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Exam 26: Mergers

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Question 21

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Although goodwill created in a merger may not be amortized for shareholder reporting purposes, it may be amortized for Federal tax purposes.

A) True
B) False

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Question 22

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Synergistic benefits can arise from a number of different sources, including operating economies of scale, financial economies, and increased managerial efficiency.

A) True
B) False

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Question 23

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two-tier merger offer is one where the acquiring company offers to purchase the target company in a two-part transaction Cash is paid to some stockholders, bonds are issued to others, but the total values of each part of the transaction are equal.

spin-off is a type of divestiture in which the assets of a division are sold to another firm.

Which of the following statements is most CORRECT?

joint venture is one in which 2, or sometimes more, independent companies agree to combine resources in order to achieve a specific objective, usually limited in scope.

Since a manager's central goal is to maximize the firm's stock price, any merger offer that provides stockholders with significant gains over the current stock price will be approved by the current management team.

present value of the free cash flows discounted at the unlevered cost of equity is the value of the firm's operations if it had no debt.

Merger activity is likely to heat up when interest rates are high because target firms can expect to receive an especially high premium over the pre-announcement stock price.

purchase of assets at below their replacement cost and tax considerations are two factors that motivate mergers.

Borrowing funds on terms that would require immediate repayment of all funds if the firm is acquired, selling off valuable assets, and granting huge "golden parachutes" that open if the firm is acquired are 3 procedures used to defend against hostile takeovers These strategies are known as "poison pills."

congeneric merger is one where the merging firms operate in related businesses but do not necessarily produce the same products or have a producer-supplier relationship.

goodwill created in a merger must be amortized over its expected life, usually 40 years, for shareholder reporting purposes.

Which of the following statements about valuing a firm using the APV approach is most CORRECT?

Post-merger control and the negotiated price paid by the acquirer are 2 of the most important issues in agreeing on the terms of a merger.

Coca-Cola's acquisition of Columbia Pictures and its announcement that it would operate its new subsidiary separately could be described as primarily a financial merger.

Which of the following statements about valuing a firm using the APV approach is most CORRECT?

if a target firm's value is greater to the acquiring firm than its market value as a separate entity will a merger be financially justified.

regional restaurant chain, Club Café, is considering purchasing a smaller chain, Sally's Sandwiches, which is currently financed using 20% debt at a cost of 8% Club Café's analysts project that the merger will result in incremental free cash flows and interest tax savings of $2 million in Year 1, $4 million in Year 2, $5 million in Year 3, and $117 million in Year 4 (The Year 4 cash flow includes a horizon value of $107 million.) The acquisition would be made immediately, if it is to be undertaken Sally's pre-merger beta is 2.0, and its post-merger tax rate would be 34% The risk-free rate is 8%, and the market risk premium is 4% What is the appropriate rate for use in discounting the free cash flows and the interest tax savings?

a merger with true synergies, the post-merger value exceeds the sum of the separate companies' pre-merger values.