Вы находитесь на странице: 1из 83

Chapter 26 - Mergers and Acquisitions

Chapter 26
Mergers and Acquisitions
Multiple Choice Questions

1. Last month, Keyser Design acquired all of the assets and liabilities of Tenor Machine
Works. The combined firm is known as Keyser Design. Tenor Machine Works no longer
exists as a separate entity. This acquisition is best described as a:
A. merger.
B. consolidation.
C. tender offer.
D. spinoff.
E. divestiture.

2. The Cat Box acquired The Dog House. As part of this transaction, both firms ceased to
exist in their prior form and combined to create an all-new entity, Animal World. Which one
of the following terms best describes this transaction?
A. divestiture
B. consolidation
C. tender offer
D. spinoff
E. conglomeration

3. The Daily News published an ad today wherein it announced its desire to purchase shares
of a competing newspaper, the Oil Town Gossip. Which one of the following terms is best
described by this announcement?
A. merger request
B. consolidation
C. tender offer
D. spinoff
E. divestiture

26-1

Chapter 26 - Mergers and Acquisitions

4. Some Freight Line Express shareholders are very dissatisfied with the performance of the
firm's current management team. These shareholders want to gain control of the board of
directors so they can have the power to oust current management. As a means of gaining
control, these shareholders have select candidates for all of the open positions on the firm's
board of directors. Since they have insufficient votes to guarantee the election of these
individuals, they are contacting other shareholders and asking them to vote with them on this
important matter. Of course, the current management team is encouraging shareholders to
vote for their candidates for the board. Which one of the following terms is best illustrated by
this situation?
A. tender offer
B. proxy contest
C. going-private transaction
D. leveraged buyout
E. consolidation

5. A group of individual investors is in the process of acquiring all of the publicly-traded


shares of OM Outfitters. Once the shares are acquired, they will no longer be publicly traded.
Which of the following terms applies to this process?
A. tender offer
B. proxy contest
C. going-private transaction
D. leveraged buyout
E. consolidation

6. The current president and vice-presidents of Mountain Top Consulting have decided to
form a private investment group with the sole purpose of purchasing Mountain Top
Consulting. These individuals have found a lender who will lend them 85 percent of the
purchase cost if they pledge their personal assets as collateral for the loan. The current officers
agree to this arrangement, borrow the funds, and purchase Mountain Top Consulting. The
purchase of this firm is referred to as a:
A. conglomeration.
B. proxy contest.
C. merger.
D. leveraged buyout.
E. consolidation.

26-2

Chapter 26 - Mergers and Acquisitions

7. Johnson Manufacturers and Peabody Enterprises are both manufacturers of plastic


products, such as plastic plates and silverware. These two firms have decided to work together
to find a more efficient way to recycle rejected products so that any rejected material can be
reused. Thus, each company is going to assign two of its engineers to this project and have
agreed to share any and all costs incurred in this process. This project is an example of a:
A. consolidation.
B. merged alliance.
C. joint venture.
D. takeover project.
E. strategic alliance.

8. Diet Soda and High Caffeine are two firms that compete in the soft drink market. These
two competitors have decided to invest $10 million to form a new company, Fruit Tea, which
will manufacture flavored teas. This new firm is defined as a:
A. consolidation.
B. strategic alliance.
C. joint venture.
D. merged alliance.
E. takeover project.

9. Alliance Chemicals recently acquired Swenson Industries in a transaction that produced a


NPV of $1.3 million. This NPV is referred to as:
A. the agency effect.
B. the consolidating value.
C. diversification.
D. the consolidation effect.
E. synergy.

26-3

Chapter 26 - Mergers and Acquisitions

10. Roger is a major shareholder in RB Industrial Supply. Currently, Roger is quite unhappy
with the direction the firm is headed and is rumored to be considering an attempt to take over
the firm by soliciting the votes of other shareholders. To head off this potential attempt, the
board of RB Industrial Supply has decided to offer Roger $35 a share for all the shares he
owns in the firm. The current market value per share is $32. This offer to purchase Roger's
shares is commonly referred to as:
A. a golden parachute.
B. standstill payments.
C. greenmail.
D. a poison pill.
E. a white knight.

11. Which one of the following generally has a flip-in provision that significantly increases
the cost to a shareholder who is attempting to gain control over a firm?
A. golden parachute
B. standstill agreement
C. greenmail
D. poison pill
E. white knight

12. Melvin was attempting to gain control of Western Wood Products until he realized that the
existing shareholders in the firm had the right to purchase additional shares at a below-market
price given his hostile takeover attempt. Thus, Melvin decided to forego investing in this firm.
What term applies to the tactic used by Western Wood Products to stave off this takeover
attempt?
A. pac-man defense
B. shark repellent plan
C. golden parachute provision
D. greenmail provision
E. share rights plan

26-4

Chapter 26 - Mergers and Acquisitions

13. Nieger Mills engages in farming, trucking of farm products, and the milling and retailing
of farm grains. The firm has decided to sell its farming operations to Jasper Farms. This sale
is referred to as a(n):
A. liquidation.
B. divestiture.
C. merger.
D. allocation.
E. restructuring.

14. Princeton Enterprises is a diversified company. In addition to its primary business


operations, the firm is also the sole shareholder of a wholly owned subsidiary. As part of its
restructuring plan, Princeton has decided to implement an IPO offering for shares in the
subsidiary. This offering is equivalent to a 25 percent ownership stake in the subsidiary. What
is the distribution of these shares called?
A. split-up
B. equity carve-out
C. countertender offer
D. white knight transaction
E. lockup transaction

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

26-5

Chapter 26 - Mergers and Acquisitions

16. Blasco Distributors has become a large conglomerate. Its board of directors recently
concluded that the firm has become so large that it has lost its efficiency. The board further
concluded that the firm could be both more efficient and more profitable if it were divided
into three distinct and separate firms. The board presented this suggested to the firm's
shareholders and those shareholders voted and agreed to divide the firm. Dividing this firm
into separate entities is referred to as a(n):
A. lockup transaction.
B. divestiture.
C. equity carve-out.
D. spin-off.
E. split-up.

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.

18. Which of the following statements correctly apply to a merger?


I. The titles to individual assets of the acquired firm must be transferred into the acquiring
firm's name.
II. The merged firm will retain the use of the acquiring company's name.
III. The acquiring firm does not have to seek approval for the merger from its shareholders.
IV. The shareholders of the acquired company must approve the merger.
A. I and III only
B. II and IV only
C. I, II, and III only
D. I, II, and IV only
E. I, II, III, and IV

26-6

Chapter 26 - Mergers and Acquisitions

19. In a merger the:


A. legal status of both the acquiring firm and the target firm is terminated.
B. acquiring firm retains its pre-merger legal status.
C. acquiring firm acquires the assets, but not the liabilities, of the target firm.
D. shareholders of the target firm have little, if any, say as to whether or not the merger
occurs.
E. target firm continues to exist but will be a wholly owned subsidiary of the acquiring firm.

20. Which of the following increase the costs associated with a merger?
A. changing the title to all the combined firm's assets
B. disbanding the operations of the target firm
C. hiring an underwriter to distribute the IPO shares
D. issue costs associated with warrants that must be offered to the shareholders of the
acquiring firm
E. seeking approval of the shareholders of both the acquiring and the acquired firm

21. Down River Markets has decided to acquire a controlling interest in Blue Jays by
purchasing shares of stock in the public markets. Which of the following statements correctly
apply to this acquisition?
I. The purchase of publicly-traded shares may be more expensive than an outright merger with
Blue Jays would have been.
II. Down River Markets can avoid dealing with the board of directors of Blue Jays by
purchasing shares in this manner.
III. If Down River Markets is successful in acquiring at least 80 percent of the outstanding
shares of Blue Jays, the remaining shareholders in Blue Jays will be forced to also sell their
shares to Down River Markets.
IV. Whether or not Down River Markets gains control of Blue Jays depends upon the
willingness of Blue Jays shareholders to sell their shares.
A. I and III only
B. II and IV only
C. I, II, and IV only
D. I, II, and III only
E. I, II, III, and IV

26-7

Chapter 26 - Mergers and Acquisitions

22. Biltwell Hotels is acquiring all of the assets of Green Roof Inns. As a result, Green Roof
Inns:
A. will become a fully owned subsidiary of Biltwell Hotels.
B. will remain as a shell corporation unless the shareholders opt to dissolve it.
C. will be fully merged into Biltwell Hotels and will no longer exist as a separate entity.
D. and Biltwell Hotels will both cease to exist and a new firm will be formed.
E. will automatically be dissolved.

