(ic: Di!estitures and restructurings

26-6<
A. A spin-o requently ollo%s an equity car*e-out.
(. A split-up requently ollo%s a spin-o.
C. An equity car*e-out is a speciic type o acquisition.
D. A spin-o in*ol*es an initial pu!lic oering.
). A di*estiture means that the original irm ceases to e&ist.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&2
'o(ic: Di!estitures and restructurings

56. .elson4s >nteriors has ;2.1- million in net %or$ing capital. "he irm has i&ed assets %ith
a !oo$ *alue o ;2-.2- million and a mar$et *alue o ;26.16 million. "he irm has no long-
term de!t. "he +ome Centre is !uying .elson4s >nteriors or ;2=.5 million in cash. "he
acquisition %ill !e recorded using the purchase accounting method. #hat is the amount o
good%ill that "he +ome Centre %ill record on its !alance sheet as a result o this acquisition,
A. ;1.21 million
(. ;-.-1 million
C. ;-.66 million
D. ;1.11 million
). ;6.27 million
0ood%ill E ;2=.5m - ;2.1-m - ;26.16m E ;1.21m

AACSB: Analytic
Bloom's: A((lication
Difficulty: Basic
Section: "#&.
'o(ic: ,oodwill

26-61
57. "royer Mar$ets and De!4s 0rocery are all-equity irms. "royer Mar$ets has 2,1<< shares
outstanding at a mar$et price o ;11.6< a share. De!4s 0rocery has -,2<< shares outstanding at
a price o ;26 a share. De!4s 0rocery is acquiring "royer Mar$ets or ;-7,5<< in cash. #hat is
the merger premium per share,
A. ;<
B. ;<.625
C. ;1.1<6
D. ;1.216
). ;1.-2<
Merger premium per share E B;-7,5<<K2,1<<C - ;11.6< E ;<.625

AACSB: Analytic
Difficulty: Basic
Section: "#&.
'o(ic: )erger (remium

56. "he Cycle 2top has 1,5<< shares outstanding at a mar$et price per share o ;6.16. Kate4s
#heels has 1,75< shares outstanding at a mar$et price o ;1- a share. .either irm has any
de!t. Kate4s #heels is acquiring "he Cycle 2top or ;15,<<< in cash. #hat is the merger
premium per share,
A. ;1.27
(. ;1.16
C. ;1.52
D. ;1.1-
). ;1.52
Merger premium per share E B;15,<<<K1,5<<C - ;6.16 E ;1.52

AACSB: Analytic
Difficulty: Basic
Section: "#&.
'o(ic: )erger (remium

26-62
5=. @osie4s has 1,6<< shares outstanding at a mar$et price per share o ;2-.5<. 2andy4s has
2,5<< shares outstanding at a mar$et price o ;21 a share. .either irm has any de!t. 2andy4s
is acquiring @osie4s. "he incremental *alue o the acquisition is ;1,2<<. #hat is the *alue o
@osie4s to 2andy4s,
A. ;11,1<<
(. ;11,=<<
C. ;12,-<<
D. ;12,7<<
E. ;1-,5<<
?alue o @osie4s to 2andy4s E B1,6<< ;2-.5<C F ;1,2<< E ;1-,5<<

AACSB: Analytic
Difficulty: Basic
Section: "#&/
'o(ic: 6alue of firm B to firm A

6<. "he "o%n Crier and "he .e%s )&press are all-equity irms. "he "o%n Crier has 11,5<<
shares outstanding at a mar$et price o ;26 a share. "he .e%s )&press has 15,<<< shares
outstanding at a price o ;-1 a share. "he .e%s )&press is acquiring "he "o%n Crier. "he
incremental *alue o the acquisition is ;-,6<<. #hat is the *alue o "he "o%n Crier to "he
.e%s )&press,
A. ;57,5<<
(. ;75,<<<
C. ;67,<<<
D. ;2==,<<<
E. ;-<2,6<<
?alue o "he "o%n Crier to "he .e%s )&press E B11,5<< ;26C F ;-,6<< E ;-<2,6<<

