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Chapter 26 - Mergers and Acquisitions
Chapter 26 - Mergers and Acquisitions
Chapter 26
Mergers and Acquisitions
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
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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.
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Chapter 26 - Mergers and Acquisitions
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.
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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
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
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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.
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.
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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.
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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
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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
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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
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.
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Chapter 26 - Mergers and Acquisitions
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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
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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
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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
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
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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
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.
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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.
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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
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
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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
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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 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?
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
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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
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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
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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
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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
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
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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
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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
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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.
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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.
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
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Chapter 26 - Mergers and Acquisitions
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
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Chapter 26 - Mergers and Acquisitions
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
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Chapter 26 - Mergers and Acquisitions
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
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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
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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
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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
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
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.
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
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
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
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
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.
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
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.
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
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-3
Section: 26.4
Topic: Synergy
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
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
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.
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.9
Topic: Divestiture
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.
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.
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.
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.1
Topic: Merger
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.1
Topic: Merger
26-42
Chapter 26 - Mergers and Acquisitions
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.1
Topic: Merger
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
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.
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
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
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
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.1
Topic: Horizontal acquisition
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
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.
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
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-1
Section: 26.2
Topic: Taxes and acquisitions
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
AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 26-1
Section: 26.2
Topic: Taxes and acquisitions
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
AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 26-2
Section: 26.3
Topic: Purchase accounting method
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
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
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
AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 26-3
Section: 26.4
Topic: Synergy
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
AACSB: N/A
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 26-3
Section: 26.4
Topic: Acquisition gains
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
AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 26-3
Section: 26.4
Topic: Tax gains
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
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.
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
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-3
Section: 26.4
Topic: Acquisition gains
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.
AACSB: N/A
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 26-3
Section: 26.5
Topic: Acquisitions and earnings per share
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 26-3
Section: 26.5
Topic: Diversification
26-57
Chapter 26 - Mergers and Acquisitions
AACSB: N/A
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 26-3
Section: 26.5
Topic: Effects of acquisitions
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
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
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
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
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
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 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?
A. $1.21 million
B. $3.34 million
C. $3.88 million
D. $4.14 million
E. $6.27 million
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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.
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.
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.
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.
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
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
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
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
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
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
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
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
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
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
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
AACSB: Analytic
Bloom's: Analysis
Difficulty: Intermediate
EOC #: 26-11
Learning Objective: 26-3
Section: 26.5
Topic: Post-merger EPS
26-83