23. An auto maker recently acquired a windshield manufacturer. Which type of an acquisition
was this?
A. horizontal
B. longitudinal
C. conglomerate
D. vertical
E. indirect

24. If General Electric, a highly diversified company, were to acquire Ocean Freight Limited,
the acquisition would be classified as a _____ acquisition.
A. horizontal
B. longitudinal
C. conglomerate
D. vertical
E. integrated

25. If Paul's Hardware were to acquire Suburban Hardware, the acquisition would be
classified as a _____ acquisition.
A. horizontal
B. longitudinal
C. conglomerate
D. vertical
E. integrated

26-8

Chapter 26 - Mergers and Acquisitions

26. Which of the following is a form of a takeover?


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

27. Firms A and B formally agree to each put up $25 million to create firm C. Firm C will
perform environmental testing on the products produced by both Firm A and Firm B. Which
one of the following terms describes Firm C?
A. joint venture
B. going-private transaction
C. conglomerate
D. subsidiary
E. leveraged buyout

28. Dixie and ten of her wealthy friends formed a group and borrowed the funds necessary to
acquire 100 percent of the outstanding shares of Southern Fried Chicken. This transaction is
known as a:
A. proxy contest.
B. management buyout.
C. vertical acquisition.
D. leveraged buyout.
E. unfriendly takeover.

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 shares on a dollar-for-dollar basis.
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.

26-9

Chapter 26 - Mergers and Acquisitions

30. Which of the following are 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

31. Which one of the following statements is correct?


A. The shareholders of an acquired firm are generally given a choice of accepting either cash
or shares of stock when the acquisition is tax-free.
B. To be a tax-free acquisition, the shareholders of an acquired firm must receive shares in the
acquiring firm that are equal to 95 percent or less of the value of the shares held in the
acquired firm.
C. The assets of an acquired firm are recorded on the books of the acquiring firm at their
current book value regardless of the tax status of the acquisition.
D. Target firm shareholders demand a higher selling price when an acquisition is a nontaxable event.
E. If the assets of a firm are written up as part of the acquisition process, the increase in value
is considered to be a taxable gain.

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 for financial statement purposes.
C. the equity of the acquiring firm be reduced by the excess of the purchase price over the fair
market value of the target firm.
D. the assets of the target firm be recorded at their fair market value on the balance sheet of
the acquiring firm.
E. the excess amount paid for the target firm be recorded as a tangible asset on the books of
the acquiring firm.

26-10

Chapter 26 - Mergers and Acquisitions

33. For financial statement purposes, goodwill created by an acquisition:


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

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 currently the accounting method required by FASB for all cash acquisitions.
IV. recognizes the excess of the purchase price over the fair market value and records that
excess as an asset of the acquiring firm.
A. I only
B. II only
C. I and IV only
D. II and III only
E. I, II, and IV only

35. The incremental cash flows of a merger can relate to changes in which of the following?
I. revenue
II. capital requirements
III. operating costs
IV. income 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

26-11

Chapter 26 - Mergers and Acquisitions

36. Which of the following are examples of cost reductions that can result from an
acquisition?
I. allocating fixed overhead across a wider range of products
II. lowering office payroll costs by combining job functions
III. benefiting from economies of scale when purchasing raw materials
IV. reducing the number of management personnel required
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

37. A potential merger which produces synergy:


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

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

26-12

Chapter 26 - Mergers and Acquisitions

39. Which of the following represent potential tax benefits that can directly result from an
acquisition?
I. an increase in depreciation expense
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. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV

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.

41. Which one of the following best defines synergy given the following?
VA = Value of firm A
VB = Value of firm B
VAB = Value of merged firm AB
A. (VA + VB) - VAB
B. VAB - (VA + VB)
C. greater of 0 or (VA + VB) - VAB
D. greater of 0 or VAB - (VA + VB)
E. greater of 0 or VAB

26-13

Chapter 26 - Mergers and Acquisitions

42. Which one of the following statements is correct?


A. Firms with large net operating losses tend to be acquiring firms rather than target firms.
B. The leverage associated with an acquisition increases the tax liability of the acquiring firm.
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 production level.
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.

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

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

26-14

Chapter 26 - Mergers and Acquisitions

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

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.

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.

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.

26-15

Chapter 26 - Mergers and Acquisitions

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.

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.

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

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

26-16

Chapter 26 - Mergers and Acquisitions

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

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

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.

26-17

Chapter 26 - Mergers and Acquisitions

56. Nelson's Interiors has $2.13 million in net working capital. The firm has fixed assets with
a book value of $23.23 million and a market value of $26.16 million. The firm has no longterm debt. The Home Centre is buying Nelson's Interiors for $29.5 million in cash. The
acquisition will be recorded using the purchase accounting method. What is the amount of
goodwill that The Home Centre will record on its balance sheet as a result of this acquisition?
A. $1.21 million
B. $3.34 million
C. $3.88 million
D. $4.14 million
E. $6.27 million

57. Troyer Markets and Deb's Grocery are all-equity firms. Troyer Markets has 2,400 shares
outstanding at a market price of $14.80 a share. Deb's Grocery has 3,200 shares outstanding at
a price of $28 a share. Deb's Grocery is acquiring Troyer Markets for $37,500 in cash. What is
the merger premium per share?
A. $0
B. $0.825
C. $1.108
D. $1.216
E. $1.320

58. The Cycle Stop has 1,500 shares outstanding at a market price per share of $8.48. Kate's
Wheels has 1,750 shares outstanding at a market price of $13 a share. Neither firm has any
debt. Kate's Wheels is acquiring The Cycle Stop for $15,000 in cash. What is the merger
premium per share?
A. $1.27
B. $1.46
C. $1.52
D. $4.43
E. $4.52

26-18

Chapter 26 - Mergers and Acquisitions

59. Rosie's has 1,800 shares outstanding at a market price per share of $23.50. Sandy's has
2,500 shares outstanding at a market price of $21 a share. Neither firm has any debt. Sandy's
is acquiring Rosie's. The incremental value of the acquisition is $1,200. What is the value of
Rosie's to Sandy's?
A. $41,100
B. $41,900
C. $42,300
D. $42,700
E. $43,500

60. The Town Crier and The News Express are all-equity firms. The Town Crier has 11,500
shares outstanding at a market price of $26 a share. The News Express has 15,000 shares
outstanding at a price of $31 a share. The News Express is acquiring The Town Crier. The
incremental value of the acquisition is $3,800. What is the value of The Town Crier to The
News Express?
A. $57,500
B. $75,000
C. $87,000
D. $299,000
E. $302,800

61. The Floral Shoppe and Maggie's Flowers are all-equity firms. The Floral Shoppe has
2,500 shares outstanding at a market price of $16.50 a share. Maggie's Flowers has 5,000
shares outstanding at a price of $17 a share. Maggie's Flowers is acquiring The Floral Shoppe
for $42,900 in cash. The incremental value of the acquisition is $1,200. What is the net
present value of acquiring The Floral Shoppe to Maggie's Flowers?
A. -$450
B. $275
C. $500
D. $2,400
E. $3,700

26-19

Chapter 26 - Mergers and Acquisitions

62. Taylor's Hardware is acquiring The Corner Store for $20,000 in cash. Taylor's has 1,500
shares of stock outstanding at a market value of $46 a share. The Corner Store has 2,200
shares of stock outstanding at a market price of $8 a share. Neither firm has any debt. The
incremental value of the acquisition is $3,500. What is the value of Taylor's Hardware after
the acquisition?
A. $49,000
B. $50,300
C. $67,300
D. $70,100
E. $72,400

63. Firm A is acquiring Firm B for $75,000 in cash. Firm A has 4,500 shares of stock
outstanding at a market value of $27 a share. Firm B has 2,500 shares of stock outstanding at
a market price of $29 a share. Neither firm has any debt. The incremental value of the
acquisition is $2,200. What is the price per share of Firm A's stock after the acquisition?
A. $25.98
B. $26.45
C. $26.93
D. $27.00
E. $27.33

64. The Sweet Shoppe and Candy Land are all-equity firms. The Sweet Shoppe has 500
shares outstanding at a market price of $96 a share. Candy Land has 2,500 shares outstanding
at a price of $24 a share. The Sweet Shoppe is acquiring Candy Land for $62,000 in cash. The
incremental value of the acquisition is $3,600. What is the net present value of acquiring
Candy Land to The Sweet Shoppe?
A. $1,100
B. $1,600
C. $2,700
D. $4,200
E. $5,700

26-20

Chapter 26 - Mergers and Acquisitions

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

66. Outdoor Living has agreed to be acquired by New Adventures for $48,000 worth of New
Adventures stock. New Adventures currently has 8,000 shares of stock outstanding at a price
of $32 a share. Outdoor Living has 1,500 shares outstanding at a price of $43 a share. The
incremental value of the acquisition is $21,000. What is the value of the merged firm?
A. $85,500
B. $256,000
C. $277,000
D. $320,500
E. $341,500