AACSB: Analytic
Difficulty: Basic
Section: "#&/
'o(ic: 6alue of firm B to firm A

26-6-
61. "he 3loral 2hoppe and Maggie4s 3lo%ers are all-equity irms. "he 3loral 2hoppe has
2,5<< shares outstanding at a mar$et price o ;16.5< a share. Maggie4s 3lo%ers has 5,<<<
shares outstanding at a price o ;17 a share. Maggie4s 3lo%ers is acquiring "he 3loral 2hoppe
or ;12,=<< in cash. "he incremental *alue o the acquisition is ;1,2<<. #hat is the net
present *alue o acquiring "he 3loral 2hoppe to Maggie4s 3lo%ers,
A. -;15<
(. ;275
C. ;5<<
D. ;2,1<<
). ;-,7<<
.9? E B2,5<< ;16.5<C F ;1,2<< - ;12,=<< E -;15<

AACSB: Analytic
Difficulty: Basic
Section: "#&#
'o(ic: Cas1 ac4uisition

62. "aylor4s +ard%are is acquiring "he Corner 2tore or ;2<,<<< in cash. "aylor4s has 1,5<<
shares o stoc$ outstanding at a mar$et *alue o ;16 a share. "he Corner 2tore has 2,2<<
shares o stoc$ outstanding at a mar$et price o ;6 a share. .either irm has any de!t. "he
incremental *alue o the acquisition is ;-,5<<. #hat is the *alue o "aylor4s +ard%are ater
the acquisition,
A. ;1=,<<<
(. ;5<,-<<
C. ;67,-<<
D. ;7<,1<<
). ;72,1<<
9ost-acquisition *alue o "aylor4s E B1,5<< ;16C F B2,2<< ;6C F ;-,5<< - ;2<,<<< E
;7<,1<<

AACSB: Analytic
Difficulty: Basic
Section: "#&#

26-61
6-. 3irm A is acquiring 3irm ( or ;75,<<< in cash. 3irm A has 1,5<< shares o stoc$
outstanding at a mar$et *alue o ;27 a share. 3irm ( has 2,5<< shares o stoc$ outstanding at
a mar$et price o ;2= a share. .either irm has any de!t. "he incremental *alue o the
acquisition is ;2,2<<. #hat is the price per share o 3irm A4s stoc$ ater the acquisition,
A. ;25.=6
(. ;26.15
C. ;26.=-
D. ;27.<<
). ;27.--
9rice per share o A E LB1,5<< ;27C F B2,5<< ;2=C F ;2,2<< - ;75,<<<MK1,5<< E ;26.=-

AACSB: Analytic
Difficulty: Basic
Section: "#&#

61. "he 2%eet 2hoppe and Candy Land are all-equity irms. "he 2%eet 2hoppe has 5<<
shares outstanding at a mar$et price o ;=6 a share. Candy Land has 2,5<< shares outstanding
at a price o ;21 a share. "he 2%eet 2hoppe is acquiring Candy Land or ;62,<<< in cash. "he
incremental *alue o the acquisition is ;-,6<<. #hat is the net present *alue o acquiring
Candy Land to "he 2%eet 2hoppe,
A. ;1,1<<
B. ;1,6<<
C. ;2,7<<
D. ;1,2<<
). ;5,7<<
.9? E B2,5<< ;21C F ;-,6<< - ;62,<<< E ;1,6<<

