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Question 1

1. A divestiture is the sale of all or substantially all of a company or product line to another party for cash or securities. True or False

Answer 1

True

Question 2

2. The target company is the firm being solicited by the acquiring company. True or False

Answer 2

True

Question 3

3. A merger of equals is a merger framework usually applied whenever the merger participants are comparable in size, competitive position, profitability, and market capitalization. True or False

Answer 3

True

Question 4

4. A vertical merger is one in which the merger participants are usually competitors. True or False

Answer 4

False

Question 5

5. Joint ventures are cooperative business relationships formed by two or more separate parties to achieve common strategic objectives True or False

Answer 5

True

Question 6

6. Operational restructuring refers to the outright or partial sale of companies or product lines or to downsizing by closing unprofitable or non-strategic facilities. True or False

Answer 6

True

Question 7

7. The primary advantage of a holding company structure is the potential leverage that can be achieved by gaining effective control of other companies’ assets at a lower overall cost than would be required if the firm were to acquire 100 percent of the target’s outstanding stock. True or False

Answer 7

True

Question 8

8. Holding companies and their shareholders may be subject to triple taxation. True or False

Answer 8

True

Question 9

9. Investment bankers offer strategic and tactical advice and acquisition opportunities, screen potential buyers and sellers, make initial contact with a seller or buyer, and provide negotiation support for their clients.
   True or False

Answer 9

True

Question 10

10. Large investment banks invariably provide higher quality service and advice than smaller, so-called boutique investment banks. True or False

Answer 10

False

Question 11

11. Financial restructuring generally refers to actions taken by the firm to change total debt and equity structure. True or False

Answer 11

True

Question 12

12. An acquisition occurs when one firm takes a controlling interest in another firm, a legal subsidiary of another firm, or selected assets of another firm. The acquired firm often remains a subsidiary of the acquiring company. True or False

Answer 12

True

Question 13

13. A leveraged buyout is the purchase of a company using as much equity as possible. True or False

Answer 13

False

Question 14

14. In a statutory merger, both the acquiring and target firms survive. True or False

Answer 14

False

Question 15

15. In a statutory merger, the acquiring company assumes the assets and liabilities of the target firm in accordance with the prevailing federal government statutes. True or False

Answer 15

False

Question 16

16. In a consolidation, two or more companies join together to form a new firm. True or False

Answer 16

True

Question 17

17. A horizontal merger occurs between two companies within the same industry. True or False

Answer 17

True

Question 18

18. A conglomerate merger is one in which a firm acquires other firms, which are highly related to its current core business. True or False

Answer 18

False

Question 19

19. The acquisition of a coal mining business by a steel manufacturing company is an example of a vertical merger. True or False

Answer 19

True

Question 20

20. The merger of Exxon Oil Company and Mobil Oil Company was considered a horizontal merger. True or False

Answer 20

True

Question 21

21. Most M&A transactions in the United States are hostile or unfriendly takeover attempts. True or False

Answer 21

False

Question 22

22. Holding companies can gain effective control of other companies by owning significantly less than 100% of their outstanding voting stock. True or False

Answer 22

True

Question 23

23. Only interest payments on ESOP loans are tax deductible by the firm sponsoring the ESOP. True or False

Answer 23

False

Question 24

24. A joint venture rarely takes the legal form of a corporation. True or False

Answer 24

False

Question 25

25. When investment bankers are paid by a firm’s board to evaluate a proposed takeover bid, their opinions are given in a so-called “fairness letter.” True or False

Answer 25

True

Question 26

26. Synergy is the notion that the combination of two or more firms will create value exceeding what either firm could have achieved if they had remained independent. True or False

Answer 26

True

Question 27

27. Operating synergy consists of economies of scale and scope. Economies of scale refer to the spreading of variable costs over increasing production levels, while economies of scope refer to the use of a specific asset to produce multiple related products or services. True or False

Answer 27

False

Question 28

28. Most empirical studies support the conclusion that unrelated diversification benefits a firm’s shareholders. True or False

Answer 28

False

Question 29

29. Deregulated industries often experience an upsurge in M&A activity shortly after regulations are removed. True or False

Answer 29

True

Question 30

30. Because of hubris, managers of acquiring firms sometimes believe their valuation of a target firm is superior to the market’s valuation. Under these circumstances, they often end up overpaying for the firm. True and False

Answer 30

True

Question 31

31. During periods of high inflation, the market value of assets is often less than their book value. This often creates an attractive M&A opportunity. True or False

Answer 31

False

Question 32

32. Tax benefits, such as tax credits and net operating loss carry-forwards of the target firm, are often considered the primary reason for the acquisition of that firm. True or False

Answer 32

False

Question 33

33. Market power is a theory that suggests that firms merge to improve their ability to set product and service selling prices. True or False

Answer 33

True

Question 34

34. Mergers and acquisitions rarely pay off for target firm shareholders, but they are usually beneficial to acquiring firm shareholders. True or False

Answer 34

False

Question 35

35. Pre-merger returns to target firm shareholders can exceed 30% around the announcement date of the transaction. True or False

Answer 35

True

Question 36

36. Post-merger returns to shareholders often do not meet expectations. However, this is also true of such alternatives to M&As as joint ventures, alliances, and new product introductions. True or False

Answer 36

True

Question 37

37. Overpayment is the leading factor contributing to the failure of M&As to meet expectations. True or False

Answer 37

True

Question 38

38. Takeover attempts are likely to increase when the market value of a firm’s assets is more than their replacement value. True or False

Answer 38

False

Question 39

39. Although there is substantial evidence that mergers pay off for target firm shareholders around the time the takeover is announced, shareholder wealth creation in the 3-5 years following a takeover is often limited.

Answer 39

True

Question 40

40. A statutory merger is a combination of two corporations in which only one corporation survives with the merged corporation goes out of existence. True or False

Answer 40

True

Question 41

41. A subsidiary merger is a merger of two companies where the target company becomes a subsidiary of the parent. True or False

Answer 41

True

Question 42

42. Consolidation occurs when two or more companies join to form a new company. True or False

Answer 42

True

Question 43

43. An acquisition is the purchase of an entire company or a controlling interest in a company. True or False

Answer 43

True

Question 44

44. A leveraged buyout is the purchase of a company financed primarily by debt. This is a term commonly applied to a firm going private financed primarily by debt. True or False

Answer 44

True

Question 45

45. Growth is often cited as an important factor in acquisitions. The underlying assumption is that that bigger is better to achieve scale, critical mass, globalization, and integration. True or False

Answer 45

True

Question 46

46. The empirical evidence supports the presumption that bigger is always better when it comes to acquisitions. True or False

Answer 46

False

Question 47

47. The empirical evidence shows that unrelated diversification is an effective means of smoothing out the business cycle. True or False

Answer 47

False

Question 48

48. Individual investors can generally diversify their own stock portfolios more efficiently than corporate managers who diversify the companies they manage. True or False

Answer 48

True

Question 49

49. Financial considerations, such as an acquirer believing the target is undervalued, a booming stock market or falling interest rates, frequently drive surges in the number of acquisitions. True or False

Answer 49

True

Question 50

50. Regulatory and political change seldom plays a role in increasing or decreasing the level of M&A activity. True or False

Answer 50

False

Question 51

1. Which of the following are generally considered restructuring activities? a. A merger b. An acquisition c. A divestiture d. A consolidation e. All of the above

Answer 51

E. all of the above

Question 52

2. All of the following are considered business alliances except for a. Joint ventures b. Mergers c. Minority investments d. Franchises e. Licensing agreements

Answer 52

B. mergers

Question 53

3. Which of the following is an example of economies of scope? a. Declining average fixed costs due to increasing levels of capacity utilization b. A single computer center supports multiple business units c. Amortization of capitalized software d. The divestiture of a product line e. Shifting production from an underutilized facility to another to achieve a higher overall operating rate and shutting down the first facility

Answer 53

B. A single computer center supports multiple business units

Question 54

4. A firm may be motivated to purchase another firm whenever a. The cost to replace the target firm’s assets is less than its market value b. The replacement cost of the target firm’s assets exceeds its market value c. When the inflation rate is accelerating d. The ratio of the target firm’s market value is more than four times its book value e. The market to book ratio is greater than one and increasing

Answer 54

b. The replacement cost of the target firm’s assets exceeds its market value

Question 55

5. Which of the following is true only of a consolidation? a. More than two firms are involved in the combination b. One party to the combination disappears c. All parties to the combination disappear d. The entity resulting from the combination assumes ownership of the assets and liabilities of the acquiring firm only. e. One company becomes a wholly owned subsidiary of the other.

Answer 55

c. All parties to the combination disappear

Question 56

6. Which one of the following is not an example of a horizontal merger? a. NationsBank and Bank of America combine b. U.S. Steel and Marathon Oil combine c. Exxon and Mobil Oil combine d. SBC Communications and Ameritech Communications combine e. Hewlett Packard and Compaq Computer combine

Answer 56

b. U.S. Steel and Marathon Oil combine

Question 57

7. Buyers often prefer “friendly” takeovers to hostile ones because of all of the following except for: a. Can often be consummated at a lower price b. Avoid an auction environment c. Facilitate post-merger integration d. A shareholder vote is seldom required e. The target firm’s management recommends approval of the takeover to its shareholders

Answer 57

d. A shareholder vote is seldom required

Question 58

8. Which of the following represent disadvantages of a holding company structure? a. Potential for triple taxation b. Significant number of minority shareholders may create contentious environment c. Managers may have difficulty in making the best investment decisions d. A, B, and C e. A and C only

Answer 58

d. A, B, and C

Question 59

9. Which of the following are not true about ESOPs? a. An ESOP is a trust b. Employer contributions to an ESOP are tax deductible c. ESOPs can never borrow d. Employees participating in ESOPs are immediately vested e. C and D

Answer 59

e. C and D

Question 60

10. ESOPs may be used for which of the following? a. As an alternative to divestiture b. To consummate management buyouts c. As an anti-takeover defense d. A, B, and C e. A and B only

Answer 60

d. A, B, and C

Question 61

11. Which of the following represent alternative ways for businesses to reap some or all of the advantages of M&As? a. Joint ventures and strategic alliances b. Strategic alliances, minority investments, and licensing c. Minority investments, alliances, and licensing d. Franchises, alliances, joint ventures, and licensing e. All of the above

Answer 61

e. All of the above

Question 62

12. Which of the following are often participants in the acquisition process? a. Investment bankers b. Lawyers c. Accountants d. Proxy solicitors e. All of the above

Answer 62

e. All of the above

Question 63

The purpose of a “fairness” opinion from an investment bank is a. To evaluate for the target’s board of directors the appropriateness of a takeover offer b. To satisfy Securities and Exchange Commission filing requirements c. To support the buyer’s negotiation effort d. To assist acquiring management in the evaluation of takeover targets e. A and B

Answer 63

a. To evaluate for the target’s board of directors the appropriateness of a takeover offer

Question 64

Arbitrageurs often adopt which of the following strategies in a share for share exchange just before or just after a merger announcement? a. Buy the target firm’s stock b. Buy the target firm’s stock and sell the acquirer’s stock short c. Buy the acquirer’s stock only d. Sell the target’s stock short and buy the acquirer’s stock e. Sell the target stock short

Answer 64

b. Buy the target firm’s stock and sell the acquirer’s stock short

Question 65

Institutional investors in private companies often have considerable influence approving or disapproving proposed mergers. Which of the following are generally not considered institutional investors? a. Pension funds b. Insurance companies c. Bank trust departments d. United States Treasury Department e. Mutual funds

Answer 65

d. United States Treasury Department

Question 66

Which of the following are generally not considered motives for mergers? a. Desire to achieve economies of scale b. Desire to achieve economies of scope c. Desire to achieve antitrust regulatory approval d. Strategic realignment e. Desire to purchase undervalued assets