67. Moore Industries has agreed to be acquired by Scott Enterprises for $22,000 worth of
Scott Enterprises stock. Scott Enterprises currently has 7,500 shares of stock outstanding at a
price of $28 a share. Moore Industries has 1,800 shares outstanding at a price of $12 a share.
The incremental value of the acquisition is $1,100. What is the value per share of Scott
Enterprises stock after the acquisition?
A. $27.52
B. $27.96
C. $28.08
D. $28.47
E. $31.03

26-21

Chapter 26 - Mergers and Acquisitions

68. Aardvark Enterprises has agreed to be acquired by Lawson Products in exchange for
$30,000 worth of Lawson Products stock. Lawson has 3,000 shares of stock outstanding at a
price of $28 a share. Aardvark has 1,200 shares outstanding with a market value of $23 a
share. The incremental value of the acquisition is $1,400. What is the value of Lawson
Products after the merger?
A. $79,400
B. $83,000
C. $111,600
D. $113,000
E. $143,000

69. Hanover Tires is being acquired by Better Tires for $89,000 worth of Better Tires stock.
Hanover Tires has 2,500 shares of stock outstanding at a price of $36 a share. Better Tires has
6,000 shares outstanding with a market value of $23 a share. The incremental value of the
acquisition is $4,200. How many new shares of stock will be issued to complete this
acquisition?
A. 2,472 shares
B. 3,016 shares
C. 3,133 shares
D. 3,870 shares
E. 3,987 shares

70. Glendale Marine is being acquired by Inland Motors for $53,000 worth of Inland Motors
stock. Inland Motors has 6,200 shares of stock outstanding at a price of $54 a share. Glendale
Marine has 1,700 shares outstanding with a market value of $30 a share. The incremental
value of the acquisition is $2,600. What is the total number of shares in the new firm?
A. 6,200 shares
B. 7,181 shares
C. 7,229 shares
D. 7,852 shares
E. 7,900 shares

26-22

Chapter 26 - Mergers and Acquisitions

71. Firm B is being acquired by Firm A for $162,000 worth of Firm A stock. The incremental
value of the acquisition is $4,600. Firm A has 8,500 shares of stock outstanding at a price of
$36 a share. Firm B has 5,900 shares of stock outstanding at a price of $27 a share. What is
the value per share of Firm A after the acquisition?
A. $35.28
B. $35.71
C. $36.00
D. $36.15
E. $37.04

72. Firm A is being acquired by Firm B for $54,000 worth of Firm B stock. The incremental
value of the acquisition is $5,600. Firm A has 2,400 shares of stock outstanding at a price of
$21 a share. Firm B has 2,700 shares of stock outstanding at a price of $50 a share. What is
the actual cost of the acquisition using company stock?
A. $50,509
B. $52,276
C. $54,571
D. $56,780
E. $60,600

73. Merchantile Exchange is being acquired by National Sales. The incremental value of the
acquisition is $1,800. Merchantile Exchange has 1,500 shares of stock outstanding at a price
of $18 a share. National Sales has 3,500 shares of stock outstanding at a price of $54 a share.
What is the net present value of the acquisition given that the actual cost of the acquisition
using company stock is $28,780?
A. $8
B. $11
C. $20
D. $37
E. $46

26-23

Chapter 26 - Mergers and Acquisitions

74. Dressler, Inc., is planning on merging with Weston Foods. Dressler will pay Weston's
shareholders the current value of its stock in shares of Dressler stock. Dressler's currently has
6,200 shares of stock outstanding at a market price of $30 a share. Weston's has 2,200 shares
outstanding at a price of $28 a share. How many shares of stock will be outstanding in the
merged firm?
A. 6,840 shares
B. 7,061 shares
C. 7,200 shares
D. 8,253 shares
E. 8,609 shares

75. Alpha is planning on merging with Beta. Alpha will pay Beta's shareholders the current
value of their stock in shares of Alpha. Alpha currently has 4,200 shares of stock outstanding
at a market price of $40 a share. Beta has 2,500 shares outstanding at a price of $18 a share.
The after-merger earnings will be $8,800. What will the earnings per share be after the
merger?
A. $1.61
B. $1.65
C. $1.75
D. $1.81
E. $1.86

76. Sue's Bakery is planning on merging with Ted's Deli. Sue's will pay Ted's shareholders the
current value of their stock in shares of Sue's Bakery. Sue's currently has 4,500 shares of stock
outstanding at a market price of $19 a share. Ted's has 2,100 shares outstanding at a price of
$20 a share. What is the value of the merged firm?
A. $106,500
B. $107,800
C. $125,400
D. $127,500
E. $131,600

26-24

Chapter 26 - Mergers and Acquisitions

77. George's Equipment is planning on merging with Nelson Machinery. George's will pay
Nelson's shareholders the current value of their stock in shares of George's Equipment.
George's currently has 4,600 shares of stock outstanding at a market price of $31 a share.
Nelson's has 1,600 shares outstanding at a price of $38 a share. What is the value per share of
the merged firm?
A. $30.77
B. $31.00
C. $31.29
D. $31.74
E. $32.06

Essay Questions

78. Empirical evidence indicates that the returns to shareholders of the target firm vary
significantly from the returns to the shareholders of the acquiring firm. Identify the
shareholders that tend to realize the smaller return and provide some possible explanation for
these low returns.

79. Identify the three basic legal procedures that one firm can use to acquire another and
briefly discuss the advantages and disadvantages of each.

26-25

Chapter 26 - Mergers and Acquisitions

80. Defensive merger tactics are designed to thwart unwanted takeovers and mergers. Do such
activities work to the advantage of shareholders all of the time? Are these types of activities
ethical? Who do you think benefits the most from these activities?

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.

Multiple Choice Questions

82. Pearl, Inc. has offered $860 million cash for all of the common stock in Jam Corporation.
Based on recent market information, Jam is worth $710 million as an independent operation.
For the merger to make economic sense for Pearl, what would the minimum estimated value
of the synergistic benefits from the merger have to be?
A. $0
B. $75 million
C. $150 million
D. $710 million
E. $860 million

26-26

Chapter 26 - Mergers and Acquisitions

83. Consider the following premerger information about Firm X and Firm Y:

Assume that Firm X acquires Firm Y by paying cash for all the shares outstanding at a merger
premium of $3 per share. Also assume that neither firm has any debt before or after the
merger. What is the value of the total equity of the combined firm, XY, if the purchase method
of accounting is used?
A. $1,274,000
B. $1,316,000
C. $1,352,000
D. $1,422,000
E. $1,427,000

26-27

Chapter 26 - Mergers and Acquisitions

84. Assume the following balance sheets are stated at book value.

What will be the value of the equity account on the postmerger balance sheet assuming that
Meat Co. purchases Loaf, Inc. and the pooling of interests method of accounting is used.
A. $26,700
B. $33,600
C. $35,800
D. $38,200
E. $46,100

26-28

Chapter 26 - Mergers and Acquisitions

85. Assume the following balance sheets are stated at book value.

Suppose the fair market value of Loaf's fixed assets is $7,200 versus the $3,300 book value
shown. Meat pays $10,200 for Loaf and raises the needed funds through an issue of long-term
debt. Assume the purchase method of accounting is used. The post-merger balance sheet of
Meat Co. will have total debt of ______ and total equity of ______.
A. $1,600; $11,500
B. $1,600; $15,400
C. $10,200; $15,400
D. $14,500; $11,500
E. $14,500; $15,400

26-29

Chapter 26 - Mergers and Acquisitions

86. Silver Enterprises has acquired All Gold Mining in a merger transaction. The following
balance sheets represent the premerger book values for both firms.

Assume the merger is treated as a pooling of interests for accounting purposes. The total
assets are _____ and the total equity is _____ on the post-merger balance sheet.
A. $24,500; $10,500
B. $24,500; $18,200
C. $26,300; $10,500
D. $26,300; $16,600
E. $26,300; $18,200

26-30

Chapter 26 - Mergers and Acquisitions

87. Silver Enterprises has acquired All Gold Mining in a merger transaction. The following
balance sheets represent the premerger book values for both firms.

Assume the merger is treated as a purchase for accounting purposes. The market value of All
Gold Mining's fixed assets is $3,800; the market values for current and other assets are the
same as the book values. Assume that Silver Enterprises issues $5,000 in new long-term debt
to finance the acquisition. The post-merger balance sheet will reflect goodwill of _____ and
total equity of _____.
A. $640; $2,700
B. $640; $4,610
C. $890; $2,700
D. $890; $4,610
E. $890; $5,500

88. Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no
debt. Penn believes the acquisition will increase its total aftertax annual cash flows by $3.7
million indefinitely. The current market value of Teller is $103 million, and that of Penn is
$151.7 million. The appropriate discount rate for the incremental cash flows is 9 percent.
Penn is trying to decide whether it should offer 44 percent of its stock of $133 million in cash
to Teller's shareholders. The cost of the cash alternative is _____, while the cost of the stock
alternative is _____.
A. $103,000,000; $130,156,889
B. $103,000,000; $133,000,000
C. $133,000,000; $103,000,000
D. $133,000,000; $130,156,889
E. $236,000,000; $103,000,000

26-31

Chapter 26 - Mergers and Acquisitions

89. The shareholders of Jolie Company have voted in favor of a buyout offer from Pitt
Corporation. Information about each firm is given here:

Jolie's shareholders will receive one share of Pitt stock for every three shares they hold in
Jolie. Assume the NPV of the acquisition is zero. What will the post-merger PE ratio be for
Pitt?
A. 8.4
B. 9.2
C. 9.8
D. 10.5
E. 11.2

90. Consider the following premerger information about a bidding firm (Firm B) and a target
firm (Firm T). Assume that neither firm has any debt outstanding.

Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is
$2,600. What is the NPV of the merger assuming that Firm T is willing to be acquired for $28
per share in cash?
A. $400
B. $600
C. $1,800
D. $2,200
E. $2,600

26-32

Chapter 26 - Mergers and Acquisitions

91. Consider the following premerger information about Firm A and Firm B:

Assume that Firm A acquires Firm B via an exchange of stock at a price of $25 for each share
of B's stock. Both A and B have no debt outstanding. What will the earnings per share of Firm
A be after the merger?
A. $1.60
B. $1.86
C. $1.95
D. $2.02
E. $2.10

26-33

Chapter 26 - Mergers and Acquisitions

Chapter 26 Mergers and Acquisitions Answer Key

Multiple Choice Questions

1. Last month, Keyser Design acquired all of the assets and liabilities of Tenor Machine
Works. The combined firm is known as Keyser Design. Tenor Machine Works no longer
exists as a separate entity. This acquisition is best described as a:
A. merger.
B. consolidation.
C. tender offer.
D. spinoff.
E. divestiture.
Refer to section 26.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.1
Topic: Merger

2. The Cat Box acquired The Dog House. As part of this transaction, both firms ceased to
exist in their prior form and combined to create an all-new entity, Animal World. Which one
of the following terms best describes this transaction?
A. divestiture
B. consolidation
C. tender offer
D. spinoff
E. conglomeration
Refer to section 26.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.1
Topic: Consolidation

26-34

Chapter 26 - Mergers and Acquisitions

3. The Daily News published an ad today wherein it announced its desire to purchase shares
of a competing newspaper, the Oil Town Gossip. Which one of the following terms is best
described by this announcement?
A. merger request
B. consolidation
C. tender offer
D. spinoff
E. divestiture
Refer to section 26.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.1
Topic: Tender offer

4. Some Freight Line Express shareholders are very dissatisfied with the performance of the
firm's current management team. These shareholders want to gain control of the board of
directors so they can have the power to oust current management. As a means of gaining
control, these shareholders have select candidates for all of the open positions on the firm's
board of directors. Since they have insufficient votes to guarantee the election of these
individuals, they are contacting other shareholders and asking them to vote with them on this
important matter. Of course, the current management team is encouraging shareholders to
vote for their candidates for the board. Which one of the following terms is best illustrated by
this situation?
A. tender offer
B. proxy contest
C. going-private transaction
D. leveraged buyout
E. consolidation
Refer to section 26.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.1
Topic: Proxy contest

26-35

Chapter 26 - Mergers and Acquisitions

5. A group of individual investors is in the process of acquiring all of the publicly-traded


shares of OM Outfitters. Once the shares are acquired, they will no longer be publicly traded.
Which of the following terms applies to this process?
A. tender offer
B. proxy contest
C. going-private transaction
D. leveraged buyout
E. consolidation
Refer to section 26.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.1
Topic: Going-private transaction

6. The current president and vice-presidents of Mountain Top Consulting have decided to
form a private investment group with the sole purpose of purchasing Mountain Top
Consulting. These individuals have found a lender who will lend them 85 percent of the
purchase cost if they pledge their personal assets as collateral for the loan. The current officers
agree to this arrangement, borrow the funds, and purchase Mountain Top Consulting. The
purchase of this firm is referred to as a:
A. conglomeration.
B. proxy contest.
C. merger.
D. leveraged buyout.
E. consolidation.
Refer to section 26.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.1
Topic: Leveraged buyout

26-36

Chapter 26 - Mergers and Acquisitions

7. Johnson Manufacturers and Peabody Enterprises are both manufacturers of plastic


products, such as plastic plates and silverware. These two firms have decided to work together
to find a more efficient way to recycle rejected products so that any rejected material can be
reused. Thus, each company is going to assign two of its engineers to this project and have
agreed to share any and all costs incurred in this process. This project is an example of a:
A. consolidation.
B. merged alliance.
C. joint venture.
D. takeover project.
E. strategic alliance.
Refer to section 26.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.1
Topic: Strategic alliance

8. Diet Soda and High Caffeine are two firms that compete in the soft drink market. These
two competitors have decided to invest $10 million to form a new company, Fruit Tea, which
will manufacture flavored teas. This new firm is defined as a:
A. consolidation.
B. strategic alliance.
C. joint venture.
D. merged alliance.
E. takeover project.
Refer to section 26.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.1
Topic: Joint venture

26-37

Chapter 26 - Mergers and Acquisitions

9. Alliance Chemicals recently acquired Swenson Industries in a transaction that produced a


NPV of $1.3 million. This NPV is referred to as:
A. the agency effect.
B. the consolidating value.
C. diversification.
D. the consolidation effect.
E. synergy.
Refer to section 26.4

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-3
Section: 26.4
Topic: Synergy

10. Roger is a major shareholder in RB Industrial Supply. Currently, Roger is quite unhappy
with the direction the firm is headed and is rumored to be considering an attempt to take over
the firm by soliciting the votes of other shareholders. To head off this potential attempt, the
board of RB Industrial Supply has decided to offer Roger $35 a share for all the shares he
owns in the firm. The current market value per share is $32. This offer to purchase Roger's
shares is commonly referred to as:
A. a golden parachute.
B. standstill payments.
C. greenmail.
D. a poison pill.
E. a white knight.
Refer to section 26.7

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.7
Topic: Greenmail

26-38

Chapter 26 - Mergers and Acquisitions

11. Which one of the following generally has a flip-in provision that significantly increases
the cost to a shareholder who is attempting to gain control over a firm?
A. golden parachute
B. standstill agreement
C. greenmail
D. poison pill
E. white knight
Refer to section 26.7

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.7
Topic: Poison pills

12. Melvin was attempting to gain control of Western Wood Products until he realized that the
existing shareholders in the firm had the right to purchase additional shares at a below-market
price given his hostile takeover attempt. Thus, Melvin decided to forego investing in this firm.
What term applies to the tactic used by Western Wood Products to stave off this takeover
attempt?
A. pac-man defense
B. shark repellent plan
C. golden parachute provision
D. greenmail provision
E. share rights plan
Refer to section 26.7

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.7
Topic: Share rights plans

26-39

Chapter 26 - Mergers and Acquisitions

13. Nieger Mills engages in farming, trucking of farm products, and the milling and retailing
of farm grains. The firm has decided to sell its farming operations to Jasper Farms. This sale
is referred to as a(n):
A. liquidation.
B. divestiture.
C. merger.
D. allocation.
E. restructuring.
Refer to section 26.9

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.9
Topic: Divestiture

14. Princeton Enterprises is a diversified company. In addition to its primary business


operations, the firm is also the sole shareholder of a wholly owned subsidiary. As part of its
restructuring plan, Princeton has decided to implement an IPO offering for shares in the
subsidiary. This offering is equivalent to a 25 percent ownership stake in the subsidiary. What
is the distribution of these shares called?
A. split-up
B. equity carve-out
C. countertender offer
D. white knight transaction
E. lockup transaction
Refer to section 26.9

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.9
Topic: Equity carve-out

26-40

Chapter 26 - Mergers and Acquisitions

15. Family Travel Plans is the sole shareholder in its subsidiary, Traveler's Insurance Co.
Family Travel Plans has decided to divest itself of its insurance operations and does so by
distributing the shares in the subsidiary to the shareholders of Family Travel Plans. This
distribution of shares is called a(n):
A. lockup transaction.
B. bear hug.
C. equity carve-out.
D. spin-off.
E. split-up.
Refer to section 26.9

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.9
Topic: Spin-off

16. Blasco Distributors has become a large conglomerate. Its board of directors recently
concluded that the firm has become so large that it has lost its efficiency. The board further
concluded that the firm could be both more efficient and more profitable if it were divided
into three distinct and separate firms. The board presented this suggested to the firm's
shareholders and those shareholders voted and agreed to divide the firm. Dividing this firm
into separate entities is referred to as a(n):
A. lockup transaction.
B. divestiture.
C. equity carve-out.
D. spin-off.
E. split-up.
Refer to section 26.9

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.9
Topic: Split-up

26-41

Chapter 26 - Mergers and Acquisitions

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.
Refer to section 26.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.1
Topic: Merger