AACSB: Analytic
Difficulty: Basic
Section: "#&#

26-65
65. 2leep "ight is acquiring @estul >nns or ;52,5<< in cash. 2leep "ight has -,<<< shares o
stoc$ outstanding at a mar$et price o ;-6 a share. @estul >nns has 2,1<< shares o stoc$
outstanding at a mar$et price o ;21 a share. .either irm has any de!t. "he incremental *alue
o the acquisition is ;1,7<<. #hat is the price per share o 2leep "ight ater the acquisition,
A. ;-6.=2
(. ;-7.-<
C. ;-7.67
D. ;-=.1=
). ;-=.2=
9rice per share E LB-,<<< ;-6C F B2,1<< ;21C F ;1,7<< - ;52,5<<MK-,<<< E ;-7.67

AACSB: Analytic
Difficulty: Basic
Section: "#&#

66. /utdoor Li*ing has agreed to !e acquired !y .e% Ad*entures or ;16,<<< %orth o .e%
Ad*entures stoc$. .e% Ad*entures currently has 6,<<< shares o stoc$ outstanding at a price
o ;-2 a share. /utdoor Li*ing has 1,5<< shares outstanding at a price o ;1- a share. "he
incremental *alue o the acquisition is ;21,<<<. #hat is the *alue o the merged irm,
A. ;65,5<<
(. ;256,<<<
C. ;277,<<<
D. ;-2<,5<<
E. ;-11,5<<
?alue o merged irm E B6,<<< ;-2C F B1,5<< ;1-C F ;21,<<< E ;-11,5<<

AACSB: Analytic
Difficulty: Basic
Section: "#&#

26-66
67. Moore >ndustries has agreed to !e acquired !y 2cott )nterprises or ;22,<<< %orth o
2cott )nterprises stoc$. 2cott )nterprises currently has 7,5<< shares o stoc$ outstanding at a
price o ;26 a share. Moore >ndustries has 1,6<< shares outstanding at a price o ;12 a share.
"he incremental *alue o the acquisition is ;1,1<<. #hat is the *alue per share o 2cott
)nterprises stoc$ ater the acquisition,
A. ;27.52
(. ;27.=6
C. ;26.<6
D. ;26.17
). ;-1.<-
?alue per share E LB7,5<< ;26C F B1,6<< ;12C F ;1,1<<MKL7,5<< F B;22,<<<K26CM E ;26.<6

AACSB: Analytic
Difficulty: Basic
Section: "#&#

66. Aard*ar$ )nterprises has agreed to !e acquired !y La%son 9roducts in e&change or
;-<,<<< %orth o La%son 9roducts stoc$. La%son has -,<<< shares o stoc$ outstanding at a
price o ;26 a share. Aard*ar$ has 1,2<< shares outstanding %ith a mar$et *alue o ;2- a
share. "he incremental *alue o the acquisition is ;1,1<<. #hat is the *alue o La%son
9roducts ater the merger,
A. ;7=,1<<
(. ;6-,<<<
C. ;111,6<<
D. ;11-,<<<
). ;11-,<<<
?alue ater merger E B-,<<< ;26C F B1,2<< ;2-C F ;1,1<< E ;11-,<<<

AACSB: Analytic
Difficulty: Basic
Section: "#&#

26-67
6=. +ano*er "ires is !eing acquired !y (etter "ires or ;6=,<<< %orth o (etter "ires stoc$.
+ano*er "ires has 2,5<< shares o stoc$ outstanding at a price o ;-6 a share. (etter "ires has
6,<<< shares outstanding %ith a mar$et *alue o ;2- a share. "he incremental *alue o the
acquisition is ;1,2<<. +o% many ne% shares o stoc$ %ill !e issued to complete this
acquisition,
A. 2,172 shares
(. -,<16 shares
C. -,1-- shares
D. -,67< shares
). -,=67 shares
.um!er o shares issued E ;6=,<<<K;2- E -,67< shares

