A

A group of individual investors is in the process of acquiring all of the publiclytraded

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? going -private transaction

A potential merger which produces synergy: creates value and therefore should be
pursued.

A proposed acquisition may create synergy by: increasing the market power of the
combined firm. improving the distribution network of the acquiring firm. providing
the combined firm with a strategic advantage.
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 1,100 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? $110,700

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

NPV of $1.3 million. This NPV is referred to as: synergy.

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 $1.65

An acquisition completed simply to diversify a firm will: generally not add any value to
the firm.

An auto maker recently acquired a windshield manufacturer. Which type of an acquisition

was this? vertical

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: acquiring firm has the better management team and replaces the target
firm's managers.

Biltwell Hotels is acquiring all of the assets of Green Roof Inns. As a result, Green Roof
Inns: will remain as a shell corporation unless the shareholders opt to dissolve it.

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): split-up.

Chicken. This transaction is known as a: leveraged buyout.

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: joint venture.

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

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? The purchase of publicly-traded shares may be

more expensive than an outright merger with Blue Jays would have been. Down

River Markets can avoid dealing with the board of directors of Blue Jays by
purchasing shares in this manner. Whether or not Down River Markets gains control

of Blue Jays depends upon the willingness of Blue Jays shareholders to sell their

shares.

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 $25 a share. How many shares of stock will be outstanding

in the merged firm? 8 ,033 shares

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 $4,500. What is the

value of The Town Crier to The News Express? 303,500

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): spin-off.

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?

$26.93

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 $19 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? $53,200

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? $36.15

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? joint venture

For financial statement purposes, goodwill created by an acquisition: must be reviewed

each year and amortized to the extent that it has lost value.

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? $31.00

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 $49 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? 7,282 shares
H
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? 3 ,870 shares
I
If Paul's Hardware were to acquire Suburban Hardware, the acquisition would be
classified as a acquisition. horizontal

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. scorched earth

If an acquisition does not create value and the market is smart, then the: earnings per
share can change but the stock price of the acquiring firm should remain constant.

If General Electric, a highly diversified company, were to acquire Ocean Freight

In a merger the: acquiring firm retains its pre-merger legal status.

In a tax-free acquisition, the shareholders of the target firm are viewed as having
exchanged shares on a dollar -for-dollar basis.

Jasper Farms. This sale is referred to as a(n): divestiture.

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: strategic alliance.

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 merger.
Limited, the acquisition would be classified as a acquisition conglomerate

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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? share rights plan

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? $20 acquisition

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? $28.08

Nelson's Interiors has $1.52 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 long-

term 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? $1.82 million

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 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 1,700 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?$350,100

Pearl, Inc. has offered $920 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? $210 million

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? equity carve-out

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: greenmail.

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? $43,500

S

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? $37.87

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? proxy contest

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 2,300 shares outstanding at a

price of $20 a share. What is the value of the merged firm? $131,500

Taylor's Hardware is acquiring The Corner Store for $25,000 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? $65,100

T

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 consolidation

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: leveraged buyout.

The Cycle Stop has 1,600 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? $0.90

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? tender offer

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? -$450

The incremental cash flows of a merger can relate to changes in which of the following? I,

II, III, and IV

The pooling of interests method of accounting: consists of simply combining the balance
sheets of the acquiring and the target firm.
The primary purpose of a flip-in provision is to: dilute a corporate raider's ownership
position.
The purchase accounting method requires that: the assets of the target firm be recorded
at their fair market value on the balance sheet of the acquiring firm.

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 2,700 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? $6,400

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

The value of a target firm to the acquiring firm is equal to: the value of the target firm as
a separate entity plus the incremental value derived from the acquisition.

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? $0.825

When evaluating an acquisition you should: apply the rate of return that is relevant to
the incremental cash flows.
Which of the following are examples of cost reductions that can result from an acquisition?

I, II, III, and IV

Which of the following are reasons why a firm may want to divest itself of some of its

assets? I, II, III, and IV

Which of the following are required for an acquisition to be considered tax-free?

continuity of equity interest, a business purpose, other than avoiding taxes, for the
acquisition, payment in the form of equity shares for the acquired firm
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, II, and IV

Which of the following increase the costs associated with a merger? seeking approval of
the shareholders of both the acquiring and the acquired firm

Which of the following is a form of a takeover? I, II, III, and IV

Which of the following represent potential gains from an acquisition? increased use of
debt, lower costs per unit produced, strategic beachhead
Which of the following represent potential tax benefits that can directly result from an

acquisition? an increase in depreciation expense, the use of net operating losses, an

increased use of leverage

Which of the following statements correctly apply to a merger? The merged firm will
retain the use of the acquiring company's name. Theshareholders of the acquired
company must approve the merger.
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 : greater of 0 or V AB - (VA +
V B)
Which one of the following defensive tactics is designed to prevent a "two-tier" takeover

offer? fair price provision

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? poison pill

Which one of the following pairs of businesses could probably benefit the most by sharing

complementary resources? ski resort and golf course

Which one of the following statements correctly applies to a legally defined merger? The

acquired firm is completely absorbed and ceases to exist as a separate legal entity.

Which one of the following statements is correct? A spin-off frequently follows an

equity carve-out.
Which one of the following statements is correct? 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.

Which one of the following statements is correct? 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.

Which one of the following statements is correct? 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.

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?

$1,352,000

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. $38,300

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 ______. $14,500; $11,500

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 postmerger

balance sheet. $27,500; $19,400

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

_____. $890; $2,700

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 40 percent of its stock of $127 million in cash to Teller's

shareholders. The cost of the cash alternative is _____, while the cost of the

stock alternative is _____. $127,000,000; $118,324,444

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85. 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? 10.5

86. 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 $2,500. What is the NPV of the $100

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? $2.10