Answer 66

c. Desire to achieve antitrust regulatory approval

Question 67

Which of the following are not true about economies of scale? a. Spreading fixed costs over increasing production levels b. Improve the overall cost position of the firm c. Most common in manufacturing businesses d. Most common in businesses whose costs are primarily variable e. Are common to such industries as utilities, steel making, pharmaceutical, chemical and aircraft manufacturing

Answer 67

d. Most common in businesses whose costs are primarily variable

Question 68

Which of the following is not true of financial synergy? a. Tends to reduce the firm’s cost of capital b. Results from a better matching of investment opportunities available to the firm with internally generated funds c. Enables larger firms to experience lower average security underwriting costs than smaller firms d. Tends to spread the firm’s fixed expenses over increasing levels of production e. A and B

Answer 68

d. Tends to spread the firm’s fixed expenses over increasing levels of production

Question 69

Which of the following is not true of unrelated diversification? a. Involves buying firms outside of the company’s primary lines of business b. Involves shifting from a firm’s core product lines into those which are perceived to have higher growth potential c. Generally results in higher returns to shareholders d. Generally requires that the cash flows of acquired businesses are uncorrelated with those of the firm’s existing businesses e. A and D only

Answer 69

c. Generally results in higher returns to shareholders

Question 70

20. Which of the following is not true of strategic realignment? a. May be a result of industry deregulation b. Is rarely a result of technological change c. Is a common motive for M&As d. A and C only e. Is commonly a result of technological change

Answer 70

b. Is rarely a result of technological change

Question 71

The hubris motive for M&As refers to which of the following? a. Explains why mergers may happen even if the current market value of the target firm reflects its true economic value b. The ratio of the market value of the acquiring firm’s stock exceeds the replacement cost of its assets c. Agency problems d. Market power e. The Q ratio

Answer 71

a. Explains why mergers may happen even if the current market value of the target firm reflects its true economic value

Question 72

22. Around the announcement date of a merger or acquisition, abnormal returns to target firm shareholders during the last several decades have been a. Trending down b. Trending up c. Unchanged d. Doubling each decade e. None of the above

Answer 72

a. Trending down

Question 73

Around the announcement date of a merger, acquiring firm shareholders of large publicly traded firms normally earn a. 30% positive abnormal returns b. –20% abnormal returns c. Zero to slightly negative returns d. 100% positive abnormal returns e. 10% positive abnormal returns

Answer 73

c. Zero to slightly negative returns

Question 74

24. Which of the following is the most common reason that M&As often fail to meet expectations? a. Overpayment b. Form of payment c. Large size of target firm d. Inadequate post-merger due diligence e. Poor post-merger communication

Answer 74

a. Overpayment

Question 75

Post-merger financial performance of the new firm is often about the same as which of the following? a. Joint ventures b. Strategic alliances c. Licenses d. Minority investments e. All of the above

Answer 75

e. All of the above

Question 76

26. Restaurant chain, Camin Holdings, acquired all of the assets and liabilities of Cheesecakes R Us. The combined firm is known as Camin Holdings and Cheesecakes R Us no longer exists as a separate entity. The acquisition is best described as a: a. Merger b. Consolidation c. Tender offer d. Spinoff e. Divestiture

Answer 76

a. Merger

Question 77

27. Pacific Surfware acquired Surferdude and as part of the transaction both of the firms ceased to exist in their form prior to the transaction and combined to create an entirely new entity, Wildly Exotic Surfware. Which one of the following terms best describes this transaction? a. Divestiture b. Tender offer c. Joint venture d. Spinoff e. Consolidation

Answer 77

e. Consolidation

Question 78

28. News Corporation of America announced its intention to purchase shares in another national newspaper chain. Which one of the following terms best describes this announcement? a. Divestiture b. Spinoff c. Consolidation d. Tender offer e. Merger proposal

Answer 78

d. Tender offer

Question 79

Which one of the following statements accurately describes a merger? a. A merger transforms the target firm into a new entity which necessarily becomes a subsidiary of the acquiring firm b. A new firm is created from the assets and liabilities of the acquirer and target firms c. The acquiring firm absorbs only the assets of the target firm d. The target firm is absorbed entirely into the acquiring firm and ceases to exist as a separate legal entity. e. A new firm is created holding the assets and liabilities of the target firm and its former assets only.

Answer 79

d. The target firm is absorbed entirely into the acquiring firm and ceases to exist as a separate legal entity.

Question 80

An investor group borrowed the money necessary to buy all of the stock of a company. Which of the following terms best describes this transaction? a. Merger b. Consolidation c. Leveraged buyout d. Tender offer e. Joint venture

Answer 80

c. Leveraged buyout

Question 81

31. A steel maker acquired a coal mining company. Which of the following terms best describes this deal? a. Vertical b. Conglomerate c. Horizontal d. Obtuse e. Tender offer

Answer 81

a. Vertical

Question 82

32. Joe’s barber shop buys Jose’s Hair Salon. Which of the following terms best describes this deal? a. Joint venture b. Strategic alliance c. Horizontal d. Vertical e. Conglomerate

Answer 82

c. Horizontal

Question 83

Insider trading involves buying or selling securities based on knowledge not available to the general public. True or False

Answer 83

True

Question 84

The primary reason the Sarbanes-Oxly Act of 2002 was passed was to eliminate insider trading. True or False

Answer 84

False

Question 85

Federal antitrust laws exist to prevent individual corporations from assuming too much market power such that they can limit their output and raise prices without concern for any significant competitor reaction. True or False

Answer 85

True

Question 86

A typical consent decree for firms involved in a merger requires the merging parties to divest overlapping businesses or to restrict anticompetitive practices. True or False

Answer 86

True

Question 87

Foreign competitors are not relevant to antitrust regulators when trying to determine if a merger of two domestic firms would create excessive pricing power. True or False

Answer 87

False

Question 88

The U.S. Securities Act of 1933 requires that all securities offered to the public must be registered with the government. True or False

Answer 88

True

Question 89

Mergers and acquisitions are subject to federal regulation only. True or False

Answer 89

False

Question 90

Whenever either the acquiring or the target firm’s stock is publicly traded, the transaction is subject to the substantial reporting requirements of federal securities laws. True or False

Answer 90

True

Question 91

Antitrust laws exist to prevent individual corporations from assuming too much market power such that they can limit their output and raise prices without concern for how their competitors might react. True or False

Answer 91

True

Question 92

Unlike the Sherman Act, which contains criminal penalties, the Clayton Act is a civil statute and allows private parties injured by the antitrust violations to sue in federal court for a multiple of their actual damages. True or False

Answer 92

True

Question 93

The Williams Act of 1968 consists of a series of amendments to the Securities Act of 1933, and it is intended to protect target firm shareholders from lighting fast takeovers in which they would not have enough time to adequately assess the value of an acquirer’s offer. True or False

Answer 93

True

Question 94

Whenever an investor acquires 5% or more of public company, it must disclose its intentions, the identities of all investors, their occupation, sources of financing, and the purpose of the acquisition. True or False

Answer 94

True

Question 95

Whenever an investor accumulates 5% or more of a public company’s stock, it must make a so-called 13(d) filing with the SEC. True or False

Answer 95

True

Question 96

If an investor initiates a tender offer, it must make a 14(d) filing with the SEC. True or False

Answer 96

True

Question 97

In the U.S., the Federal Trade Commission has the exclusive right to approve mergers and acquisitions if they are determined to be potentially anti-competitive. True or False

Answer 97

False

Question 98

In the U.S., the Sherman Act makes illegal all contracts, combinations and conspiracies, which “unreasonably” restrain trade. The Act applies to all transactions and businesses engaging in both interstate and intrastate trade. True or False

Answer 98

False

Question 99

Acquisitions involving companies of a certain size cannot be completed until certain information is supplied to the federal government and until a specific waiting period has elapsed. True or False

Answer 99

True

Question 100

If the regulatory authorities suspect that a potential transaction may be anti-competitive, they will file a lawsuit to prevent completion of the transaction. True or False

Answer 100

True

Question 101

Under a consent decree, the regulatory authorities agree to approve a proposed transaction if the parties involved agree to take certain actions following closing. True or False

Answer 101

True

Question 102

Negotiated agreements between the buyer and seller rarely have a provision enabling the parties to back out, if the proposed transaction is challenged by the FTC or SEC. True or False

Answer 102

False

Question 103

About 40% of all proposed M&A transactions are disallowed by the U.S. antitrust regulators, because they are believed to be anti-competitive. True or False

Answer 103

False

Question 104

The U.S. antitrust regulators are likely to be most concerned about vertical mergers. True or False

Answer 104

False

Question 105

The market share of the combined firms is rarely an important factor in determining whether a proposed transaction is likely to be considered anti-competitive. True or False

Answer 105

False

Question 106

The market share of the combined firms is rarely an important factor in determining whether a proposed transaction is likely to be considered anti-competitive. True or False

Answer 106

True

Question 107

Market share is usually easy to define. True or False

Answer 107

False

Question 108

U.S. antitrust regulators may approve a horizontal transaction even if it results in the combined firms having substantial market share if it can be shown that significant cost efficiencies would result. True or False

Answer 108

True

Question 109

In addition to market share, antitrust regulators consider barriers to entry, the number of product substitutes, and the degree of product differentiation. True or False

Answer 109

True

Question 110

Antitrust authorities may approve a proposed takeover even if the resulting combination will substantially increase market concentration if the target from would go bankrupt if the takeover does not occur. True or False

Answer 110

True

Question 111

Alliances and joint ventures are likely to receive more intensive scrutiny by regulators because of their tendency to be more anti-competitive than M&As. True or False

Answer 111

False

Question 112

U.S. antitrust regulators in determining if a proposed business combination is likely to be anti-competitive consider only domestic competitors or foreign competitors with domestic operations. True or False

Answer 112

False

Question 113

Antitrust regulators rarely consider the impact of a proposed takeover on product and technical innovation. True or False

Answer 113

False

Question 114

There are no state statutes affecting proposed takeovers. True or False

Answer 114

False

Question 115

States are not allowed to pass any laws that impose restrictions on interstate commerce or that conflict in any way with federal laws regulating interstate commerce. True or False

Answer 115

True

Question 116

Some state anti-takeover laws contain so-called “fair price provisions” requiring that all target shareholders of a successful tender offer receive the same price as those who actually tendered their shares. True or False

Answer 116

True

Question 117

State antitrust laws are usually quite similar to federal laws. True or False

Answer 117

True

Question 118

State antitrust laws are usually quite similar to federal laws. True or False

Answer 118

True

Question 119

Federal securities and antitrust laws are the only laws affecting corporate takeovers. Other laws usually have little impact. True or False

Answer 119

False

Question 120

Employee benefit plans seldom create significant liabilities for buyers. True or False

Answer 120

False

Question 121

Unlike the European Economic Union, a decision by U.S. antitrust regulators to block a transaction may be appealed in the courts. True or False

Answer 121

True

Question 122

The primary shortcoming of industry concentration ratios is the frequent inability of antitrust regulators to define accurately what constitutes an industry, the failure to reflect ease of entry or exit, foreign competition, and the distribution of firm size. True or false

Answer 122

True

Question 123

Antitrust regulators take into account the likelihood that a firm would fail and exit a market if it is not allowed to merger with another firm. True or False

Answer 123

True

Question 124

Efficiencies rarely are considered by antitrust regulators in determining whether to accept or reject a proposed merger. True or False

Answer 124

False

Question 125

The Herfindahl-Hirschman Index is a measure of industry concentration used by U.S. antitrust regulators in determining whether to accept or reject a proposed merger. True or False

Answer 125

True

Question 126

Horizontal mergers are rarely rejected by antitrust regulators. True or False

Answer 126

False

Question 127

The Sherman Act makes illegal all contracts, combinations, and conspiracies that “unreasonably” restrain trade. True or False

Answer 127

True

Question 128

The requirements to be listed on most major public exchanges far exceed the auditor independence requirements of the Sarbanes-Oxley Act. True or False

Answer 128

True

Question 129

U.S. and European Union antitrust law are virtually identical. True or False

Answer 129

False

Question 130

Transactions involving firms in different countries are complicated by having to deal with multiple regulatory jurisdictions in specific countries or regions. True or False

Answer 130

True

Question 131

Antitakeover laws do not exist at the state level. True or False

Answer 131

False

Question 132

Environmental laws in the European Union are generally more restrictive than in the U.S. True or False

Answer 132

True

Question 133

In determining whether a proposed transaction is anti-competitive, U.S. regulators look at all of the following except for a. Market share of the combined businesses b. Potential for price fixing c. Ease of new competitors to enter the market d. Potential for job loss among target firm’s employees e. The potential for the target firm to fail without the takeover

Answer 133

d. Potential for job loss among target firm’s employees

Question 134

Which of the following is among the least regulated industries in the U.S.? a. Defenses b. Communications c. Retailing d. Public utilities e. Banking

Answer 134

c. Retailing

Question 135

All of the following are true of the Williams Act except for a. Consists of a series of amendments to the 1934 Securities Exchange Act b. Facilitates rapid takeovers over target companies c. Requires investors acquiring 5% or more of a public company to file a 13(d) with the SEC d. Firms undertaking tender offers are required to file a 14(d)-1 with the SEC e. Acquiring firms initiating tender offers must disclose their intentions and business plans

Answer 135

b. Facilitates rapid takeovers over target companies

Question 136

The Securities Act of 1933 requires the registration of all securities issued to the public. Such registration requires which of the following disclosures: a. Description of the firm’s properties and business b. Description of the securities c. Information about management d. Financial statements audited by public accountants e. All of the above.