AACSB: Analytic
Difficulty: Basic
Section: "#&#

7<. 0lendale Marine is !eing acquired !y >nland Motors or ;5-,<<< %orth o >nland Motors
stoc$. >nland Motors has 6,2<< shares o stoc$ outstanding at a price o ;51 a share. 0lendale
Marine has 1,7<< shares outstanding %ith a mar$et *alue o ;-< a share. "he incremental
*alue o the acquisition is ;2,6<<. #hat is the total num!er o shares in the ne% irm,
A. 6,2<< shares
B. 7,161 shares
C. 7,22= shares
D. 7,652 shares
). 7,=<< shares
"otal num!er o shares E 6,2<< F B;5-,<<<K;51C E 7,161 shares

AACSB: Analytic
Difficulty: Basic
Section: "#&#

26-66
71. 3irm ( is !eing acquired !y 3irm A or ;162,<<< %orth o 3irm A stoc$. "he incremental
;-6 a share. 3irm ( has 5,=<< shares o stoc$ outstanding at a price o ;27 a share. #hat is
the *alue per share o 3irm A ater the acquisition,
A. ;-5.26
(. ;-5.71
C. ;-6.<<
D. ;-6.15
). ;-7.<1
?alue per share E LB6,5<< ;-6C F B5,=<< ;27C F ;1,6<<MKL6,5<< F B;162,<<<K;-6CM E
;-6.15

AACSB: Analytic
Difficulty: Basic
Section: "#&#

72. 3irm A is !eing acquired !y 3irm ( or ;51,<<< %orth o 3irm ( stoc$. "he incremental
;21 a share. 3irm ( has 2,7<< shares o stoc$ outstanding at a price o ;5< a share. #hat is
the actual cost o the acquisition using company stoc$,
A. ;5<,5<=
(. ;52,276
C. ;51,571
D. ;56,76<
). ;6<,6<<
.um!er o shares issued E ;51,<<<K;5< E 1,<6< shares
?alue per share ater merger E LB2,1<< ;21C F B2,7<< ;5<C F ;5,6<<MKL2,7<< F 1,<6<M E
;5<.52=1
Actual cost o acquisition E 1,<6< ;5<.52=1 E ;51,571

AACSB: Analytic
Bloom's: Analysis
Section: "#&#

26-6=
7-. Merchantile )&change is !eing acquired !y .ational 2ales. "he incremental *alue o the
acquisition is ;1,6<<. Merchantile )&change has 1,5<< shares o stoc$ outstanding at a price
o ;16 a share. .ational 2ales has -,5<< shares o stoc$ outstanding at a price o ;51 a share.
#hat is the net present *alue o the acquisition gi*en that the actual cost o the acquisition
using company stoc$ is ;26,76<,
A. ;6
(. ;11
C. ;2<
D. ;-7
). ;16
.et present *alue E LB1, 5<< ;16C F ;1,6<<M - ;26,76< E ;2<

AACSB: Analytic
Difficulty: Basic
Section: "#&#

71. Dressler, >nc., is planning on merging %ith #eston 3oods. Dressler %ill pay #eston4s
shareholders the current *alue o its stoc$ in shares o Dressler stoc$. Dressler4s currently has
6,2<< shares o stoc$ outstanding at a mar$et price o ;-< a share. #eston4s has 2,2<< shares
outstanding at a price o ;26 a share. +o% many shares o stoc$ %ill !e outstanding in the
merged irm,
A. 6,61< shares
(. 7,<61 shares
C. 7,2<< shares
D. 6,25- shares
). 6,6<= shares
.um!er o shares E 6,2<< F LB2,2<< ;26CK;-<M E 6,25- shares

AACSB: Analytic
Difficulty: Basic
Section: "#&:
'o(ic: 3arnings and !aluation

26-7<
75. Alpha is planning on merging %ith (eta. Alpha %ill pay (eta4s shareholders the current
*alue o their stoc$ in shares o Alpha. Alpha currently has 1,2<< shares o stoc$ outstanding
at a mar$et price o ;1< a share. (eta has 2,5<< shares outstanding at a price o ;16 a share.
"he ater-merger earnings %ill !e ;6,6<<. #hat %ill the earnings per share !e ater the
merger,
A. ;1.61
B. ;1.65
C. ;1.75
D. ;1.61
). ;1.66
.um!er o shares E 1,2<< F LB2,5<< ;16CK;1<M E 5,-25
)arnings per share E ;6,6<<K5,-25 E ;1.65

