Final Ch.20

Question 1

consolidation

Answer 1

two or more companies combined to form a new entity

Question 2

tax loss carryforward

Answer 2

motive for companies to merge and takes place when one of the firms has previously sustained a tax loss

Question 3

vertical integration

Answer 3

acquisition of buyers or sellers of goods to the company

Question 4

horizontal integration

Answer 4

acquisition of competitors

Question 5

stock for stock exchange

Answer 5

emphasis is laid on earnings per share impact of exchanging securities
- acquiring firm increases its immediate earnings per share as a result of the merger

Question 6

portfolio effect

Answer 6

overall risk is reduced -> increase in P/E ratio and market value may increase

if there is less risk in a firm, investor may be willing to assign a higher valuation (increasing P/E ratio)

Question 7

tender offer

Answer 7

involves an attempt by a company to acquire a target firm against its will

An offer to purchase some or all of shareholders’ shares in a corporation.

Question 8

two step buyout

Answer 8

acquiring company attempts to gain control

1. offering a very high price for 51% of the shares outstanding
2. announces a second lower price that will be paid off late