Answer 136

e. All of the above.

Question 137

All of the following is true about proxy contests except for a. Proxy materials must be filed with the SEC immediately following their distribution to investors b. The names and interests of all parties to the proxy contest must be disclosed in the proxy materials c. Proxy materials may be distributed by firms seeking to change the composition of a target firm’s board of directors d. Proxy materials may be distributed by the target firm seeking to influence how their shareholders vote on a particular proposal e. Target firm proxy materials must be filed with the SEC.

Answer 137

a. Proxy materials must be filed with the SEC immediately following their distribution to investors

Question 138

The purpose of the 1968 Williams Act was to a. Give target firm shareholders time to review takeover proposals b. Prosecute target firm shareholders who misuse information c. Protect target firm employees from layoffs d. Prevent tender offers e. Promote tender offers

Answer 138

a. Give target firm shareholders time to review takeover proposals

Question 139

Which of the following represent important shortcomings of using industry concentration ratios to determine whether the combination of certain firms will result in an increase in market power? a. Frequent inability to define what constitutes an industry b. Failure to measure ease of entry or exit for other firms c. Failure to account for foreign competition d. Failure to account properly for the distribution of firms of different sizes e. All of the above

Answer 139

e. All of the above

Question 140

In a tender offer, which of the following is true? a. Both acquiring and target firms are required to disclose their intentions to the SEC b. The target’s management cannot advise its shareholders how to respond to a tender offer until has disclosed certain information to the SEC c. Information must be disclosed only to the SEC and not to the exchanges on which the target’s shares are traded d. A and B e. A, B, and C

Answer 140

d. A and B

Question 141

Which of the following are true about the Sherman Antitrust Act? a. Prohibits business combinations that result in monopolies. b. Prohibits business combinations resulting in a significant increase in the pricing power of a single firm. c. Makes illegal all contracts unreasonably restraining trade. d. A and C only e. A, B, and C

Answer 141

e. A, B, and C

Question 142

Which of the following are true about the Sherman Antitrust Act? a. Prohibits business combinations that result in monopolies. b. Prohibits business combinations resulting in a significant increase in the pricing power of a single firm. c. Makes illegal all contracts unreasonably restraining trade. d. A and C only e. A, B, and C Answer: E 10. All of the following are true of the Hart-Scott-Rodino Antitrust Improvements Act except for a. Acquisitions involving firms of a certain size cannot be completed until certain information is supplied to the FTC b. Only the acquiring firm is required to file with the FTC c. An acquiring firm may agree to divest certain businesses following the completion of a transaction in order to get regulatory approval. d. The Act is intended to give regulators time to determine whether the proposed combination is anti-competitive. e. The FTC may file a lawsuit to block a proposed transaction

Answer 142

b. Only the acquiring firm is required to file with the FTC

Question 143

All of the following are true of antitrust lawsuits except for a. The FTC files lawsuits in most cases they review. b. The FTC reviews complaints that have been recommended by its staff and approved by the FTC c. FTC guidelines commit the FTC to make a final decision within 13 months of a complaint d. As an alternative to litigation, a company may seek to negotiate a voluntary settlement of its differences with the FTC. e. FTC decisions can be appealed in the federal circuit courts.

Answer 143

a. The FTC files lawsuits in most cases they review.

Question 144

All of the following are true about a consent decree except for a. Requires the merging parties to divest overlapping businesses b. An acquirer may seek to negotiate a consent decree in advance of consummating a deal. c. In the absent of a consent decree, a buyer usually makes the receipt of regulatory approval necessary to closing the deal. d. FTC studies indicate that consent decrees have historically been largely ineffectual in promoting competition e. Consent decrees tend to be most effective in promoting competition if the divestitures made by the acquiring firms are to competitors.

Answer 144

d. FTC studies indicate that consent decrees have historically been largely ineffectual in promoting competition

Question 145

U.S. antitrust regulators are most concerned about what types of transaction? a. Vertical mergers b. Horizontal mergers c. Alliances d. Joint ventures e. Minority investments

Answer 145

b. Horizontal mergers

Question 146

Which of the following are used by antitrust regulators to determine whether a proposed transaction will be anti-competitive? a. Market share b. Barriers to entry c. Number of substitute products d. A and B only e. A, B, and C

Answer 146

e. A, B, and C

Question 147

European antitrust policies differ from those in the U.S. in what important way? a. They focus on the impact on competitors b. They focus on the impact on consumers c. They focus on both consumers and competitors d. They focus on suppliers e. They focus on consumers, suppliers, and competitors

Answer 147

a. They focus on the impact on competitors

Question 148

Which other types of legislation can have a significant impact on a proposed transaction? a. State anti-takeover laws b. State antitrust laws c. Federal benefits laws d. Federal and state environmental laws e. All of the above

Answer 148

e. All of the above

Question 149

State “blue sky” laws are designed to a. Allow states to block M&As deemed as anticompetitive b. Protect individual investors from investing in fraudulent securities’ offerings c. Restrict foreign investment in individual states d. Protect workers’ pensions e. Prevent premature announcement of M&As

Answer 149

b. Protect individual investors from investing in fraudulent securities’ offerings

Question 150

All of the following are examples of antitakeover provisions commonly found in state statutes except for a. Fair price provisions b. Business combination provisions c. Cash-out provisions d. Short-form merger provisions e. Share control provisions

Answer 150

d. Short-form merger provisions

Question 151

A collaborative arrangement is a term used by regulators to describe agreements among competitors for all of the following except for a. Joint ventures b. Strategic alliances c. Mergers and acquisitions d. A & B only e. A & C only

Answer 151

c. Mergers and acquisitions

Question 152

Vertical mergers are likely to be challenged by antitrust regulators for all of the following reasons except for a. An acquisition by a supplier of a customer prevents the supplier’s competitors from having access to the customer. b. The relevant market has few customers and is highly concentrated c. The relevant market has many suppliers. d. The acquisition by a customer of a supplier could become a concern if it prevents the customer’s competitors from having access to the supplier. e. The suppliers’ products are critical to a competitor’s operations

Answer 152

c. The relevant market has many suppliers.

Question 153

All of the following are true of the U.S. Foreign Corrupt Practices Act except for which of the following: a. The U.S. law carries anti-bribery limitations beyond U.S. political boundaries to within the domestic boundaries of foreign states. b. This Act prohibits individuals, firms, and foreign subsidiaries of U.S. firms from paying anything of value to foreign government officials in exchange for obtaining new business or retaining existing contracts. c. The Act permits so-called facilitation payments to foreign government officials if relatively small amounts of money are required to expedite goods through foreign custom inspections, gain approvals for exports, obtain speedy passport approvals, and related considerations. d. The payments described in c above are considered legal according to U.S. law and the laws of countries in which such payments are considered routine e. Bribery is necessary if a U.S. company is to win a contract that comprises more than 10% of its annual sales.

Answer 153

e. Bribery is necessary if a U.S. company is to win a contract that comprises more than 10% of its annual sales.

Question 154

Foreign direct investment in U.S. companies that may threaten national security is regulated by which of the following: a. Hart-Scott-Rodino Antitrust Improvements Act b. Defense Production Act c. Sherman Act d. Federal Trade Commission Act e. Clayton Act

Answer 154

b. Defense Production Act

Question 155

A diligent buyer must ensure that the target is in compliance with the labyrinth of labor and benefit laws, including those covering all of the following except for a. Sexual harassment b. Age discrimination, c. National security d. Drug testing e. Wage and hour laws.

Answer 155

c. National security

Question 156

All of the following factors are considered by U.S. antitrust regulators except for a. Market share b. Potential adverse competitive effects c. Barriers to entry d. Purchase price paid for the target firm e. Efficiencies created by the combination

Answer 156

d. Purchase price paid for the target firm

Question 157

The Sarbanes-Oxley bill is intended to achieve which of the following: a. Auditor independence b. Corporate responsibility c. Improved financial disclosure d. Increased penalties for fraudulent behavior e. All of the above

Answer 157

e. All of the above

Question 158

Friendly takeovers are negotiated settlements that are often characterized by bargaining, which remains undisclosed until the agreement has been signed. True or False

Answer 158

True

Question 159

Concern about their fiduciary responsibility to shareholders and shareholder lawsuits often puts pressure on a target firm’s board of directors to accept an offer if it includes a significant premium to the target’s current share price. True or False

Answer 159

True

Question 160

An astute bidder should always analyze the target firm’s possible defenses such as golden parachutes for key employees and poison pills before making a bid. True or False

Answer 160

True

Question 161

The accumulation of a target firm’s stock by arbitrageurs makes purchases of blocks of stock by the bidder easier. True or False

Answer 161

True

Question 162

5. A successful proxy fight may represent a far less expensive means of gaining control over a target than a tender offer. True or False

Answer 162

True

Question 163

Public announcements of a proposed takeover are often designed to put pressure on the board of the target firm. True or False

Answer 163

True

Question 164

A tender offer is a proposal made directly to the target firm’s board as the first step leading to a friendly takeover. True or False

Answer 164

False

Question 165

A bear hug involves mailing a letter containing an acquisition proposal to the target’s board without warning and demanding an immediate response. True or False

Answer 165

True

Question 166

9. Dissident shareholders always undertake a tender offer to change the composition of a firm’s board of directors. True or False

Answer 166

False

Question 167

A proxy contest is one in which a group of dissident shareholders attempts to obtain representation on a firm’s board by soliciting other shareholders for the right to vote their shares. True or False

Answer 167

True

Question 168

A hostile tender offer is a takeover tactic in which the acquirer bypasses the target’s board and management and goes directly to the target’s shareholders with an offer to purchase their shares. True or False

Answer 168

True

Question 169

According to the management entrenchment hypothesis, takeover defenses are designed to protect the target firm’s management from a hostile takeover. True or False

Answer 169

True

Question 170

The shareholder interests theory suggests that shareholders gain when management resists takeover attempts. True or False

Answer 170

True

Question 171

A standstill agreement is one in which the target firm agrees not to solicit bids from other potential buyers while it is negotiating with the first bidder. True or False

Answer 171

True

Question 172

15. Most takeover attempts may be characterized as hostile bids. True or False

Answer 172

False

Question 173

16. Litigation is a tactic that is used only by acquiring firms. True or False

Answer 173

False

Question 174

The takeover premium is the dollar or percentage amount the purchase price proposed for a target firm exceeds the acquiring firm’s share price. True or False