AACSB: Analytic
Bloom's: Analysis
Section: "#&:

76. 2ue4s (a$ery is planning on merging %ith "ed4s Deli. 2ue4s %ill pay "ed4s shareholders the
current *alue o their stoc$ in shares o 2ue4s (a$ery. 2ue4s currently has 1,5<< shares o stoc$
outstanding at a mar$et price o ;1= a share. "ed4s has 2,1<< shares outstanding at a price o
;2< a share. #hat is the *alue o the merged irm,
A. ;1<6,5<<
(. ;1<7,6<<
C. ;125,1<<
D. ;127,5<<
). ;1-1,6<<
?alue o merged irm E B1,5<< ;1=C F B2,1<< ;2<C E ;127,5<<

AACSB: Analytic
Difficulty: Basic
Section: "#&:

26-71
77. 0eorge4s )quipment is planning on merging %ith .elson Machinery. 0eorge4s %ill pay
.elson4s shareholders the current *alue o their stoc$ in shares o 0eorge4s )quipment.
0eorge4s currently has 1,6<< shares o stoc$ outstanding at a mar$et price o ;-1 a share.
.elson4s has 1,6<< shares outstanding at a price o ;-6 a share. #hat is the *alue per share o
the merged irm,
A. ;-<.77
B. ;-1.<<
C. ;-1.2=
D. ;-1.71
). ;-2.<6
?alue per share E LB1,6<< ;-1C F B1,6<< ;-6CMKNL1,6<< F B1,6<< ;-6CMK;-1O E ;-1

AACSB: Analytic
Bloom's: Analysis
Section: "#&:

Essay Questions

76. )mpirical e*idence indicates that the returns to shareholders o the target irm *ary
signiicantly rom the returns to the shareholders o the acquiring irm. >dentiy the
shareholders that tend to realiAe the smaller return and pro*ide some possi!le e&planation or
these lo% returns.
"he empirical e*idence strongly indicates that the shareholders o the target irm realiAe large
%ealth gains as a result o a ta$eo*er !id !ut the shareholders in the acquiring irm gain little,
i anything. #hile a deiniti*e ans%er is elusi*e, the ollo%ing ha*e !een oered as possi!le
e&planations or these lo% returns to acquiring shareholders' siAe dierentials, competition in
the ta$eo*er mar$et, lac$ o achie*ing merger gains, management goals other than the !est
interests o the shareholders, and early announcements o corporate acquisition intent.
3eed!ac$' @eer to section 26.6

AACSB: <eflecti!e t1in5ing
Difficulty: Basic
Section: "#&;
'o(ic: )erger gains

26-72
7=. >dentiy the three !asic legal procedures that one irm can use to acquire another and
!riely discuss the ad*antages and disad*antages o each.
"he three orms are merger, acquisition o stoc$, and acquisition o assets. A merger has the
ad*antage that it is legally simple and thereore lo% cost !ut it has the disad*antage that it
must !e appro*ed !y the shareholders o !oth irms. Acquisition !y stoc$ requires no
shareholder meetings and management o the target irm can !e !ypassed. +o%e*er, it can !e
a costly orm o acquisition and minority shareholders may hold out, there!y raising the cost
o the purchase. An acquisition o assets requires the *ote o the target irm4s shareholders.
+o%e*er, it can !ecome quite costly to transer title to all o the assets.