18. Which of the following statements correctly apply to a merger?


I. The titles to individual assets of the acquired firm must be transferred into the acquiring
firm's name.
II. The merged firm will retain the use of the acquiring company's name.
III. The acquiring firm does not have to seek approval for the merger from its shareholders.
IV. The shareholders of the acquired company must approve the merger.
A. I and III only
B. II and IV only
C. I, II, and III only
D. I, II, and IV only
E. I, II, III, and IV
Refer to section 26.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.1
Topic: Merger

26-42

Chapter 26 - Mergers and Acquisitions

19. In a merger the:


A. legal status of both the acquiring firm and the target firm is terminated.
B. acquiring firm retains its pre-merger legal status.
C. acquiring firm acquires the assets, but not the liabilities, of the target firm.
D. shareholders of the target firm have little, if any, say as to whether or not the merger
occurs.
E. target firm continues to exist but will be a wholly owned subsidiary of the acquiring firm.
Refer to section 26.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.1
Topic: Merger

20. Which of the following increase the costs associated with a merger?
A. changing the title to all the combined firm's assets
B. disbanding the operations of the target firm
C. hiring an underwriter to distribute the IPO shares
D. issue costs associated with warrants that must be offered to the shareholders of the
acquiring firm
E. seeking approval of the shareholders of both the acquiring and the acquired firm
Refer to section 26.1

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 26-1
Section: 26.1
Topic: Merger

26-43

Chapter 26 - Mergers and Acquisitions

21. Down River Markets has decided to acquire a controlling interest in Blue Jays by
purchasing shares of stock in the public markets. Which of the following statements correctly
apply to this acquisition?
I. The purchase of publicly-traded shares may be more expensive than an outright merger with
Blue Jays would have been.
II. Down River Markets can avoid dealing with the board of directors of Blue Jays by
purchasing shares in this manner.
III. If Down River Markets is successful in acquiring at least 80 percent of the outstanding
shares of Blue Jays, the remaining shareholders in Blue Jays will be forced to also sell their
shares to Down River Markets.
IV. Whether or not Down River Markets gains control of Blue Jays depends upon the
willingness of Blue Jays shareholders to sell their shares.
A. I and III only
B. II and IV only
C. I, II, and IV only
D. I, II, and III only
E. I, II, III, and IV
Refer to section 26.1

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 26-1
Section: 26.1
Topic: Stock acquisition

22. Biltwell Hotels is acquiring all of the assets of Green Roof Inns. As a result, Green Roof
Inns:
A. will become a fully owned subsidiary of Biltwell Hotels.
B. will remain as a shell corporation unless the shareholders opt to dissolve it.
C. will be fully merged into Biltwell Hotels and will no longer exist as a separate entity.
D. and Biltwell Hotels will both cease to exist and a new firm will be formed.
E. will automatically be dissolved.
Refer to section 26.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.1
Topic: Asset acquisition

26-44

Chapter 26 - Mergers and Acquisitions

23. An auto maker recently acquired a windshield manufacturer. Which type of an acquisition
was this?
A. horizontal
B. longitudinal
C. conglomerate
D. vertical
E. indirect
Refer to section 26.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.1
Topic: Vertical acquisition

24. If General Electric, a highly diversified company, were to acquire Ocean Freight Limited,
the acquisition would be classified as a _____ acquisition.
A. horizontal
B. longitudinal
C. conglomerate
D. vertical
E. integrated
Refer to section 26.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.1
Topic: Conglomerate acquisition

26-45

Chapter 26 - Mergers and Acquisitions

25. If Paul's Hardware were to acquire Suburban Hardware, the acquisition would be
classified as a _____ acquisition.
A. horizontal
B. longitudinal
C. conglomerate
D. vertical
E. integrated
Refer to section 26.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.1
Topic: Horizontal acquisition

26. Which of the following is a form of a takeover?


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
Refer to section 26.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.1
Topic: Takeovers

26-46

Chapter 26 - Mergers and Acquisitions

27. Firms A and B formally agree to each put up $25 million to create firm C. Firm C will
perform environmental testing on the products produced by both Firm A and Firm B. Which
one of the following terms describes Firm C?
A. joint venture
B. going-private transaction
C. conglomerate
D. subsidiary
E. leveraged buyout
Refer to section 26.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.1
Topic: Joint venture

28. Dixie and ten of her wealthy friends formed a group and borrowed the funds necessary to
acquire 100 percent of the outstanding shares of Southern Fried Chicken. This transaction is
known as a:
A. proxy contest.
B. management buyout.
C. vertical acquisition.
D. leveraged buyout.
E. unfriendly takeover.
Refer to section 26.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.1
Topic: Leveraged buyout

26-47

Chapter 26 - Mergers and Acquisitions

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 shares on a dollar-for-dollar basis.
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.
Refer to section 26.2

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.2
Topic: Taxes and acquisitions

30. Which of the following are 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
Refer to section 26.2

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.2
Topic: Taxes and acquisitions

26-48

Chapter 26 - Mergers and Acquisitions

31. Which one of the following statements is correct?


A. The shareholders of an acquired firm are generally given a choice of accepting either cash
or shares of stock when the acquisition is tax-free.
B. To be a tax-free acquisition, the shareholders of an acquired firm must receive shares in the
acquiring firm that are equal to 95 percent or less of the value of the shares held in the
acquired firm.
C. The assets of an acquired firm are recorded on the books of the acquiring firm at their
current book value regardless of the tax status of the acquisition.
D. Target firm shareholders demand a higher selling price when an acquisition is a nontaxable event.
E. If the assets of a firm are written up as part of the acquisition process, the increase in value
is considered to be a taxable gain.
Refer to section 26.2

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 26-1
Section: 26.2
Topic: Taxes and acquisitions

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 for financial statement purposes.
C. the equity of the acquiring firm be reduced by the excess of the purchase price over the fair
market value of the target firm.
D. the assets of the target firm be recorded at their fair market value on the balance sheet of
the acquiring firm.
E. the excess amount paid for the target firm be recorded as a tangible asset on the books of
the acquiring firm.
Refer to section 26.3

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 26-2
Section: 26.3
Topic: Purchase accounting method

26-49

Chapter 26 - Mergers and Acquisitions

33. For financial statement purposes, goodwill created by an acquisition:


A. must be amortized on a straight-line basis over 10 years.
B. must be reviewed each year and amortized to the extent that it has lost value.
C. is expensed evenly over a 20-year period.
D. never affects the profits of the acquiring firm.
E. is recorded in an amount equal to the fair market value of the assets of the target firm.
Refer to section 26.3

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 26-2
Section: 26.3
Topic: Purchase accounting method

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 currently the accounting method required by FASB for all cash acquisitions.
IV. recognizes the excess of the purchase price over the fair market value and records that
excess as an asset of the acquiring firm.
A. I only
B. II only
C. I and IV only
D. II and III only
E. I, II, and IV only
Refer to section 26.3

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 26-2
Section: 26.3
Topic: Pooling of interests

26-50

Chapter 26 - Mergers and Acquisitions

35. The incremental cash flows of a merger can relate to changes in which of the following?
I. revenue
II. capital requirements
III. operating costs
IV. income 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
Refer to section 26.4

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-3
Section: 26.4
Topic: Incremental cash flows

36. Which of the following are examples of cost reductions that can result from an
acquisition?
I. allocating fixed overhead across a wider range of products
II. lowering office payroll costs by combining job functions
III. benefiting from economies of scale when purchasing raw materials
IV. reducing the number of management personnel required
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
Refer to section 26.4

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 26-3
Section: 26.4
Topic: Cost reductions

26-51

Chapter 26 - Mergers and Acquisitions

37. A potential merger which produces synergy:


A. should be rejected due to the projected negative cash flows.
B. should be rejected because the synergy will dilute the benefits of the merger.
C. has a net present value of zero.
D. creates value and therefore should be pursued.
E. reduces the anticipated net income from the target firm.
Refer to section 26.4

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 26-3
Section: 26.4
Topic: Synergy

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
Refer to section 26.4

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 26-3
Section: 26.4
Topic: Synergy

26-52

Chapter 26 - Mergers and Acquisitions

39. Which of the following represent potential tax benefits that can directly result from an
acquisition?
I. an increase in depreciation expense
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. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV
Refer to section 26.4

AACSB: N/A
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 26-3
Section: 26.4
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.
Refer to section 26.4

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 26-3
Section: 26.4
Topic: Acquisition considerations

26-53

Chapter 26 - Mergers and Acquisitions

41. Which one of the following best defines synergy given the following?
VA = Value of firm A
VB = Value of firm B
VAB = Value of merged firm AB
A. (VA + VB) - VAB
B. VAB - (VA + VB)
C. greater of 0 or (VA + VB) - VAB
D. greater of 0 or VAB - (VA + VB)
E. greater of 0 or VAB
Refer to section 26.4