Answer 174

False

Question 175

18. Concern about their fiduciary responsibility and about stockholder lawsuits puts pressure on the target’s board to accept the offer. True or False

Answer 175

True

Question 176

The final outcome of a hostile takeover is rarely affected by the composition of the target’s stock ownership and how stockholders feel about management’s performance. True or False

Answer 176

False

Question 177

20. Despite the pressure of an attractive purchase price premium, the composition of the target’s board greatly influences what the board does and the timing of its decisions. True or False

Answer 177

True

Question 178

21. The target firm’s bylaws may provide significant hurdles for an acquiring firm. True or False

Answer 178

True

Question 179

22. Bylaws may provide for a staggered board, the inability to remove directors without cause, and supermajority voting requirements for approval of mergers. True or False

Answer 179

True

Question 180

An acquiring firm may attempt to limit the options of the target’s senior management by making a formal acquisition proposal, usually involving a public announcement, to the board of the directors of the target. True or False

Answer 180

True

Question 181

24. A target firm is unlikely to reject a bid without getting a “fairness” opinion from an investment banker stating that the offer is inadequate. True or False

Answer 181

True

Question 182

25. By replacing the target’s board members, proxy fights may be an effective means of gaining control without owning 51% of the target’s voting stock. True or False

Answer 182

True

Question 183

26. Proxy contests and tender offers are often viewed by acquirers as inexpensive ways to takeover another firm. True or False

Answer 183

False

Question 184

All materials in a proxy contest must be filed with the SEC before they are sent to shareholders. True or False

Answer 184

True

Question 185

28. Federal and state laws make it extremely difficult for a bidder to acquire a controlling interest in a target without such actions becoming public knowledge. True or False

Answer 185

True

Question 186

Tender offers always consist of an offer to exchange acquirer shares for shares in the target firm. True or False

Answer 186

False

Question 187

30. The size of the target firm is the best predictor of the likelihood of being taken over by another firm. True or False

Answer 187

True

Question 188

31. Poison pills are a commonly used takeover tactic to remove the management and board of the target firm. True or False

Answer 188

False

Question 189

32. Poison pills represent a new class of securities issued by a company to its shareholders, which have no value unless an investor acquires a specific percentage of the firm’s voting stock. True or False

Answer 189

True

Question 190

33. In elections involving staggered or classified boards, only one group of board members is up for reelection each year. True or False

Answer 190

True

Question 191

34. Golden parachutes are employee severance arrangements, which are triggered whenever a change in control takes place. They are generally held by a large number of employees at all levels of management throughout the firm. True or False

Answer 191

False

Question 192

Tender offers apply only for share for share exchanges. True or False

Answer 192

False

Question 193

Corporate governance refers to the way firms elect CEOs. True or False

Answer 193

False

Question 194

37. The threat of hostile takeovers is a factor in encouraging a firm to implement good governance practices. True or False

Answer 194

True

Question 195

38. Corporate governance refers to a system of controls both internal and external to the firm that protects stakeholders’ interests. True or False

Answer 195

True

Question 196

Stakeholders in a firm refer to shareholders only. True or False

Answer 196

False

Question 197

40. Corporate anti-takeover defenses are necessarily a sign of bad corporate governance. True or False

Answer 197

False

Question 198

The threat of corporate takeover has little impact on how responsibly a corporate board and management manage a firm. True or False

Answer 198

False

Question 199

Institutional activism has assumed a larger role in ensuring good corporate governance practices in recent years. True or False

Answer 199

True

Question 200

Executive stock option plans have little impact on the way management runs the firm. True or False

Answer 200

False

Question 201

A standstill agreement prevents an investor who has signed the agreement from ever again buying stock in the target firm. True or False

Answer 201

False

Question 202

The primary forms of proxy contests are those for seats on the board of directors, those concerning management proposals, and those seeking to force management to take a particular action. True or False

Answer 202

True

Question 203

Purchasing target stock in the open market is a rarely used takeover tactic. True or False

Answer 203

False

Question 204

In a one-tier offer, the acquirer announces the same offer to all target shareholders. True or False.

Answer 204

True

Question 205

In a two-tiered offer, target shareholders typically received two offers, which potentially have different values. True or False

Answer 205

True

Question 206

A no-shop agreement prohibits the takeover target from seeking other bids. True or False

Answer 206

True

Question 207

Poison pills represent a new class of stock issued by a company to its shareholders, usually as a dividend. True or False

Answer 207

True

Question 208

1. All of the following are commonly used takeover tactics, except for a. Poison pills b. Bear hug c. Tender offer d. Proxy contest e. Litigation

Answer 208

a. Poison pills

Question 209

2. According to the management entrenchment theory, a. Management resistance to takeover attempts is an attempt to increase the proposed purchase price premium b. Management resistance to takeover attempts is an attempt to extend their longevity with the target firm c. Shareholders tend to benefit when management resists takeover attempts d. Management attempts to maximize shareholder value e. Describes the primary reason takeover targets resist takeover bids

Answer 209

b. Management resistance to takeover attempts is an attempt to extend their longevity with the target firm

Question 210

3. Which of the following factors often affects hostile takeover bids? a. The takeover premium b. The composition of the board of the target firm c. The composition of the ownership of the target’s stock d. The target’s bylaws e. All of the above

Answer 210

e. All of the above

Question 211

All of the following are true of a proxy contest except for a. Are usually successful b. Are sometimes designed to replace members of the board c. Are sometimes designed to have certain takeover defenses removed d. May enable effective control of a firm without owning 51% of the voting stock e. Are often costly

Answer 211

a. Are usually successful

Question 212

Purchasing the target firm’s stock in the open market is a commonly used tactic to achieve all of the following except for a. Acquiring a controlling interest in the target firm without making such actions public knowledge. b. Lowering the average cost of acquiring the target firm’s shares c. Recovering the cost of an unsuccessful takeover attempt d. Obtaining additional voting rights in the target firm e. Strengthening the effectiveness of proxy contests

Answer 212

a. Acquiring a controlling interest in the target firm without making such actions public knowledge.

Question 213

All of the following are true of tender offers except for a. Tender offers consist only of offers of cash for target stock b. Are generally considered an expensive takeover tactic c. Are extended for a specific period of time d. Are sometimes over subscribed e. Must be filed with the SEC

Answer 213

a. Tender offers consist only of offers of cash for target stock

Question 214

Which of the following are common takeover tactics? a. Bear hugs b. Open market purchases c. Tender offers d. Litigation e. All of the above

Answer 214

e. All of the above

Question 215

All of the following are common takeover defenses except for a. Poison pills b. Litigation c. Tender offers d. Staggered boards e. Golden parachutes

Answer 215

c. Tender offers

Question 216

All of the following are true of poison pills except for a. They are a new class of security b. Generally prevent takeover attempts from being successful c. Enable target shareholders to buy additional shares in the new company if an unwanted shareholder’s ownership exceeds a specific percentage of the target’s stock d. Delays the completion of a takeover attempt e. May be removed by the target’s board if an attractive bid is received from a so-called “white knight.”

Answer 216

b. Generally prevent takeover attempts from being successful

Question 217

The following takeover defenses are generally put in place by a firm before a takeover attempt is initiated. a. Standstill agreements b. Poison pills c. Recapitalization d. Corporate restructuring e. Greenmail

Answer 217

b. Poison pills

Question 218

The following takeover defenses are generally put in place by a firm after a takeover attempt is underway. a. Staggered board b. Standstill agreement c. Supermajority provision d. Fair price provision e. Reincorporation

Answer 218

b. Standstill agreement

Question 219

Which of the following is true about so-called shark repellants? a. They are put in place to strengthen the board b. They include poison pills c. Often consist of the right to issue greenmail d. Involve White Knights e. Involve corporate restructuring

Answer 219

a. They are put in place to strengthen the board

Question 220

Which of the following is true? A hostile takeover attempt a. Is generally found to be illegal b. Is one that is resisted by the target’s management c. Results in lower returns to the target firm’s shareholders than a friendly attempt d. Usually successful e. Supported by the target firm’s board and its management

Answer 220

b. Is one that is resisted by the target’s management

Question 221

Which is true of the following? A white knight a. Is a group of dissident shareholders which side with the bidding firm b. Is a group of the target firm’s current shareholders which side with management c. Is a third party that is willing to acquire the target firm at the same price as the bidder but usually removes the target’s management d. Is a firm which is viewed by management as a more appropriate suitor than the bidder e. Is a firm that is willing to acquire only a large block of stock in the target firm

Answer 221

d. Is a firm which is viewed by management as a more appropriate suitor than the bidder

Question 222

Which of the following is true about supervoting stock? a. Is a commonly used takeover tactic. b. Is generally encouraged by the SEC c. May have 10 to 100 times of the voting rights of other classes of stock d. Is issued to acquiring firms if they agree not to purchase a controlling interest in the target firm e. Is a widely used takeover defense

Answer 222

c. May have 10 to 100 times of the voting rights of other classes of stock

Question 223

Which of the following factors influences corporate governance practices? a. Securities legislation b. Government regulatory agencies c. The threat of a hostile takeover d. Institutional activism e. All of the above

Answer 223

d. Institutional activism

Question 224

Which of the following are commonly considered alternative models of corporate governance? a. Market model b. Control model c. Takeover model d. A & B only e. A & C only

Answer 224

d. A & B only

Question 225

The market governance model is applicable when which of the following conditions are true? a. Capital markets are liquid b. Equity ownership is widely dispersed c. Ownership and control are separate d. Board members are largely independent e. All of the above

Answer 225

e. All of the above

Question 226

The control market is applicable when which of the following conditions are true? a. Capital markets are illiquid b. Equity ownership is heavily concentrated c. Board members are largely insiders d. Ownership and control overlap e. All of the above

Answer 226

e. All of the above

Question 227

The control model of corporate governance is applicable under all of the following conditions except for a. Capital markets are illiquid b. Board members are largely insiders c. Ownership and control overlap d. Equity ownership is widely dispersed e. A, B, & D only

Answer 227

d. Equity ownership is widely dispersed

Question 228

Which of the following are the basic principles on which the market model is based? a. Management incentives should be aligned with those of shareholders and other major stakeholders b. Transparency of financial statements c. Equity ownership should be widely dispersed d. A & B only e. A, B, and C only

Answer 228

e. A, B, and C only

Question 229

Which of the following statements best describes the business judgment rule? a. Board members are expected to conduct themselves in a manner that could reasonably be seen as being in the best interests of the shareholders. b. Board members are always expected to make good decisions. c. The courts are expected to “second guess’ decisions made by corporate boards. d. Directors and managers are always expected to make good decisions. e. Board decisions should be subject to constant scrutiny by the courts.

Answer 229

a. Board members are expected to conduct themselves in a manner that could reasonably be seen as being in the best interests of the shareholders.