Bloom's: Analysis
Section: "#&%
'o(ic: =orms of ac4uisitions

6<. Deensi*e merger tactics are designed to th%art un%anted ta$eo*ers and mergers. Do such
acti*ities %or$ to the ad*antage o shareholders all o the time, Are these types o acti*ities
ethical, #ho do you thin$ !eneits the most rom these acti*ities,
0ood students %ill recogniAe that deensi*e tactics GinsulateG e&isting management rom the
*agaries o the mar$etplace and may allo% ineecti*e management to remain in charge.
/!*iously, deensi*e maneu*ers do not al%ays act in the !est interest o shareholders. 2ome
students %ill argue that management !eneits most rom these acti*ities. "he ethics de!ate
a!out these issues is al%ays an interesting one.

Bloom's: Analysis
Section: "#&0
'o(ic: *oison (ills

26-7-
61. 3irms can requently create synergy !y merging and sharing complementary resources
%ith another irm. 0i*e t%o e&amples o situations %here this %ould most li$ely occur.
2tudent e&amples %ill *ary !ut should display an understanding o ho% complementary
resources can !e shared in a manner that %ill reduce costs. A common e&ample %ould !e t%o
seasonal irms such as a gol course and a s$i resort %here assets such as the administrati*e
unctions, the hospitality sta, the dining areas, and the resort areas %ould all !e considered
complementary resources.

Bloom's: Analysis
Section: "#&/
'o(ic: Com(lementary resources


62. 9earl, >nc. has oered ;66< million cash or all o the common stoc$ in 8am Corporation.
(ased on recent mar$et inormation, 8am is %orth ;71< million as an independent operation.
3or the merger to ma$e economic sense or 9earl, %hat %ould the minimum estimated *alue
o the synergistic !eneits rom the merger ha*e to !e,
A. ;<
(. ;75 million
C. ;15< million
D. ;71< million
). ;66< million
Minimum economic *alue E ;66< million - ;71< million E ;15< million

AACSB: Analytic
Difficulty: Basic
3OC >: "#$%
Section: "#&/
'o(ic: Calculating synergy

26-71
6-. Consider the ollo%ing premerger inormation a!out 3irm H and 3irm I'

Assume that 3irm H acquires 3irm I !y paying cash or all the shares outstanding at a merger
premium o ;- per share. Also assume that neither irm has any de!t !eore or ater the
merger. #hat is the *alue o the total equity o the com!ined irm, HI, i the purchase method
o accounting is used,
A. ;1,271,<<<
(. ;1,-16,<<<
C. ;1,-52,<<<
D. ;1,122,<<<
). ;1,127,<<<
Assets rom H E 26,<<<B;26C E ;676,<<< B!oo$ *alueC
Assets rom I E 26,<<<B;2-C E ;5=6,<<< Bmar$et *alueC
0ood%ill E 26,<<<B;2- F ;-C - ;5=6,<<< E ;76,<<<
"otal Assets HI E"otal equity HI E ;676,<<< F ;5=6,<<< F ;76,<<< E ;1,-52,<<<

AACSB: Analytic
Difficulty: Basic
3OC >: "#$"
Section: "#&"
'o(ic: Balance s1eet for mergers

26-75

#hat %ill !e the *alue o the equity account on the postmerger !alance sheet assuming that
Meat Co. purchases Loa, >nc. and the pooling o interests method o accounting is used.
A. ;26,7<<
(. ;--,6<<
C. ;-5,6<<
D. ;-6,2<<
). ;16,1<<
9ostmerger equity E ;26,7<< F ;=,1<< E ;-5,6<<

AACSB: Analytic
Difficulty: Basic
3OC >: "#$.
Section: "#&.

26-76

2uppose the air mar$et *alue o Loa4s i&ed assets is ;7,2<< *ersus the ;-,-<< !oo$ *alue
sho%n. Meat pays ;1<,2<< or Loa and raises the needed unds through an issue o long-term
de!t. Assume the purchase method o accounting is used. "he post-merger !alance sheet o
Meat Co. %ill ha*e total de!t o DDDDDD and total equity o DDDDDD.
A. ;1,6<<J ;11,5<<
(. ;1,6<<J ;15,1<<
C. ;1<,2<<J ;15,1<<
D. ;11,5<<J ;11,5<<
). ;11,5<<J ;15,1<<
"otal post-merger de!t E ;1,6<< F ;1,1<< F ;=<< F ;5<< F ;1<,2<< E ;11,5<<
"otal post-merger equity E 9re-merger equity o acquiring irm E ;11,5<<

AACSB: Analytic
Difficulty: Basic
3OC >: "#$/
Section: "#&.