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 26-3
Section: 26.4
Topic: Tax gains

42. Which one of the following statements is correct?


A. Firms with large net operating losses tend to be acquiring firms rather than target firms.
B. The leverage associated with an acquisition increases the tax liability of the acquiring firm.
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 production level.
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.
Refer to section 26.4

AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 26-3
Section: 26.4
Topic: Acquisition effects

26-54

Chapter 26 - Mergers and Acquisitions

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
Refer to section 26.4

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 26-3
Section: 26.4
Topic: Complementary resources

44. Assume the shareholders of a target firm benefit from being acquired in a stock
transaction. Given this, these shareholders are most apt to realize the largest benefit if the:
A. acquiring firm has the better management team and replaces the target firm's managers.
B. management of the target firm is more efficient than the management of the acquiring firm
which replaces them.
C. management of both the acquiring firm and the target firm are as equivalent as possible.
D. current management team of the target firm is kept in place even though the managers of
the acquiring firm are more suited to manage the target firm's situation.
E. current management team of the target firm is technologically knowledgeable but yet
ineffective.
Refer to section 26.4

AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 26-3
Section: 26.4
Topic: Inefficient management

26-55

Chapter 26 - Mergers and Acquisitions

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
Refer to section 26.4

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-3
Section: 26.4
Topic: Acquisition gains

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.
Refer to section 26.4

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-3
Section: 26.4
Topic: Cost of an acquisition

26-56

Chapter 26 - Mergers and Acquisitions

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.
Refer to section 26.5

AACSB: N/A
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 26-3
Section: 26.5
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.
Refer to section 26.5

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-3
Section: 26.5
Topic: Diversification

26-57

Chapter 26 - Mergers and Acquisitions

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.
Refer to section 26.5

AACSB: N/A
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 26-3
Section: 26.5
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.
Refer to section 26.7

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-3
Section: 26.7
Topic: Defensive tactics

26-58

Chapter 26 - Mergers and Acquisitions

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
Refer to section 26.7

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-3
Section: 26.7
Topic: Defensive tactics

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
Refer to section 26.7

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-3
Section: 26.7
Topic: Defensive tactics

26-59

Chapter 26 - Mergers and Acquisitions

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
Refer to section 26.8

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-3
Section: 26.8
Topic: Acquisition effects on stockholders

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
Refer to section 26.9

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-3
Section: 26.9
Topic: Divestitures and restructurings

26-60

Chapter 26 - Mergers and Acquisitions

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.
Refer to section 26.9

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-3
Section: 26.9
Topic: Divestitures and restructurings

56. Nelson's Interiors has $2.13 million in net working capital. The firm has fixed assets with
a book value of $23.23 million and a market value of $26.16 million. The firm has no longterm debt. The Home Centre is buying Nelson's Interiors for $29.5 million in cash. The
acquisition will be recorded using the purchase accounting method. What is the amount of
goodwill that The Home Centre will record on its balance sheet as a result of this acquisition?
A. $1.21 million
B. $3.34 million
C. $3.88 million
D. $4.14 million
E. $6.27 million
Goodwill = $29.5m - $2.13m - $26.16m = $1.21m

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 26-2
Section: 26.3
Topic: Goodwill

26-61

Chapter 26 - Mergers and Acquisitions

57. Troyer Markets and Deb's Grocery are all-equity firms. Troyer Markets has 2,400 shares
outstanding at a market price of $14.80 a share. Deb's Grocery has 3,200 shares outstanding at
a price of $28 a share. Deb's Grocery is acquiring Troyer Markets for $37,500 in cash. What is
the merger premium per share?
A. $0
B. $0.825
C. $1.108
D. $1.216
E. $1.320
Merger premium per share = ($37,500/2,400) - $14.80 = $0.825

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 26-2
Section: 26.3
Topic: Merger premium

58. The Cycle Stop has 1,500 shares outstanding at a market price per share of $8.48. Kate's
Wheels has 1,750 shares outstanding at a market price of $13 a share. Neither firm has any
debt. Kate's Wheels is acquiring The Cycle Stop for $15,000 in cash. What is the merger
premium per share?
A. $1.27
B. $1.46
C. $1.52
D. $4.43
E. $4.52
Merger premium per share = ($15,000/1,500) - $8.48 = $1.52

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 26-2
Section: 26.3
Topic: Merger premium

26-62

Chapter 26 - Mergers and Acquisitions

59. Rosie's has 1,800 shares outstanding at a market price per share of $23.50. Sandy's has
2,500 shares outstanding at a market price of $21 a share. Neither firm has any debt. Sandy's
is acquiring Rosie's. The incremental value of the acquisition is $1,200. What is the value of
Rosie's to Sandy's?
A. $41,100
B. $41,900
C. $42,300
D. $42,700
E. $43,500
Value of Rosie's to Sandy's = (1,800 $23.50) + $1,200 = $43,500

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 26-3
Section: 26.4
Topic: Value of firm B to firm A

60. The Town Crier and The News Express are all-equity firms. The Town Crier has 11,500
shares outstanding at a market price of $26 a share. The News Express has 15,000 shares
outstanding at a price of $31 a share. The News Express is acquiring The Town Crier. The
incremental value of the acquisition is $3,800. What is the value of The Town Crier to The
News Express?
A. $57,500
B. $75,000
C. $87,000
D. $299,000
E. $302,800
Value of The Town Crier to The News Express = (11,500 $26) + $3,800 = $302,800

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 26-3
Section: 26.4
Topic: Value of firm B to firm A

26-63

Chapter 26 - Mergers and Acquisitions

61. The Floral Shoppe and Maggie's Flowers are all-equity firms. The Floral Shoppe has
2,500 shares outstanding at a market price of $16.50 a share. Maggie's Flowers has 5,000
shares outstanding at a price of $17 a share. Maggie's Flowers is acquiring The Floral Shoppe
for $42,900 in cash. The incremental value of the acquisition is $1,200. What is the net
present value of acquiring The Floral Shoppe to Maggie's Flowers?
A. -$450
B. $275
C. $500
D. $2,400
E. $3,700
NPV = (2,500 $16.50) + $1,200 - $42,900 = -$450

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 26-3
Section: 26.6
Topic: Cash acquisition

62. Taylor's Hardware is acquiring The Corner Store for $20,000 in cash. Taylor's has 1,500
shares of stock outstanding at a market value of $46 a share. The Corner Store has 2,200
shares of stock outstanding at a market price of $8 a share. Neither firm has any debt. The
incremental value of the acquisition is $3,500. What is the value of Taylor's Hardware after
the acquisition?
A. $49,000
B. $50,300
C. $67,300
D. $70,100
E. $72,400
Post-acquisition value of Taylor's = (1,500 $46) + (2,200 $8) + $3,500 - $20,000 =
$70,100

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 26-3
Section: 26.6
Topic: Cash acquisition

26-64

Chapter 26 - Mergers and Acquisitions

63. Firm A is acquiring Firm B for $75,000 in cash. Firm A has 4,500 shares of stock
outstanding at a market value of $27 a share. Firm B has 2,500 shares of stock outstanding at
a market price of $29 a share. Neither firm has any debt. The incremental value of the
acquisition is $2,200. What is the price per share of Firm A's stock after the acquisition?
A. $25.98
B. $26.45
C. $26.93
D. $27.00
E. $27.33
Price per share of A = [(4,500 $27) + (2,500 $29) + $2,200 - $75,000]/4,500 = $26.93

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 26-3
Section: 26.6
Topic: Cash acquisition

64. The Sweet Shoppe and Candy Land are all-equity firms. The Sweet Shoppe has 500
shares outstanding at a market price of $96 a share. Candy Land has 2,500 shares outstanding
at a price of $24 a share. The Sweet Shoppe is acquiring Candy Land for $62,000 in cash. The
incremental value of the acquisition is $3,600. What is the net present value of acquiring
Candy Land to The Sweet Shoppe?
A. $1,100
B. $1,600
C. $2,700
D. $4,200
E. $5,700
NPV = (2,500 $24) + $3,600 - $62,000 = $1,600

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 26-3
Section: 26.6
Topic: Cash acquisition

26-65

Chapter 26 - Mergers and Acquisitions

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

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 26-3
Section: 26.6
Topic: Cash acquisition

66. Outdoor Living has agreed to be acquired by New Adventures for $48,000 worth of New
Adventures stock. New Adventures currently has 8,000 shares of stock outstanding at a price
of $32 a share. Outdoor Living has 1,500 shares outstanding at a price of $43 a share. The
incremental value of the acquisition is $21,000. What is the value of the merged firm?
A. $85,500
B. $256,000
C. $277,000
D. $320,500
E. $341,500
Value of merged firm = (8,000 $32) + (1,500 $43) + $21,000 = $341,500

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 26-3
Section: 26.6
Topic: Stock acquisition