Question 230

Over the years, the U.S. Congress has transferred some of the enforcement of securities laws to organizations other than the SEC such as a. Public stock exchanges b. Financial Accounting Standards Board c. Public Accounting Oversight Board d. State regulatory agencies e. All of the above

Answer 230

e. All of the above

Question 231

Which of the following government agencies can discipline firms with inappropriate governance practices? a. Securities and Exchange Commission b. Federal Trade Commission c. The Department of Justice d. A & C only e. A, B, & C

Answer 231

e. A, B, & C

Question 232

Studies show that which of the following combinations of corporate defenses can be most effective in discouraging hostile takeovers? a. Poison pills and staggered boards b. Poison pills and golden parachutes c. Golden parachutes and staggered boards d. Standstill agreements and White Knights e. Poison Pills and tender offers

Answer 232

a. Poison pills and staggered boards

Question 233

Some of Acme Inc.’s shareholders are very dissatisfied with the performance of the firm’s current management team and want to gain control of the board. To do so, these shareholders offer their own slate of candidates for open spaces on the firm’s board of directors. Lacking the necessary votes to elect these candidates, they are contacting other shareholders and asking them to vote for their slate of candidates. The firm’s existing management and board is asking shareholders to vote for the candidates they have proposed to fill vacant seats on the board. Which of the following terms best describes this scenario? a. Leveraged buyout b Proxy contest c. Merger d. Divestiture e. None of the above

Answer 233

b Proxy contest

Question 234

Xon Enterprises is attempting to take over Rayon Group. Rayon’s shareholders have the right to buy additional shares at below market price if Xon (considered by Rayon’s board to be a hostile bidder) buys more than 15 percent of Rayon’s outstanding shares. What term applies to this antitakeover measure? a. Share repellent plan b. Golden parachute plan c. Pac Man defense d. Poison pill e. Greenmail provision

Answer 234

d. Poison pill

Question 235

A planning-based acquisition process consists of both a business plan and acquisition plan, which drive all subsequent phases of the acquisition process. True or False

Answer 235

True

Question 236

A business plan articulates a mission or vision for the firm and a strategy for realizing that mission. True or False

Answer 236

True

Question 237

Determining where a firm should compete starts with deciding who the firm’s current or potential customers are and what are their needs. True or False

Answer 237

True

Question 238

Market segmentation involves identifying customers with common characteristics and needs. True or False

Answer 238

True

Question 239

An analysis of markets should involve current and potential customers, as well as current and potential competitors, but it should exclude suppliers. True or False

Answer 239

False

Question 240

A competitive self-assessment involves an analysis of the firm’s absolute strengths and weaknesses. True or False

Answer 240

False

Question 241

A firm’s core competencies refer to those skills which are required to produce the firm’s primary products but which have little or no application in producing related products. True or False

Answer 241

False

Question 242

Core competencies should be defined as narrowly as possible. True or False

Answer 242

False

Question 243

9. A corporate mission statement should be defined as broadly as possible since it seeks to describe the corporation’s reason for being, and it should not exclude the firm from pursuing any significant opportunities. True or False

Answer 243

False

Question 244

10. The market targeted by the firm should reflect the fit between the corporation‘s primary strengths and competencies and its ability to satisfy customer needs better than the competition. True or False

Answer 244

True

Question 245

11. Corporate objectives are defined as what is to be accomplished within a specific period. True or False

Answer 245

True

Question 246

12. A firm should choose that strategy from among the range of reasonable alternatives that enables it to achieve its stated objectives in an acceptable time period without regard for resource constraints. True or False

Answer 246

False

Question 247

13. A price or cost leader in an industry is usually the firm with the largest market share. True or False

Answer 247

True

Question 248

14. The experience curve is most important in analyzing industries with low fixed costs. True or False

Answer 248

False

Question 249

15. A cost leadership strategy can be highly destructive to the firm with the largest market share if pursued concurrently by a number of firms with very different market shares. True or False

Answer 249

False

Question 250

16. A differentiation strategy is one in which customers believe that various competitors have significantly different cost structures. True or False

Answer 250

False

Question 251

17. A differentiation strategy is one in which a firm’s products are perceived by customers to be slightly different from other firms’ products in the same industry. True or False

Answer 251

True

Question 252

18. Firms adopting a focus strategy tend to concentrate their efforts by selling a few products to a single market and compete primarily on price. True or False

Answer 252

False

Question 253

19. Firms adopting a focus strategy compete primarily based on their superior understanding of how to satisfy their customers needs better than the competition. True or False

Answer 253

True

Question 254

20. Coca Cola is an example of a company that pursues both a differentiation and cost leadership strategy. True or False

Answer 254

False

Question 255

21. The evolution of the growth of a product can be characterized in four stages: embryonic, growth, maturity, and decline. This description is called a business attractiveness matrix. True or False

Answer 255

False

Question 256

22. Strong sales growth and low entry barriers characterize the embryonic and growth stages of a product’s life cycle. True or False

Answer 256

True

Question 257

23. An acquisition plan defines the objectives to be achieved by acquiring another firm, management’s preferences as to how the acquisition process should be managed, resources required, and the roles and responsibilities of those responsible for implementing the plan. True or False

Answer 257

True

Question 258

24. An acquisition plan is developed if management determines that an acquisition or merger is required to implement the firm’s business strategy. True or False

Answer 258

True

Question 259

25. Resource limitations in developing the acquisition plan include money, borrowing capacity, as well as management time and skills. True or False

Answer 259

True

Question 260

26. Operating risk addresses the ability of the buyer to manage the acquired company. True or False

Answer 260

True

Question 261

27. An acquisition is one of many options available for implementing a firm’s business plan. True or False

Answer 261

True

Question 262

28. Financial risk refers to the buyer’s willingness and ability to leverage a transaction as well as the willingness of shareholders to accept near-term earnings per share dilution. True or False

Answer 262

True

Question 263

29. Examples of management preferences used in an acquisition plan include their preference for an asset or stock purchase or openness to partial rather than full ownership of the target firm. True or False

Answer 263

True

Question 264

30. While management’s upfront involvement in the acquisition process is crucial, management should largely disengage from the process until the transaction is completed. True or False

Answer 264

False

Question 265

31. Market profiling entails collecting sufficient data to accurately assess and characterize a firm’s competitive environment within its chosen markets. True or False

Answer 265

True

Question 266

32. Potential competitors include firms (both domestic and foreign) in the current market, those in related markets, current customers, and current suppliers. True or False

Answer 266

True

Question 267

33. The market or markets in which a firm chooses to compete should reflect the fit between the firm’s primary strengths and its ability to satisfy customers needs better than the competition. True or False

Answer 267

True

Question 268

34. A cost leadership strategy is most appropriate when pursued concurrently by a number of firms in the same industry with approximately the same market share. True or False

Answer 268

False

Question 269

35. The joint venture may represent an attractive alternative to a merger or acquisition. True or False

Answer 269

True

Question 270

36. Stakeholders only include a firm’s shareholders. True or False

Answer 270

False

Question 271

The implementation strategy refers to the way in which a firm chooses to implement its business strategy. True or False

Answer 271

True

Question 272

A merger or acquisition is generally not considered an example of an implementation strategy. True or False

Answer 272

False

Question 273

Contingency plans are actions that are taken as an alternative to the firm’s current business strategy. True or False

Answer 273

TRue

Question 274

Good planning expedites sound decision making. True or False

Answer 274

True

Question 275

Planning in advance of a merger or an acquisition necessarily slows down decision making. True or False

Answer 275

False

Question 276

A collection of markets is said to comprise an industry. True or False

Answer 276

TRue

Question 277

A corporate mission statement seeks to describe the corporation’s purpose for being and where the corporation hopes to go. True or False

Answer 277

true

Question 278

A diversification strategy involves a firm moving into only those businesses which are unrelated to the firm’s current core business. True or False

Answer 278

False

Question 279

Management can obtain insight into the firm’s probable future cash requirements and in turn its value by determining its position in its industry’s product life cycle. True or False

Answer 279

True

Question 280

Accounting considerations rarely affect the decision to buy another business rather than to build the business internally. True or False

Answer 280

False

Question 281

Overpayment risk involves the dilution of EPS or a reduction in its growth rate resulting from paying significantly more than the economic value of the acquired firm. True or False

Answer 281

True

Question 282

Acquisition plan objectives should be directly linked to key business plan objectives. True or False

Answer 282

True

Question 283

The acquisition plan provides the detail needed to implement effectively the firm’s business strategy, True or False

Answer 283

True

Question 284

The acquisition plan provides the detail needed to implement effectively the firm’s business strategy, True or False

Answer 284

True

Question 285

All of the following represent commonly found components of a well-constructed business plan except for a. Mission statement b. Strategy c. Acquisition plan d. Objectives e. Tactical or implementation plans

Answer 285

c. Acquisition plan

Question 286

2. Which of the following represent key components of the acquisition process a. Business plan b. Integration plan c. Search plan d. Negotiation process e. All of the above

Answer 286

e. All of the above

Question 287

3. Which of the following best defines market segmentation a. The identification of customers with common characteristics and needs b. The identification of customers with heterogeneous characteristics and needs c. The grouping of customers with different characteristics d. The process of reducing large markets into smaller markets without regard to customer characteristics e. The process of identifying the various markets that comprise an industry without regard to customer characteristics

Answer 287

a. The identification of customers with common characteristics and needs

Question 288

4. Determining how to compete requires a firm’s management to consider which of the following factors? a. Factors critical to successfully competing in its targeted markets b. An external market analysis c. An evaluation of what criteria customers use to make buying decisions d. Availability of product substitutes e. All of the above

Answer 288

e. All of the above

Question 289

5. Determining where a firm should compete requires management to consider which of the following factors? a. Determining the firm’s current customers only b. Determining the firm’s potential customers only c. Determining the needs of current and potential customers, as well as suppliers d. Determining the needs of potential suppliers only e. A and D only

Answer 289

c. Determining the needs of current and potential customers, as well as suppliers

Question 290

6. Market profiling requires an analysis of all of the following factors except for: a. Customers b. Suppliers c. Core competencies d. Current and potential competitors e. Product or service substitutes

Answer 290

c. Core competencies

Question 291

7. All of the following questions are relevant for conducting a self-assessment or internal analysis of the firm except for a. What are the firm’s critical strengths and weaknesses as compared to the competition? b. Can the firm’s critical strengths be easily duplicated and surpassed by the competition? c. Can the firm’s critical strengths be used to gain strategic advantage in the firm’s chosen market? d. What are the least important factors customers consider in making purchasing decisions? e. Can the firm’s key weaknesses be exploited by the competition?

Answer 291

d. What are the least important factors customers consider in making purchasing decisions?

Question 292

8. Which of the following examples represents the best application of a firm’s primary core competence? a. Honda Motors manufactures cars, motorcycles, lawnmowers, and snow blowers b. IBM provides both software services and manufactures computer hardware c. PepsiCo manufactures and distributes soft drinks and manages restaurant chains d. Microsoft sells operating system software and access to the internet through its MSN subscription service e. McDonalds sells hamburgers and pizza.

Answer 292

a. Honda Motors manufactures cars, motorcycles, lawnmowers, and snow blowers

Question 293

What is the core competence underlying Honda Corporation product offering? a. Product distribution b. Marketing c. Internal combustion engine design d. Exterior design e. Organizational structure

Answer 293

c. Internal combustion engine design

Question 294

In selecting an appropriate business strategy, all of the following are relevant questions except for a. Does the firm have sufficient resources to implement the strategy? b. Have all reasonable alternatives available for implementing the strategy been evaluated? c. What are the key assumptions underlying the various strategic options under consideration? d. What do the firm’s targeted customers primarily consider in making purchasing decisions? e. Why might an acquisition be preferred to a joint venture in implementing the business strategy?

Answer 294

e. Why might an acquisition be preferred to a joint venture in implementing the business strategy?