26-77

Assume the merger is treated as a pooling o interests or accounting purposes. "he total
assets are DDDDD and the total equity is DDDDD on the post-merger !alance sheet.
A. ;21,5<<J ;1<,5<<
(. ;21,5<<J ;16,2<<
C. ;26,-<<J ;1<,5<<
D. ;26,-<<J ;16,6<<
E. ;26,-<<J ;16,2<<
9ost-merger total assets E ;16,6<< F ;=,7<< E ;26,-<<
9ost-merger total equity E ;1<,5<< F ;7,7<< E ;16,2<<

AACSB: Analytic
Difficulty: Basic
3OC >: "#$:
Section: "#&.

26-76

Assume the merger is treated as a purchase or accounting purposes. "he mar$et *alue o All
0old Mining4s i&ed assets is ;-,6<<J the mar$et *alues or current and other assets are the
same as the !oo$ *alues. Assume that 2il*er )nterprises issues ;5,<<< in ne% long-term de!t
to inance the acquisition. "he post-merger !alance sheet %ill relect good%ill o DDDDD and
total equity o DDDDD.
A. ;61<J ;2,7<<
(. ;61<J ;1,61<
C. ;6=<J ;2,7<<
D. ;6=<J ;1,61<
). ;6=<J ;5,5<<
0ood%ill %ill !e created since the acquisition price is greater than the !oo$ *alue. "he
good%ill amount is equal to the purchase price minus the mar$et *alue o assets, plus the
mar$et *alue o the acquired company4s de!t.
0ood%ill E ;5,<<< - B;-,6<< mar$et *alue 3AC - B;6<< mar$et *alue o CAC - B;21< mar$et
*alue /AC F B;5<< current lia!ilitiesC E ;6=<
"otal equity E )quity o acquiring irm E ;2,7<<

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
3OC >: "#$#
Section: "#&.
'o(ic: 9ncor(orating goodwill

26-7=
66. 9enn Corp. is analyAing the possi!le acquisition o "eller Company. (oth irms ha*e no
de!t. 9enn !elie*es the acquisition %ill increase its total aterta& annual cash lo%s !y ;-.7
million indeinitely. "he current mar$et *alue o "eller is ;1<- million, and that o 9enn is
;151.7 million. "he appropriate discount rate or the incremental cash lo%s is = percent.
9enn is trying to decide %hether it should oer 11 percent o its stoc$ o ;1-- million in cash
to "eller4s shareholders. "he cost o the cash alternati*e is DDDDD, %hile the cost o the stoc$
alternati*e is DDDDD.
A. ;1<-,<<<,<<<J ;1-<,156,66=
(. ;1<-,<<<,<<<J ;1--,<<<,<<<
C. ;1--,<<<,<<<J ;1<-,<<<,<<<
D. ;1--,<<<,<<<J ;1-<,156,66=
). ;2-6,<<<,<<<J ;1<-,<<<,<<<
Cash cost E Amount o cash oered E ;1-- million
"o calculate the cost o the stoc$ oer, %e irst need to calculate the *alue o the target to the
acquirer. "he *alue o the target irm to the acquiring irm %ill !e the mar$et *alue o the
target plus the 9? o the incremental cash lo%s generated !y the target irm. "he cash lo%s
are a perpetuity, so'
?P E ;1<-,<<<,<<< F ;-,7<<,<<<K<.<= E ;111,111,111
"he cost o the stoc$ oer is the percentage o the acquiring irm gi*en up times the sum o
the mar$et *alue o the acquiring irm and the *alue o the target irm to the acquiring irm.
2o, the equity cost %ill !e'
)quity cost E <.11B;151,7<<,<<< F ;111,111,111C E ;1-<,156,6==

