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1. Suppose that the market price of Company X is $45 per share and that

of Company Y is $30. If X offers three-fourths a share of common stock for each share of Y, the ratio of exchange of market prices would be: .667

viewed as sexual harassment when it occurs in the workplace.

7. The public sale of common stock in a subsidiary in which the parent

usually retains majority control is called a pure play. 1.0 a spin-off. 1.125 a partial sell-off. 1.5

2. The restructuring of a corporation should be undertaken if

the restructuring can prevent an unwanted takeover.

an equity carve-out.

8. In the United States, goodwill charges arising from a current acquisition

are generally deductible for "tax purposes" over 15 years.

the restructuring is expected to create value for shareholders.

20 years. the restructuring is expected to increase the firm's revenue. 40 years. the interests of bondholders are not negatively affected.

3. The "information effect" refers to the notion that

a corporation's actions may convey information about its future prospects.

no years (i.e., these goodwill charges are not deductible for "tax purposes").

9. Empirical evidence on acquisitions indicates

excess returns on average to the shareholders of the selling company, and e xcess returns on average to those of the buying company. no; no

management is reluctant to provide financial information that is not required by law.

substantial; no agents incur costs in trying to obtain information. no; substantial the financial manager should attempt to manage sensitive information about the firm.

4. In the long run, a successful acquisition is one that:

enables the acquirer to make an all-equity purchase, thereby avoiding additional financial leverage.

substantial; substantial

10. One means for a company to "go private" is

divestiture.

enables the acquirer to diversify its asset base.

the pure play.

increases the market price of the acquirer's stock over what it would have been without the acquisition.

the leveraged buyout (LBO).

the prepackaged reorganization.

increases financial leverage.

11. Recent accounting changes in the US

5. Bidding companies often pay too much for the acquired firm. The hubris hypothesis explains this by suggesting that the bidders
have too little information to make an optimal decision.

eliminated the purchase method, allowing only the pooling-of-interests method for mergers and acquisitions

eliminated the pooling-of-interests method, allowing only the purchase method for mergers and acquisitions

have big egos and this impedes rational decision-making. allow for both the purchase method and the pooling-ofinterests method for mergers and acquisitions

have difficulty in thinking strategically over the long-term.

are overly influenced by the tax consequences of an acquisition.

outlawed the recording of goodwill for any merger or acquisition 1. A business is traditionally valued through which two mechanisms: A. Multiple of EBITDA (Earnings before interest, taxes, depreciation and amortization) B. The charming nature of its CEO C. % or multiple of revenue D. A & C 2. When selling your business be prepared to do the following in a due diligence meeting EXCEPT: A. Get under NDA B. Talk in more detail about your financials & customers

6. A tender offer is
a goodwill gesture by a "white knight."

a would-be acquirer's friendly takeover attempt.

a would-be acquirer's offer to buy stock directly from shareholders.

C. Talk about how you would grow and improve your business D. Be evasive and sneaky 3. A functional website, marketing plan, proprietary products and stable employee base lend themselves to a higher valuation for the selling company. A. TRUE B. FALSE 4. An acquisition, from start to finish, generally takes between: A. 1-2 weeks B. 3-12 months C. 2-4 years D. 5 years + 5. Motivations for selling a business may include: A. The need for outside strength/capital B. Retirement C. Partner/Ownership changes D. All of the above 6. A selling businesss real estate must ALWAYS be purchased by the acquiring company: A. TRUE B. FALSE 7. After how long might unsold inventory be considered stale? A. 1 week B. 4 years C. 12-18 months D. Parts from 1972 are still good, right? 8. Equipment assets are more valuable if they are operational and in use. A. TRUE B. FALSE Answers: 1. D.; 2. D.; 3. A.; 4. B.; 5. D.; 6. B.; 7. C.; 8. A TRUE or FALSE: M&A transactions deliver a premium return to shareholders of the target company, but buyers (on average) earn only a going rate of return. TRUE or FALSE: Whenever an investor acquires 5% or more of a U.S. public company, it must disclose its intentions, the identities of all investors, their occupation, sources of financing, and the purpose of the acquisition. TRUE or FALSE: Conventional wisdom that a diversification strategy destroys company value is currently being challenged. TRUE or FALSE: The consensus among academics and practitioners is that 5% is a good representation of the market risk premium that should be used in the CAPM model of valuation. TRUE or FALSE: Holding companies and their shareholders may be subject to triple taxation. TRUE or FALSE: In evaluating the impact of an acquisition, Wall Street tends to value potential revenue synergies more highly than cost synergies. TRUE or FALSE: Effective merger integration progresses through a series of phases that begins with strategic planning and ends with post-merger integration efforts. TRUE or FALSE: Acquisition integration means effectively absorbing the target company into the culture and business systems of the acquirer. TRUE or FALSE: Over the past few decades, over 25% of M&A transactions in the United States have been hostile or unfriendly takeover attempts. TRUE or FALSE: In a triangular cash merger, the target firm may either be merged into an acquirer's operating or shell acquisition subsidiary with the subsidiary surviving, or the acquirer's subsidiary is merged into the target firm with the target survinging. A)Shares of the new company are given to shareholders of the parent company B)Shares of the new company are sold as a public offering C)Shares of the new company are bought by borrowing or issuing junk bonds D)None of the above 7 INCORRECT In case of carve-outs: A)Shares of the new company are given to the shareholders of the parent company B)Shares of the new company are sold in a public offering C)Shares of the new company are bought by borrowing or issuing junk bonds D)None of the above 8 INCORRECT Which of the following statements regarding spin-offs and carve-outs is not true?