26-66

Chapter 26 - Mergers and Acquisitions

67. Moore Industries has agreed to be acquired by Scott Enterprises for $22,000 worth of
Scott Enterprises stock. Scott Enterprises currently has 7,500 shares of stock outstanding at a
price of $28 a share. Moore Industries has 1,800 shares outstanding at a price of $12 a share.
The incremental value of the acquisition is $1,100. What is the value per share of Scott
Enterprises stock after the acquisition?
A. $27.52
B. $27.96
C. $28.08
D. $28.47
E. $31.03
Value per share = [(7,500 $28) + (1,800 $12) + $1,100]/[7,500 + ($22,000/28)] = $28.08

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 26-3
Section: 26.6
Topic: Stock acquisition

68. Aardvark Enterprises has agreed to be acquired by Lawson Products in exchange for
$30,000 worth of Lawson Products stock. Lawson has 3,000 shares of stock outstanding at a
price of $28 a share. Aardvark has 1,200 shares outstanding with a market value of $23 a
share. The incremental value of the acquisition is $1,400. What is the value of Lawson
Products after the merger?
A. $79,400
B. $83,000
C. $111,600
D. $113,000
E. $143,000
Value after merger = (3,000 $28) + (1,200 $23) + $1,400 = $113,000

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 26-3
Section: 26.6
Topic: Stock acquisition

26-67

Chapter 26 - Mergers and Acquisitions

69. Hanover Tires is being acquired by Better Tires for $89,000 worth of Better Tires stock.
Hanover Tires has 2,500 shares of stock outstanding at a price of $36 a share. Better Tires has
6,000 shares outstanding with a market value of $23 a share. The incremental value of the
acquisition is $4,200. How many new shares of stock will be issued to complete this
acquisition?
A. 2,472 shares
B. 3,016 shares
C. 3,133 shares
D. 3,870 shares
E. 3,987 shares
Number of shares issued = $89,000/$23 = 3,870 shares

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 26-3
Section: 26.6
Topic: Stock acquisition

70. Glendale Marine is being acquired by Inland Motors for $53,000 worth of Inland Motors
stock. Inland Motors has 6,200 shares of stock outstanding at a price of $54 a share. Glendale
Marine has 1,700 shares outstanding with a market value of $30 a share. The incremental
value of the acquisition is $2,600. What is the total number of shares in the new firm?
A. 6,200 shares
B. 7,181 shares
C. 7,229 shares
D. 7,852 shares
E. 7,900 shares
Total number of shares = 6,200 + ($53,000/$54) = 7,181 shares

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 26-3
Section: 26.6
Topic: Stock acquisition

26-68

Chapter 26 - Mergers and Acquisitions

71. Firm B is being acquired by Firm A for $162,000 worth of Firm A stock. The incremental
value of the acquisition is $4,600. Firm A has 8,500 shares of stock outstanding at a price of
$36 a share. Firm B has 5,900 shares of stock outstanding at a price of $27 a share. What is
the value per share of Firm A after the acquisition?
A. $35.28
B. $35.71
C. $36.00
D. $36.15
E. $37.04
Value per share = [(8,500 $36) + (5,900 $27) + $4,600]/[8,500 + ($162,000/$36)] =
$36.15

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 26-3
Section: 26.6
Topic: Stock acquisition

72. Firm A is being acquired by Firm B for $54,000 worth of Firm B stock. The incremental
value of the acquisition is $5,600. Firm A has 2,400 shares of stock outstanding at a price of
$21 a share. Firm B has 2,700 shares of stock outstanding at a price of $50 a share. What is
the actual cost of the acquisition using company stock?
A. $50,509
B. $52,276
C. $54,571
D. $56,780
E. $60,600
Number of shares issued = $54,000/$50 = 1,080 shares
Value per share after merger = [(2,400 $21) + (2,700 $50) + $5,600]/[2,700 + 1,080] =
$50.5291
Actual cost of acquisition = 1,080 $50.5291 = $54,571

AACSB: Analytic
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 26-3
Section: 26.6
Topic: Stock acquisition

26-69

Chapter 26 - Mergers and Acquisitions

73. Merchantile Exchange is being acquired by National Sales. The incremental value of the
acquisition is $1,800. Merchantile Exchange has 1,500 shares of stock outstanding at a price
of $18 a share. National Sales has 3,500 shares of stock outstanding at a price of $54 a share.
What is the net present value of the acquisition given that the actual cost of the acquisition
using company stock is $28,780?
A. $8
B. $11
C. $20
D. $37
E. $46
Net present value = [(1, 500 $18) + $1,800] - $28,780 = $20

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 26-3
Section: 26.6
Topic: Stock acquisition

74. Dressler, Inc., is planning on merging with Weston Foods. Dressler will pay Weston's
shareholders the current value of its stock in shares of Dressler stock. Dressler's currently has
6,200 shares of stock outstanding at a market price of $30 a share. Weston's has 2,200 shares
outstanding at a price of $28 a share. How many shares of stock will be outstanding in the
merged firm?
A. 6,840 shares
B. 7,061 shares
C. 7,200 shares
D. 8,253 shares
E. 8,609 shares
Number of shares = 6,200 + [(2,200 $28)/$30] = 8,253 shares

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 26-3
Section: 26.5
Topic: Earnings and valuation

26-70

Chapter 26 - Mergers and Acquisitions

75. Alpha is planning on merging with Beta. Alpha will pay Beta's shareholders the current
value of their stock in shares of Alpha. Alpha currently has 4,200 shares of stock outstanding
at a market price of $40 a share. Beta has 2,500 shares outstanding at a price of $18 a share.
The after-merger earnings will be $8,800. What will the earnings per share be after the
merger?
A. $1.61
B. $1.65
C. $1.75
D. $1.81
E. $1.86
Number of shares = 4,200 + [(2,500 $18)/$40] = 5,325
Earnings per share = $8,800/5,325 = $1.65

AACSB: Analytic
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 26-2
Section: 26.5
Topic: Earnings and valuation

76. Sue's Bakery is planning on merging with Ted's Deli. Sue's will pay Ted's shareholders the
current value of their stock in shares of Sue's Bakery. Sue's currently has 4,500 shares of stock
outstanding at a market price of $19 a share. Ted's has 2,100 shares outstanding at a price of
$20 a share. What is the value of the merged firm?
A. $106,500
B. $107,800
C. $125,400
D. $127,500
E. $131,600
Value of merged firm = (4,500 $19) + (2,100 $20) = $127,500

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 26-3
Section: 26.5
Topic: Earnings and valuation

26-71

Chapter 26 - Mergers and Acquisitions

77. George's Equipment is planning on merging with Nelson Machinery. George's will pay
Nelson's shareholders the current value of their stock in shares of George's Equipment.
George's currently has 4,600 shares of stock outstanding at a market price of $31 a share.
Nelson's has 1,600 shares outstanding at a price of $38 a share. What is the value per share of
the merged firm?
A. $30.77
B. $31.00
C. $31.29
D. $31.74
E. $32.06
Value per share = [(4,600 $31) + (1,600 $38)]/{[4,600 + (1,600 $38)]/$31} = $31

AACSB: Analytic
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 26-3
Section: 26.5
Topic: Earnings and valuation

Essay Questions

78. Empirical evidence indicates that the returns to shareholders of the target firm vary
significantly from the returns to the shareholders of the acquiring firm. Identify the
shareholders that tend to realize the smaller return and provide some possible explanation for
these low returns.
The empirical evidence strongly indicates that the shareholders of the target firm realize large
wealth gains as a result of a takeover bid but the shareholders in the acquiring firm gain little,
if anything. While a definitive answer is elusive, the following have been offered as possible
explanations for these low returns to acquiring shareholders: 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.
Feedback: Refer to section 26.8

AACSB: Reflective thinking


Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 26-3
Section: 26.8
Topic: Merger gains

26-72

Chapter 26 - Mergers and Acquisitions

79. Identify 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.
Feedback: Refer to section 26.1

AACSB: Reflective thinking


Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 26-1
Section: 26.1
Topic: Forms of acquisitions

80. Defensive merger tactics are designed to thwart unwanted takeovers and mergers. Do such
activities work to the advantage of shareholders all of the time? Are these types of activities
ethical? Who do you think benefits the 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. Some
students will argue that management benefits most from these activities. The ethics debate
about these issues is always an interesting one.
Feedback: Refer to section 26.7

AACSB: Reflective thinking


Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 26-1
Section: 26.7
Topic: Poison pills

26-73

Chapter 26 - Mergers and Acquisitions

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.
Feedback: Refer to section 26.4

AACSB: Reflective thinking


Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 26-3
Section: 26.4
Topic: Complementary resources