Question 295

In a conducting a self-assessment, a firm should consider all of the following except for a. The degree on government regulation in its targeted markets b. The effectiveness of its R&D activities c. Product quality d. Responsiveness to changing customer needs e. Brand name recognition

Answer 295

a. The degree on government regulation in its targeted markets

Question 296

A good mission statement should be a. Very broadly defined b. Very narrowly defined c. Reference the firm’s targeted markets, product or service offering, distribution channels and management’s core operating beliefs d. Describe only the purpose of the corporation e. A and C only

Answer 296

c. Reference the firm’s targeted markets, product or service offering, distribution channels and management’s core operating beliefs

Question 297

All of the following represent generic business strategies except for a. Cost leadership b. Differentiation c. Focus d. Market segmentation e. A and D

Answer 297

d. Market segmentation

Question 298

All of the following are true about experience curves except for a. Applicable primarily to differentiation strategies b. Applicable primarily to cost leadership strategies c. Reflect declining average unit costs due to increasing accumulated production levels d. Reflect both economies of scale and the introduction of more efficient production methods as output increases e. Often found in commodity-type industries

Answer 298

a. Applicable primarily to differentiation strategies

Question 299

15. All of the following are true about product life cycles except for a. Strong sales growth and low barriers to entry often characterize the early stages of a product’s introduction b. New entrants have substantially poorer cost positions, as a result of their small market shares when compared to earlier entrants. c. Later phases are characterized by slower market growth rates d. During the high growth phases, firms usually experience high positive operating cash flow e. The introduction of product enhancements can extend a firm’s product life cycle

Answer 299

d. During the high growth phases, firms usually experience high positive operating cash flow

Question 300

16. An acquisition plan entails all of the following except for a. Identifies key management objectives for making an acquisition b. Determines important resource constraints c. Articulates management’s preferences for acquiring stock or assets or considering competitors as possible targets d. Constitutes the firm’s business plan e. Defines roles and responsibilities of those on the acquisition team

Answer 300

d. Constitutes the firm’s business plan

Question 301

Which of the following are ways to implement a firm’s business strategy? a. Merge or acquisition b. Joint venture c. Going it alone d. Asset swap e. All of the above

Answer 301

e. All of the above

Question 302

Which of the following are components of an acquisition plan? a. Timetable b. Resource/capability evaluation c. Management preferences d. Objectives e. All of the above

Answer 302

e. All of the above

Question 303

Which of the following are components of a business strategy? a. Mission/vision b. Objectives c. Internal analysis d. External analysis e. All of the above

Answer 303

e. All of the above

Question 304

Stakeholders include which of the following groups? a. Shareholders b. Customers c. Lenders d. Suppliers e. All of the above

Answer 304

e. All of the above

Question 305

Which of the following are true of real options? a. Real options give management the ability to delay the implementation of a strategy b. Real options give management the ability to accelerate the implementation of a strategy c. Real options give management the ability to abandon a strategy d. Real options represent the ability of management to change their strategy after the strategy has been implemented. e. All of the above

Answer 305

e. All of the above

Question 306

Which of the following are not components of the negotiation phase of the acquisition process? a. Refining valuation b. Identifying potential target firms c. Conducting due diligence d. Structuring the deal e. Developing the financing plan

Answer 306

b. Identifying potential target firms

Question 307

Which of the following phases of the acquisition process contains a “feedback” loop? a. Negotiation phase b. Search phase c. Integration phase d. Post-closing evaluation phase e. Closing

Answer 307

a. Negotiation phase

Question 308

Which of the following are common objectives of an external analysis? a. Determining where to compete b. Determining how to compete c. Identifying core competencies d. A & B only e. A, B, & C

Answer 308

d. A & B only

Question 309

Examples of corporate level strategies include which of the following: a. Growth b. Diversification c. Operational d. Financial e. All of the above

Answer 309

e. All of the above

Question 310

In calculating the weighted average cost of capital, the weights should be estimated using the market value of the target firm’s debt and equity. True or False

Answer 310

True

Question 311

. A beta coefficient is a measure of a firm’s diversifiable risk. True or False

Answer 311

False

Question 312

3. In the absence of debt, the unlevered beta measures the volatility of the firm’s financial return to changes in the general stock market’s overall return. True or False

Answer 312

True

Question 313

4. Free cash flow to the firm is calculated before debt and taxes. True or False

Answer 313

False

Question 314

5. Free cash flow to equity is calculated using operating income. True or False

Answer 314

False

Question 315

6. If free cash flow to the firm is expected to remain at $10 million indefinitely and the firm’s cost of equity is .10, the present value of the firm is $100 million. True or False

Answer 315

False

Question 316

7. The constant growth valuation model is primarily applicable to firms in mature markets. True or False

Answer 316

True

Question 317

8. The estimation of present value using the constant growth model involves the calculation of a terminal value. True or False

Answer 317

False

Question 318

9. It is possible to determine the equity value of the firm if you know the present value of free cash flow to the firm and the book value of the firm’s outstanding shares. True or False

Answer 318

False

Question 319

10. The discounted cash flow method for valuing a firm adjusts for differences in the magnitude and timing of cash flows and for risk. True or False

Answer 319

True

Question 320

. The cost of equity is the minimum financial return required by investors to invest in stocks of comparable risk. True or False

Answer 320

True

Question 321

. The capital asset pricing model is commonly used to estimate the cost of equity. True or False

Answer 321

True

Question 322

Interest payments are tax deductible to firms in the U.S. True or False

Answer 322

True

Question 323

. A firm’s beta is affected by the amount of debt a firm maintains relative to its equity. True or False

Answer 323

True

Question 324

Free cash flow to the firm is also called enterprise cash flow. True or False

Answer 324

True

Question 325

A risk-free rate of return is one for which the expected return is certain. True or False

Answer 325

True

Question 326

. If an investor anticipates a future cash flow stream of five or ten years, she needs to use either a five- or ten- year Treasury bond rate as the risk-free rate. True or False

Answer 326

True

Question 327

. Studies show that it is generally unnecessary to adjust the capital asset pricing model for the size of the firm . True or False

Answer 327

False

Question 328

The size factor used to adjust the capital asset pricing model serves as a proxy for factors such as smaller firms being subject to higher default risk and generally being less liquid than large capitalization firms. True or False

Answer 328

True

Question 329

. Preferred stock exhibits some of the characteristics of long-term debt in that its dividend is generally constant and preferred stockholders are paid before common shareholders in the event the firm is liquidated. True or False

Answer 329

True

Question 330

Viewing preferred dividends as paid in perpetuity, the cost of preferred stock can be calculated as dividends per share of preferred stock divided by the market value of the preferred stock. True or False

Answer 330

True

Question 331

The weighted average cost of capital consists only of debt and equity. True or False

Answer 331

False

Question 332

. The after-tax cost of borrowed funds to the firm is estimated by multiplying the pretax interest rate, i, by (1 – t), where t is the marginal tax rate for the firm. True or False

Answer 332

True

Question 333

The weights used to calculate the weighted average cost of capital for a firm with common equity and debt only represent the book value of equity and debt. True or False

Answer 333

False

Question 334

. The cost of capital formula can be generalized to include hybrid sources of funds available to firms such as convertible preferred and debt. True or False

Answer 334

True

Question 335

. According to the capital asset pricing model, risk consists of both diversifiable and non-diversifiable components. True or False

Answer 335

True

Question 336

. Both public and private firms are subject to non-diversifiable risk. True or False

Answer 336

True

Question 337

. In the absence of debt,  measures the volatility of a firm’s financial return to changes in the general market’s overall financial return. True or False

Answer 337

True

Question 338

Net debt is defined as all of the firm’s interest bearing debt less the value of cash and marketable securities. True or False

Answer 338

True

Question 339

When the firm increases its debt in direct proportion to the market value of its equity, the level of the debt is perfectly correlated with the firm’s market value. True or False

Answer 339

True

Question 340

Beta is a measure of non-diversifiable risk. True or False

Answer 340

True

Question 341

Free cash flow to the firm is often called enterprise cash flow. True or False

Answer 341

True

Question 342

The enterprise or free cash flow to the firm approach to valuation discounts the after-tax free cash flow available to the firm from operations at the weighted average cost of capital to obtain the enterprise value. True or False

Answer 342

True

Question 343

The constant growth model is most applicable to firms in mature markets. True or False

Answer 343

True

Question 344

The variable growth model would be most appropriate for valuing firms in the growth phase of their product life cycle. True or False

Answer 344

True

Question 345

Growth rates can be calculated based on the historical experience of the firm or industry. True or False

Answer 345

True

Question 346

Intuition suggests that the length of the high-growth period when applying the variable growth model should be shorter the greater the current growth rate of the firm’s cash flow. True or False

Answer 346

False

Question 347

When cash flow is temporarily depressed due to strikes, litigation, warranty claims, or other one-time events, it is generally safe to assume that cash flow will recover in the near term. True or False

Answer 347

True

Question 348

The projected cash flow of firms in highly cyclical industries can be distorted depending on where the firm is in the business cycle. True or False

Answer 348

True

Question 349

The constant growth model may be used to estimate the risk premium component of the cost of equity as an alternative to relying on historical information as is done in the capital asset pricing model. True or False

Answer 349

True

Question 350

Discounted cash flow and the asset-oriented valuation methods necessarily provide identical results. True or False

Answer 350

False

Question 351

Investors require a minimum rate of return on an investment to compensate them for the level of perceived risk associated with that investment. True or False

Answer 351

True

Question 352

The cost of equity can also be viewed as an opportunity cost. True or False

Answer 352

True

Question 353

For a return to be considered risk-free over some future time period it must be free of default risk and there must not be any uncertainty about the reinvestment rate (i.e., the rate of return that can be earned at the end of the investor’s holding period). True or False

Answer 353

True

Question 354

Whether an analyst should use a short or long-term interest rate for the risk free rate in calculating the CAPM depends on when the investor receives their future cash flows. True or False

Answer 354

True

Question 355

A three-month Treasury bill rate is not free of risk for a five- or ten-year period, since interest and principal received at maturity must be reinvested at three month intervals. True or False

Answer 355

True

Question 356

The market risk or equity premium refers to the additional rate of return in excess of the weighted average cost of capital that investors require to purchase a firm’s equity. True or False

Answer 356

False

Question 357

Betas do not vary over time and are quite insensitive to the time period and methodology employed in their estimation. True or False

Answer 357

False

Question 358

Studies show that the market risk premium is unstable, lower during periods of prosperity and higher during periods of economic slowdowns. True or False

Answer 358

True

Question 359

For firms whose market value is less than $50 million, the adjustment to the CAPM in estimating the cost of equity can be as large as 2 percentage points. True or False

Answer 359

False

Question 360

Assume the firm size premium for a firm with a market value of $20 million is 7.2%. Also, assume the risk-free rate of return, equity premium, and  are 5.0%, 5.5%, and 1.75 respectively. The firm’s cost of equity using the CAPM method adjusted for firm size is 21.8%. True or False

Answer 360

True

Question 361

A firm’s credit rating is a poor measure of a firm’s default risk. True or False

Answer 361

False

Question 362

For non-rated firms, the analyst may estimate the pretax cost of debt for an individual firm by comparing debt-to-equity or total capital ratios, interest coverage ratios, and operating margins with those of similar rated firms. True or False

Answer 362

True

Question 363

Preferred dividends are tax deductible to U.S. corporations. True or False

Answer 363

False

Question 364

The weighted average cost of capital (WACC) is the broadest measure of the firm’s cost of funds and represents the return that a firm must earn to induce investors to buy its common stock. True or False

Answer 364

False

Question 365

The relationship between the overall market and a specific firm’s beta may change significantly if a large sector of stocks that make up the overall index increase or decrease substantially. True or False

Answer 365

True

Question 366

The reduction in the firm’s tax liability due to the tax deductibility of interest is often referred as a tax shield. True or False

Answer 366

True

Question 367

When the firm increases its debt in direct proportion to the market value of its equity, the level of the debt is perfectly correlated with the firm’s market value. Consequently, the risk associated with the tax shield (resulting from interest paid on outstanding debt) is the same as that associated with the firm. True or False

Answer 367

True

Question 368

The effective tax rate is calculated from actual taxes paid based on accounting statements prepared for tax reporting purposes. True or False

Answer 368

True

Question 369

Whatever the analyst chooses to do with respect to the selection of a tax rate, it is critical to use the marginal rate in calculating after-tax operating income in perpetuity. Otherwise, the implicit assumption is that taxes can be deferred indefinitely. True or False

Answer 369

True

Question 370

The levered beta reflects the firm’s degree of cyclicality, operating and financial leverage. True or False

Answer 370

True

Question 371

The unlevered beta reflects the firm’s degree of cyclicality and operating leverage but not financial leverage. True or False

Answer 371

True

Question 372

1. Which one of the following factors is not considered in calculating the firm’s cost of equity? a. risk free rate of return b. beta c. interest rate on corporate debt d. expected return on equities e. difference between expected return on stocks and the risk free rate of return

Answer 372

c. interest rate on corporate debt

Question 373

2. Which one of the following factors is not considered in calculating the firm’s cost of capital? a. cost of equity b. interest rate on debt c. the firm’s marginal tax rate d. book value of debt and equity e. the firm’s target debt to equity ratio

Answer 373

d. book value of debt and equity

Question 374

3. A firm’s leveraged beta reflects all of the following except for a. unleveraged beta b. the firm’s debt c. marginal tax rate d. the firm’s cost of equity e. the firm’s equity

Answer 374

d. the firm’s cost of equity

Question 375

4. Which of the following factors is excluded from the calculation of free cash flow to the firm? a. Principal repayments b. Operating income c. Depreciation d. The change in working capital e. Gross plant and equipment spending

Answer 375

a. Principal repayments

Question 376

5. Which of the following is not true about the constant growth valuation model? a. The firm’s free cash flow is assumed to be unchanged in perpetuity b. The firm’s free cash flow is assumed to grow at a constant rate in perpetuity c. Free cash flow is discounted by the difference between the appropriate discount rate and the expected growth rate of cash flow. d. The constant growth model is sometimes referred to as the Gordon Growth Model. e. If the analyst were using free cash flow to the firm, cash flow would be discounted by the firm’s cost of capital less the expected growth rate in cash flow.