TRUE or FALSE: A valuation estimation using the constant growth model involves the calculation of a terminal value. . The following are examples of changes in 1 CORRECT corporate control except: A Mergers and ) acquisition B LBO ) s C Proxy ) fights D Spin-offs and carve) outs 2 INCORRECT Leveraged buyouts (LBOs) almost always involve: A AAA grade ) debt B Issuance of new shares of stock to ) many investors C The existing management team as ) new shareholders D Junk grade ) debt E All of the ) above 3 INCORRECT Which of the following tactics completely eliminates the possibility of a takeover via tender offer? A Leveraged buyout ) (LBO) B Exclusionary self) tender C Targeted ) repurchase D Super majority ) amendment E None of the ) above 4 INCORRECT Big gainers from LBOs were: A Junk bond ) holders B Raider ) s C Selling ) stockholders D Investment banking ) firms 5 INCORRECT Junk bonds are bonds with: A AAA or Aaa ) ratings B BBB or Baa ) ratings C BB or Ba ratings or ) lower D D rated ) bonds 6 INCORRECT In case of spin-offs: A)Spin-offs are not taxed if the shareholders of the parent company are given a majority of shares in the new company B)Spin-offs are not taxed if the shareholders of the parent company are given at least 80% of the shares in the new company C)Gains or losses from carve-outs are taxed at the corporate tax rate D)None of the above 9 CORRECT A privatization is a: A)Sale of a government-owned company to private investors B)Sale of private companies to the government C)Sale of a publicly traded company to private investors D)None of the above 10 INCORRECT The following are important motives for

privatization except: A)Revenue for the government B)Increased efficiency C)Share ownership B)Vertical mergers C)Conglomerate mergers D)Privatization 12 INCORRECT The costs of resolving the conflicts of interest among the stakeholders in a firm are called: A)Agency costs B)Legal costs C)Bankruptcy costs D)Administrative costs 13 CORRECT "Effective" control of a firm requires approximately: A)100% ownership 15 INCORRECT 11 INCORRECT

D)Economies of scale Mergers and acquisitions in unrelated industries are called: A)Horizontal mergers B)51% ownership C)50% ownership D)20% ownership Spin-offs are not taxed as long as shareholders of the parent company are given at least 80% of the shares in the new company. A)True B)False A keiretsu is a network of companies organized around a major bank. A)True B)False

14 INCORRECT

When a firm purchases a majority of another firm's assets or a controlling share of another firm's assets, the firm is engaging in Your Answer: An acquisition. According to the FTC, a firm is engaging in a _______ when the firm acquires suppliers or customers. Correct Answer: Vertical merger.

All of the following are possible motivations for firms to engage in mergers and acquisitions except Your Answer: To increase the stock price of the firm. The market for corporate control is imperfectly competitive when Your Answer: The bidding firm has valuable, rare, and costly to imitate economies of scope with the target firm. Thinly traded merger and acquisition markets typically have all of the following characteristics except Correct Answer: It is uncommon for bidding and target firms to have valuable and rare economies of scale.

__________ is when a target firm's managers purchase any of the target firm's stock that is owned by the bidder. Correct Answer: Green mail

When a second bidding firm agrees to acquire the target firm in place of the original bidding firm, the target firm has Correct Answer: Found a white knight. When mergers and acquisitions are designed to create diversification strategies, the __________ is the appropriate organizational structure. Your Answer: M-Form Which of the following is NOT one of Hofstede's dimensions of culture? Correct Answer: Work orientation Which cultural dimension set forth by Hofstede reflects the attitude of employees who leave when work begins to interfere with the quality of life? Correct Answer: Passive goal behavior The difference between the current market price of a target firm's shares and the price a potential acquirer offers to pay for the shares is known as a purchase premium. Correct Answer: False The more strategically related the bidding and target firms are, the lower the economic value that will be created by mergers or acquisitions. Your Answer: False

When managerial hubris is present, the economic value of the bidding firm will increase once a merger or acquisition strategy is announced. Correct Answer: False It might be possible for bidding firms to earn profits from implementing an acquisition strategy only when the market for corporate control is perfectly competitive. Correct Answer: False Inter-firm linkages, such as a reduction in corporate overhead, are not sources of economic profits in an acquisition. Correct Answer: True Poison pills are devices used by target firms to delay or prevent an acquisition and have proven to be very effective. Correct Answer: False Typically, the entrance of a white knight in a competitive bidding contest for a target firm will increase the wealth of target firm equity holders by 7 percent. Your Answer: False The most significant challenge in integrating bidding and target firms has to do with cultural differences. Correct Answer: True Operational, functional, and cultural differences between bidding and target firms are usually compounded if the acquisition or merger was friendly. Correct Answer: False

In an international setting, acquiring firms must look to sources of value creation that do not depend on the integration of the organizational cultures of the bidding and targ Your Answer: True