Multiple Choice Questions

82. Pearl, Inc. has offered $860 million cash for all of the common stock in Jam Corporation.
Based on recent market information, Jam is worth $710 million as an independent operation.
For the merger to make economic sense for Pearl, what would the minimum estimated value
of the synergistic benefits from the merger have to be?
A. $0
B. $75 million
C. $150 million
D. $710 million
E. $860 million
Minimum economic value = $860 million - $710 million = $150 million

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
EOC #: 26-1
Learning Objective: 26-3
Section: 26.4
Topic: Calculating synergy

26-74

Chapter 26 - Mergers and Acquisitions

83. Consider the following premerger information about Firm X and Firm Y:

Assume that Firm X acquires Firm Y by paying cash for all the shares outstanding at a merger
premium of $3 per share. Also assume that neither firm has any debt before or after the
merger. What is the value of the total equity of the combined firm, XY, if the purchase method
of accounting is used?
A. $1,274,000
B. $1,316,000
C. $1,352,000
D. $1,422,000
E. $1,427,000
Assets from X = 26,000($26) = $676,000 (book value)
Assets from Y = 26,000($23) = $598,000 (market value)
Goodwill = 26,000($23 + $3) - $598,000 = $78,000
Total Assets XY =Total equity XY = $676,000 + $598,000 + $78,000 = $1,352,000

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
EOC #: 26-2
Learning Objective: 26-2
Section: 26.2
Topic: Balance sheet for mergers

26-75

Chapter 26 - Mergers and Acquisitions

84. Assume the following balance sheets are stated at book value.

What will be the value of the equity account on the postmerger balance sheet assuming that
Meat Co. purchases Loaf, Inc. and the pooling of interests method of accounting is used.
A. $26,700
B. $33,600
C. $35,800
D. $38,200
E. $46,100
Postmerger equity = $26,700 + $9,100 = $35,800

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
EOC #: 26-3
Learning Objective: 26-2
Section: 26.3
Topic: Balance sheet for mergers

26-76

Chapter 26 - Mergers and Acquisitions

85. Assume the following balance sheets are stated at book value.

Suppose the fair market value of Loaf's fixed assets is $7,200 versus the $3,300 book value
shown. Meat pays $10,200 for Loaf and raises the needed funds through an issue of long-term
debt. Assume the purchase method of accounting is used. The post-merger balance sheet of
Meat Co. will have total debt of ______ and total equity of ______.
A. $1,600; $11,500
B. $1,600; $15,400
C. $10,200; $15,400
D. $14,500; $11,500
E. $14,500; $15,400
Total post-merger debt = $1,800 + $1,100 + $900 + $500 + $10,200 = $14,500
Total post-merger equity = Pre-merger equity of acquiring firm = $11,500

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
EOC #: 26-4
Learning Objective: 26-2
Section: 26.3
Topic: Balance sheet for mergers

26-77

Chapter 26 - Mergers and Acquisitions

86. Silver Enterprises has acquired All Gold Mining in a merger transaction. The following
balance sheets represent the premerger book values for both firms.

Assume the merger is treated as a pooling of interests for accounting purposes. The total
assets are _____ and the total equity is _____ on the post-merger balance sheet.
A. $24,500; $10,500
B. $24,500; $18,200
C. $26,300; $10,500
D. $26,300; $16,600
E. $26,300; $18,200
Post-merger total assets = $16,600 + $9,700 = $26,300
Post-merger total equity = $10,500 + $7,700 = $18,200

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
EOC #: 26-5
Learning Objective: 26-2
Section: 26.3
Topic: Balance sheet for mergers

26-78

Chapter 26 - Mergers and Acquisitions

87. Silver Enterprises has acquired All Gold Mining in a merger transaction. The following
balance sheets represent the premerger book values for both firms.

Assume the merger is treated as a purchase for accounting purposes. The market value of All
Gold Mining's fixed assets is $3,800; the market values for current and other assets are the
same as the book values. Assume that Silver Enterprises issues $5,000 in new long-term debt
to finance the acquisition. The post-merger balance sheet will reflect goodwill of _____ and
total equity of _____.
A. $640; $2,700
B. $640; $4,610
C. $890; $2,700
D. $890; $4,610
E. $890; $5,500
Goodwill will be created since the acquisition price is greater than the book value. The
goodwill amount is equal to the purchase price minus the market value of assets, plus the
market value of the acquired company's debt.
Goodwill = $5,000 - ($3,800 market value FA) - ($600 market value of CA) - ($210 market
value OA) + ($500 current liabilities) = $890
Total equity = Equity of acquiring firm = $2,700

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
EOC #: 26-6
Learning Objective: 26-2
Section: 26.3
Topic: Incorporating goodwill

26-79

Chapter 26 - Mergers and Acquisitions

88. Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no
debt. Penn believes the acquisition will increase its total aftertax annual cash flows by $3.7
million indefinitely. The current market value of Teller is $103 million, and that of Penn is
$151.7 million. The appropriate discount rate for the incremental cash flows is 9 percent.
Penn is trying to decide whether it should offer 44 percent of its stock of $133 million in cash
to Teller's shareholders. The cost of the cash alternative is _____, while the cost of the stock
alternative is _____.
A. $103,000,000; $130,156,889
B. $103,000,000; $133,000,000
C. $133,000,000; $103,000,000
D. $133,000,000; $130,156,889
E. $236,000,000; $103,000,000
Cash cost = Amount of cash offered = $133 million
To calculate the cost of the stock offer, we first need to calculate the value of the target to the
acquirer. The value of the target firm to the acquiring firm will be the market value of the
target plus the PV of the incremental cash flows generated by the target firm. The cash flows
are a perpetuity, so:
V* = $103,000,000 + $3,700,000/0.09 = $144,111,111
The cost of the stock offer is the percentage of the acquiring firm given up times the sum of
the market value of the acquiring firm and the value of the target firm to the acquiring firm.
So, the equity cost will be:
Equity cost = 0.44($151,700,000 + $144,111,111) = $130,156,899

AACSB: Analytic
Bloom's: Analysis
Difficulty: Intermediate
EOC #: 26-7
Learning Objective: 26-3
Section: 26.6
Topic: Cash versus stock payment

26-80

Chapter 26 - Mergers and Acquisitions

89. The shareholders of Jolie Company have voted in favor of a buyout offer from Pitt
Corporation. Information about each firm is given here:

Jolie's shareholders will receive one share of Pitt stock for every three shares they hold in
Jolie. Assume the NPV of the acquisition is zero. What will the post-merger PE ratio be for
Pitt?
A. 8.4
B. 9.2
C. 9.8
D. 10.5
E. 11.2
The EPS of the combined company will be the sum of the earnings of both companies divided
by the number of shares in the combined company. Since the stock offer is one share of the
acquiring firm for three shares of the target firm, net shares in the acquiring firm will increase
by one-third of the target firm's current shares. So, the new EPS will be:
EPS = ($210,000 + $630,000)/[124,000 + (1/3)(62,000)] = $5.81
The market price of Pitt will remain unchanged if it is a zero NPV acquisition. Using the PE
ratio, we find the current market price of Pitt stock, which is:
P = 12($630,000)/124,000 = $60.967742
If the acquisition has a zero NPV, the stock price should remain unchanged. Therefore, the
new PE will be:
PE = $60.967742/$5.81 = 10.5

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
EOC #: 26-8
Learning Objective: 26-3
Section: 26.5
Topic: Merger PE

26-81

Chapter 26 - Mergers and Acquisitions

90. Consider the following premerger information about a bidding firm (Firm B) and a target
firm (Firm T). Assume that neither firm has any debt outstanding.

Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is
$2,600. What is the NPV of the merger assuming that Firm T is willing to be acquired for $28
per share in cash?
A. $400
B. $600
C. $1,800
D. $2,200
E. $2,600
The NPV of the merger is the market value of the target firm, plus the value of the synergy,
minus the acquisition costs, so:
NPV = 1,100 ($26) + $2,600 - 1,100($28) = $400

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
EOC #: 26-9
Learning Objective: 26-3
Section: 26.6
Topic: Merger NPV

26-82

Chapter 26 - Mergers and Acquisitions

91. Consider the following premerger information about Firm A and Firm B:

Assume that Firm A acquires Firm B via an exchange of stock at a price of $25 for each share
of B's stock. Both A and B have no debt outstanding. What will the earnings per share of Firm
A be after the merger?
A. $1.60
B. $1.86
C. $1.95
D. $2.02
E. $2.10
Cost of acquisition = 210 ($25) = $5,250
Since the stock price of the acquiring firm is $40, the firm will have to give up:
Shares offered = $5,250/$40 = 131.25 shares
The EPS of the merged firm will be the combined earnings of the existing firms divided by
the new shares outstanding, so:
EPS = ($930 + $650)/(620 + 131.25) = $2.10

AACSB: Analytic
Bloom's: Analysis
Difficulty: Intermediate
EOC #: 26-11
Learning Objective: 26-3
Section: 26.5
Topic: Post-merger EPS

26-83