Answer 376

a. The firm’s free cash flow is assumed to be unchanged in perpetuity

Question 377

6. Which of the following is not true about the variable growth valuation model? a. Assumes a high growth period followed by a stable growth period. b. Assumes that the discount rate during the high and stable growth periods is the same. c. Is used primarily to evaluate firms in high growth industries. d. Involves the calculation of a terminal value. e. The terminal value often comprises a substantial percentage of the total present value of the firm.

Answer 377

b. Assumes that the discount rate during the high and stable growth periods is the same.

Question 378

The cost of capital reflects all of the following except for a. Cost of equity b. The firm’s beta c. The book value of the firm’s debt d. The after-tax cost of interest paid by the firm e. The risk free rate of return

Answer 378

c. The book value of the firm’s debt

Question 379

The calculation of free cash flow to the firm includes all of the following except for a. Net income b. Marginal tax rate c. Change in working capital d. Gross plant and equipment spending e. Depreciation

Answer 379

a. Net income

Question 380

The calculation of free cash flow to equity includes all of the following except for a. Operating income b. Preferred dividends c. Change in working capital d. Gross plant and equipment spending e. Principal repayments

Answer 380

a. Operating income

Question 381

All of the following are true about the marginal tax rate for the firm except for a. The marginal tax rate in the U.S. is usually about 40%. b. The effective tax rate is usually less than the marginal tax rate. c. Once tax credits have been used and the ability to further defer taxes exhausted, the effective rate can exceed the marginal rate at some point in the future. d. It is critical to use the effective tax rate in calculating after-tax operating income in perpetuity. e. It is critical to use the marginal rate in calculating after-tax operating income in perpetuity.

Answer 381

d. It is critical to use the effective tax rate in calculating after-tax operating income in perpetuity.

Question 382

For a firm having common and preferred equity as well as debt, common equity value can be estimated in which of the following ways? a. By subtracting the book value of debt and preferred equity from the enterprise value of the firm b. By subtracting the market value of debt from the enterprise value of the firm c. By subtracting the market value of debt and the market value of preferred equity from the enterprise value of the firm d. By adding the market value of debt and preferred equity to the enterprise value of the firm e. By adding the market value of debt and book value of preferred equity to the enterprise value of the firm

Answer 382

c. By subtracting the market value of debt and the market value of preferred equity from the enterprise value of the firm

Question 383

The zero growth model is a special case of what valuation model? a. Variable growth model b. Constant growth model c. Delta growth model d. Perpetuity valuation model e. None of the above

Answer 383

b. Constant growth model

Question 384

Which of the following is true of the enterprise valuation model? a. Discounts free cash flow to the firm by the cost of equity b. Discounts free cash flow to the firm by the weighted average cost of capital c. Discounts free cash flow to equity by the cost of equity d. Discounts free cash flow to equity by the weighted average cost of capital e. None of the above

Answer 384

b. Discounts free cash flow to the firm by the weighted average cost of capital

Question 385

Which of the following is true of the equity valuation model? a. Discounts free cash flow to the firm by the weighted average cost of capital b. Discounts free cash flow to equity by the cost of equity c. Discounts free cash flow the firm by the cost of equity d. Discounts free cash flow to equity by the weighted average cost of capital e. None of the above

Answer 385

b. Discounts free cash flow to equity by the cost of equity

Question 386

Which of the following is true about the variable growth model? a. Present value equals the discounted sum of the annual forecasts of cash flow b. Present value equals the discounted sum of the annual forecasts of cash flow plus the discounted value of the terminal value c. Present value equals the discounted value of the next year’s cash flow grown at a constant rate in perpetuity d. Present value equals the current year’s free cash flow discounted in perpetuity e. None of the above

Answer 386

b. Present value equals the discounted sum of the annual forecasts of cash flow plus the discounted value of the terminal value

Question 387

When evaluating an acquisition, you should do which of the following: a. Ignore market values of assets and focus on book value b. Ignore the timing of when the cash flows will be received c. Ignore acquisition fees and transaction costs d. Apply the discount rate that is relevant to the incremental cash flows e. Ignore potential losses of management talent

Answer 387

d. Apply the discount rate that is relevant to the incremental cash flows

Question 388

The incremental cash flows of a merger can relate to which of the following: a. Working capital b. Profits c. Capital spending d. Income taxes e. All of the above

Answer 388

e. All of the above

Question 389

The first step in establishing a search plan for potential acquisition or merger targets is to identify the primary screening or selection criteria. True or False

Answer 389

True

Question 390

2. The number of selection criteria should be as extensive as possible to ensure that all factors relevant to the firm’s decision-making process are considered. True or False

Answer 390

False

Question 391

3. Only acquiring firms perform due diligence. True or False

Answer 391

False

Question 392

4. Banks are commonly used to provide bridge or temporary financing to pay all or a portion of the purchase price and meet possible working capital requirements until permanent financing can be found. True or False

Answer 392

True

Question 393

5. The targeted industry and the maximum size of the potential transaction are often the most important selection criteria used in the search process. True or False

Answer 393

True

Question 394

6. Advertising in the business or trade press is generally a very efficient way to locate attractive acquisition target candidates. True or False

Answer 394

False

Question 395

7. An excessively long list of screening criteria used to develop a list of potential acquisition targets can severely limit the number of potential candidates. True or False

Answer 395

True

Question 396

8. The appropriate approach for initiating contact with a target firm is essentially the same for large or small, public or private companies. True or False

Answer 396

False

Question 397

9. In contacting large, publicly traded firms, it is usually preferable to make initial contact through an intermediary and at the highest level of the company possible. True or False

Answer 397

True

Question 398

10. Rumors of impending acquisition can have a substantial deleterious impact on the target firm. True or False

Answer 398

True

Question 399

11. So-called permanent financing for an acquisition usually consists of long-term unsecured debt. True or False

Answer 399

True

Question 400

12. Confidentiality agreements are usually signed before any information is exchanged to protect the buyer and the seller from loss of competitive information. True or False

Answer 400

True

Question 401

13. Confidentiality agreements often cover both the buyer and the seller, since both are likely to be exchanging confidential information, although for different reasons. True or False

Answer 401

True

Question 402

14. Confidentiality agreements usually also cover publicly available information on the potential acquirer and target firms. True or False

Answer 402

False

Question 403

15. A letter of intent formally stipulates the reason for the agreement, major terms and conditions, the responsibilities of both parties while the agreement is in force, a reasonable expiration date, and how all fees associated with the transaction will be paid. True or False

Answer 403

True

Question 404

16. The signing of a letter of intent usually precludes the target firm from suing the potential acquiring company if the acquirer eventually withdraws its initial offer. True or False

Answer 404

False

Question 405

17. “No shop” provisions are seldom found in letters of intent. True or False

Answer 405

False

Question 406

18. The letter of intent often specifies the type of information to be exchanged as well as the scope and duration of the potential buyer’s due diligence. True or False

Answer 406

True

Question 407

19. Letters of intent are usually legally binding on the potential buyer but rarely on the target firm. True or False

Answer 407

False

Question 408

20. The actual price paid for a target firm is unaffected by the buyer’s due diligence. True or False

Answer 408

False

Question 409

21. Total consideration refers to what is to be paid for the target firm and usually only consists of cash or stock, exclusively. True or False

Answer 409

False

Question 410

22. The total purchase price paid by the buyer should also reflect the assumption of liabilities stated on the target’s balance sheet, but it should exclude all off balance sheet liabilities. True or False

Answer 410

False

Question 411

23. Discretionary assets are undervalued or redundant assets not required to run the acquired business and which can be used by the buyer to recover a portion of the purchase price. True or False

Answer 411

True

Question 412

24. The actual purchase price paid for a target firm is determined doing the negotiation process and is often quite different from the initial offer price stipulated in a letter of intent. True or False

Answer 412

True

Question 413

25. Buyers routinely perform due diligence on sellers, but sellers rarely perform due diligence on buying firms. True or False

Answer 413

False

Question 414

26. Due diligence is the process of validating assumptions underlying the initial valuation of the target firm as well as the uncovering of factors that had not previously been considered that could enhance or detract from the value of the target firm. True or False

Answer 414

True

Question 415

27. It is usually in the best interests of the seller to allow the buyer unrestricted access to all seller employees and records doing due diligence in order to create an atmosphere of cooperation and goodwill. True or False

Answer 415

False

Question 416

28. Buyers should not be concerned about performing an exhaustive due diligence since in doing so they could degrade the value of the target firm because of the disruptive nature of a rigorous due diligence. The buyer can be assured that all significant risks can be handled through the standard representations and warranties commonly found in agreements of purchase and sale. True or False

Answer 416

False

Question 417

29. Bridge financing refers to the temporary financing obtained by the buyer to pay all or a portion of the purchase price until so-called permanent financing can be arranged. True or False

Answer 417

True

Question 418

30. Seller financing represents a very important source of financing for buyers. True or False

Answer 418

True

Question 419

31. Elaborate multimedia presentations made to potential lenders in an effort to “shop” for the best financing are often referred to as the “road show.” True or False

Answer 419

True

Question 420

32. The buyer’s ability to obtain adequate financing is a closing condition common to most agreements of purchase and sale. True or False

Answer 420

True

Question 421

33. Closing is a phase of the acquisition process that usually occurs shortly after the target has been fully integrated into the acquiring firm. True or False

Answer 421

False

Question 422

34. Shrewd sellers often negotiate a break-up clause in an agreement of purchase and sale requiring the buyer to pay the seller an amount at least equal to the seller’s cost associated with the transaction. True or False

Answer 422

True

Question 423

35. The purchase price for a target firm may be fixed at the time of closing, subject to future adjustment, or be contingent on future performance. True or False

Answer 423

True

Question 424

Brokers or finders should never be used in the search process. True or False.

Answer 424

False

Question 425

More and more firms are identifying potential target companies on their own without the use of investment bankers. True or False

Answer 425

True

Question 426

Fees charged by investment bankers are never negotiable. True or False

Answer 426

False

Question 427

Debt-to-equity ratios may be used to measure a firm’s degree of leverage and are frequently used as a search criterion in looking for potential takeover candidates. True or False

Answer 427

True

Question 428

Even though time is critical, it is always critical to build a relationship with the CEO of the target firm before approaching her with an acquisition proposal. True or False

Answer 428

False

Question 429

There is no substitute for performing a complete due diligence on the target firm. True or False

Answer 429

True

Question 430

Confidentiality agreements are rarely required when target and acquiring firms exchange information. True or False

Answer 430

False

Question 431

The financing plan may be affected by the discovery during due diligence of assets that can be sold to pay off debt accumulated to finance the transaction. True or False

Answer 431

True

Question 432

There is no need for the seller to perform due diligence on its own operations to ensure that its representations and warranties in the definitive agreement are accurate. True or False

Answer 432

False

Question 433

The closing often involves getting all the necessary third-party consents and regulatory and shareholder approvals. True or False

Answer 433

True

Question 434

The purchase price may be fixed at the time of closing, subject to future adjustment, or it may be contingent on future performance of the target business. True or False

Answer 434

True

Question 435

Earnouts are generally very poor ways to create trust and often represent major impediments to the integration process. True or False

Answer 435

True

Question 436

Loan covenants are promises made by the borrower that certain acts will be performed and others will be avoided. True or False

Answer 436

True

Question 437

Buyers generally want to complete due diligence on the seller as quickly as possible. True or False

Answer 437

False

Question 438

A data room is a method commonly used by sellers to limit buyer due diligence. True or False

Answer 438

True

Question 439

Total consideration is a legal term referring to the composition of what is paid for the target company and can consist of cash, stock, debt or some combination of all three.