AACSB: Analytic
Bloom's: Analysis
3OC >: "#$0
Section: "#&#
'o(ic: Cas1 !ersus stoc5 (ayment

26-6<
6=. "he shareholders o 8olie Company ha*e *oted in a*or o a !uyout oer rom 9itt
Corporation. >normation a!out each irm is gi*en here'

8olie4s shareholders %ill recei*e one share o 9itt stoc$ or e*ery three shares they hold in
8olie. Assume the .9? o the acquisition is Aero. #hat %ill the post-merger 9) ratio !e or
9itt,
A. 6.1
(. =.2
C. =.6
D. 1<.5
). 11.2
"he )92 o the com!ined company %ill !e the sum o the earnings o !oth companies di*ided
!y the num!er o shares in the com!ined company. 2ince the stoc$ oer is one share o the
acquiring irm or three shares o the target irm, net shares in the acquiring irm %ill increase
!y one-third o the target irm4s current shares. 2o, the ne% )92 %ill !e'
)92 E B;21<,<<< F ;6-<,<<<CKL121,<<< F B1K-CB62,<<<CM E ;5.61
"he mar$et price o 9itt %ill remain unchanged i it is a Aero .9? acquisition. Qsing the 9)
ratio, %e ind the current mar$et price o 9itt stoc$, %hich is'
9 E 12B;6-<,<<<CK121,<<< E ;6<.=67712
> the acquisition has a Aero .9?, the stoc$ price should remain unchanged. "hereore, the
ne% 9) %ill !e'
9) E ;6<.=67712K;5.61 E 1<.5

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
3OC >: "#$;
Section: "#&:
'o(ic: )erger *3

26-61
=<. Consider the ollo%ing premerger inormation a!out a !idding irm B3irm (C and a target
irm B3irm "C. Assume that neither irm has any de!t outstanding.

3irm ( has estimated that the *alue o the synergistic !eneits rom acquiring 3irm " is
;2,6<<. #hat is the .9? o the merger assuming that 3irm " is %illing to !e acquired or ;26
per share in cash,
A. ;1<<
(. ;6<<
C. ;1,6<<
D. ;2,2<<
). ;2,6<<
"he .9? o the merger is the mar$et *alue o the target irm, plus the *alue o the synergy,
minus the acquisition costs, so'
.9? E 1,1<< B;26C F ;2,6<< - 1,1<<B;26C E ;1<<

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
3OC >: "#$2
Section: "#&#
'o(ic: )erger N*6

26-62
=1. Consider the ollo%ing premerger inormation a!out 3irm A and 3irm ('

Assume that 3irm A acquires 3irm ( *ia an e&change o stoc$ at a price o ;25 or each share
o (4s stoc$. (oth A and ( ha*e no de!t outstanding. #hat %ill the earnings per share o 3irm
A !e ater the merger,
A. ;1.6<
(. ;1.66
C. ;1.=5
D. ;2.<2
E. ;2.1<
Cost o acquisition E 21< B;25C E ;5,25<
2ince the stoc$ price o the acquiring irm is ;1<, the irm %ill ha*e to gi*e up'
2hares oered E ;5,25<K;1< E 1-1.25 shares
"he )92 o the merged irm %ill !e the com!ined earnings o the e&isting irms di*ided !y
the ne% shares outstanding, so'
)92 E B;=-< F ;65<CKB62< F 1-1.25C E ;2.1<

AACSB: Analytic
Bloom's: Analysis
3OC >: "#$%%
Section: "#&:
'o(ic: *ost$merger 3*S

26-6-

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Chapter 26 - Mergers and Acquisitions

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