Answer 439

True

Question 440

Each of the following is true about the acquisition search process except for a. A candidate search should start with identifying the primary selection criteria. b. The number of selection criteria should be as lengthy as possible. c. At a minimum, the primary criteria should include the industry and desired size of transaction. d. The size of the transaction may be defined in terms of the maximum purchase price the acquirer is willing to pay. e. A search strategy entails the use of electronic databases, trade publications, and querying the acquirer’s law, banking, and accounting firms for qualified candidates.

Answer 440

b. The number of selection criteria should be as lengthy as possible.

Question 441

2. The screening process represents a refinement of the search process and commonly utilizes which of the following as selection criteria a. Market share, product line, and profitability b. Product line, profitability, and growth rate c. Profitability, leverage, and growth rate d. Degree of leverage, market share, and growth rate e. All of the above

Answer 441

e. All of the above

Question 442

Initial contact should be made through an intermediary as high up in the organization for which of the following firms a. Companies with annual revenue of less than $25 million b. Medium sized companies between $25 and $100 million in annual revenue c. Large, publicly traded firms d. Small, privately owned firms e. Small, privately owned competitors

Answer 442

c. Large, publicly traded firms

Question 443

All of the following statements are true about letters of intent except for a. Are always legally binding b. Spells out the initial areas of agreement between the buyer and seller c. Defines the responsibilities and rights of the buyer and seller while the letter of intent is in force d. Includes an expiration date e. Includes a “no shop” provision

Answer 443

a. Are always legally binding

Question 444

All of the following are true about a confidentiality agreement except for a. Often applies to both the buyer and the seller b. Stipulates the type of seller information available to the buyer and how the information can be used c. Limits the use of information about the seller that is publicly available d. Includes a termination date e. Limits the ability of either party to disclose publicly the nature of discussion between the buyer and seller

Answer 444

c. Limits the use of information about the seller that is publicly available

Question 445

The actual price paid by the buyer for the target firm is determined when a. The initial offer is made b. As a result of the negotiation process c. When the letter of intent is signed d. Following the completion of due diligence e. Once a financing plan has been approved

Answer 445

b. As a result of the negotiation process

Question 446

In a merger, the acquiring firm assumes all liabilities of the target firm. Assumed liabilities include all but which of the following? a. Current liabilities b. Long-term debt c. Warranty claims d. Fully depreciated operating equipment e. Off-balance sheet liabilities

Answer 446

d. Fully depreciated operating equipment

Question 447

The negotiation process consists of all of the following concurrent activities except for a. Refining valuation b. Deal structuring c. Integration planning d. Due Diligence e. Developing the financing plan

Answer 447

c. Integration planning

Question 448

All of the following are true of buyer due diligence except for a. Due diligence is the process of validating assumptions underlying valuation. b. Can be replaced by appropriate representations and warranties in the agreement of purchase and sale. c. Primary objectives are to identify and to confirm sources and destroyers of value d. Consists of operational, financial, and legal reviews. e. Endeavors to identify the “fatal flaw” that could destroy the deal

Answer 448

b. Can be replaced by appropriate representations and warranties in the agreement of purchase and sale.

Question 449

Which of the following are commonly used sources of financing for M&A transactions? a. Asset based lending b. Cash flow based lending c. Seller financing d. A and B only e. All of the above

Answer 449

e. All of the above

Question 450

Which of the following is generally not true of a financing contingency? a. It is a condition of closing in the agreement of purchase and sale b. Trigger the payment of break-up fees if not satisfied. c. Protects both the lender and seller d. Primarily protects the buyer e. Primarily protects the seller

Answer 450

c. Protects both the lender and seller

Question 451

Which of the following is generally not true of integration planning? a. Is of secondary importance in the acquisition process. b. Is crucial to the ultimate success of the merger or acquisition c. Represents an opportunity to earn trust among all parties to the transaction d. Involves developing effective communication strategies for employees, customers, and suppliers. e. Is often neglected in the heat of negotiation.

Answer 451

a. Is of secondary importance in the acquisition process.

Question 452

All of the following are true of closing except for a. Consists of obtaining all necessary shareholder, regulatory, and third party consents b. Requires significant upfront planning c. Is rarely subject to last minute disagreements d. Involves the final review and signing of such documents as the agreement of purchase and sale, loan agreements (if borrowing is involved), security agreements, etc. e. Fulfillment of the so-called closing conditions

Answer 452

c. Is rarely subject to last minute disagreements

Question 453

Which of the following do not represent typical closing documents in an asset purchase? a. Letter of intent b. Listing of any liabilities to be assumed by the buyer c. Loan and security agreements if the transaction is to be financed with debt d. Complete descriptions of all patents, facilities, and investments e. Listing of assets to be acquired

Answer 453

a. Letter of intent

Question 454

15. Which of the following is not typically true of post-closing evaluation of an acquisition? a. It is important not to change the performance benchmarks against which the acquisition is measured b. It is critical to ask the tough questions c. It is an opportunity to learn from mistakes d. It is commonly done e. It is frequently avoided by acquiring firms because of the potential for embarrassment.

Answer 454

d. It is commonly done

Question 455

Which of the following is true about integration planning? Without integration planning, integration is not likely to a. Provide anticipated synergies b. Proceed without significant disruption to the target business’ operations c. Proceed without significant disruption to the acquirer’s operations d. Be completed without experiencing substantial customer attrition e. All of the above

Answer 455

e. All of the above

Question 456

Which of the following statements are true about due diligence? a. The seller should perform due diligence on its own operations. b. The seller should perform due diligence on the buyer. c. The seller should perform due diligence on the lender used by the buyer to finance the transaction. d. A & B e. A, B, & C

Answer 456

d. A & B

Question 457

Which of the following is not true of the financing plan? a. It is rarely affected by the discovery during due diligence of target assets not required to operate the business. b. It may include both stock and debt. c. It may include a combination of stock, debt, and cash. d. It serves as a reality check on the buyer. e. None of the above.

Answer 457

a. It is rarely affected by the discovery during due diligence of target assets not required to operate the business.

Question 458

Refining the target valuation based on new information uncovered during due diligence is most likely to affect which of the following a. Total consideration b. The search process c. The business plan d. The acquisition plan e. The target’s business plan

Answer 458

a. Total consideration

Question 459

The negotiation process consists of all of the following except for a. Refining valuation b. Due diligence c. Closing d. Developing a financing plan e. Deal structuring

Answer 459

c. Closing

Question 460

Closing is included in which of the following activities? a. Development of a business plan b. Development of an acquisition plan c. The search process d. The negotiation process e. None of the above

Answer 460

e. None of the above

Question 461

Integration planning is included in which of the following activities? a. Development of a business plan b. The search process c. Development of a financing plan d. Post-closing integration e. None of the above

Answer 461

e. None of the above

Question 462

The development of search criteria is included in which of the following activities? a. Development of a business plan b. Development of the acquisition plan c. Post-closing integration d. Post-closing evaluation of the acquisition process e. None of the above

Answer 462

b. Development of the acquisition plan

Question 463

24. The financing plan is included in which phase of the acquisition process? a. The development of the business plan b. The negotiation phase c. The integration planning phase d. The development of the acquisition plan e. None of the above

Answer 463

b. The negotiation phase

Question 464

Which of the following is not true of the acquisition process? a. It always follows a predictable sequence of steps. b. It sometimes deviates from the sequence outlined in this chapter. c. It involves a negotiation phase d. It involves the development of a business plan e. None of the above

Answer 464

a. It always follows a predictable sequence of steps.

Question 465

1. The integration process if done effectively can help to mitigate the potential loss of employees. True or False

Answer 465

True

Question 466

2. Integration is among the most important factors contributing to the success or failure of mergers and acquisitions. True or False

Answer 466

True

Question 467

3. Rapid integration helps to realize the planned synergies and may contribute to a higher present value for the merger or acquisition. True or False

Answer 467

True

Question 468

4. High employee turnover is rarely a problem during the integration of the target firm into the acquirer. True or False

Answer 468

False

Question 469

5. High employee defection during the integration period is an excellent way to realize cost savings? True or False

Answer 469

False

Question 470

6. Employees or so-called “human capital” are often the most valuable asset of the target firm. True or False

Answer 470

True

Question 471

7. Employees of both the target and acquiring firms are likely to resist change following a takeover. True or False

Answer 471

True

Question 472

8. Differences in the way the management of the acquiring and target firms make decisions, the pace of decision-making, and perceived values are common examples of cultural differences between the two firms. True or False

Answer 472

True

Question 473

9. Focus on customers is generally considered a factor critical to the ultimate success or failure of the merger or acquisition. True or False

Answer 473

True

Question 474

10. Revenue growth is often sacrificed in an effort to engage in aggressive cost cutting during the integration period. True or False

Answer 474

True

Question 475

11. Divulging the true intentions of the acquiring firm to the target firm’s employees should be deferred until it can be determined that such employees can be trusted. True or False

Answer 475

False

Question 476

12. Communication plans should be developed for all stakeholder groups except for suppliers, because they generally have a lower priority in the integration process. True or False

Answer 476

False

Question 477

13. Developing staffing plans involves identifying staffing requirements and developing a compensation strategy, among other things. True or False

Answer 477

True

Question 478

14. Co-locating employees from the acquiring and target firms is rarely a good idea early in the integration period because of the inevitable mistrust that will arise. True or False

Answer 478

False

Question 479

15. So-called contract related transition issues often involve how the new employees will be paid and what benefits they should receive. True or False

Answer 479

True

Question 480

16. Employee health care or disability claims tend to escalate just before a transaction closes, thereby adding to the total cost of the transaction. Who will pay such claims should be determined in the agreement of purchase and sale. True or False

Answer 480

True

Question 481

17. In hostile takeovers, the employees that are on the post-merger integration team should come from the acquiring firm because of concerns that the target firm’s employees cannot be trusted. True or False

Answer 481

False

Question 482

18. The management integration team’s primary responsibilities should be monitoring the daily operations of the work-teams assigned to complete specific tasks during the integration. True or False

Answer 482

False

Question 483

19. The management integration team’s primary responsibilities should be to focus on achieving long-term profit goals, monitoring actual performance to the goals of the integration plan, and on cost management. True or False

Answer 483

True

Question 484

20. An acquiring firm that focuses heavily on integrating a target firm, which represents a sizeable portion of its total operations, frequently sees deterioration in its own current operating performance. True or False

Answer 484

true

Question 485

21. It is generally more important to respond to current issues as they arise in your communication plans even if it results in the appearance of a somewhat inconsistent theme throughout communications made to stakeholders. True or False

Answer 485

False

Question 486

22. Key stakeholders in the integration effort generally include employees, customers, suppliers, communities, and regulators. True or False

Answer 486

True

Question 487

23. A newly merged company will often experience at least a 5-10% loss of current customers during the integration effort. True or False

Answer 487

True

Question 488

24. Following an acquisition, long-term contracts with suppliers can generally be broken without redress. True or False

Answer 488

False

Question 489

25. In building a new organization for the combined firms, it is important to start with a clean sheet of paper and ignore the organizational structures that existed prior to the merger or acquisition. True or False

Answer 489

False

Question 490

26. Highly decentralized organizational structures generally expedite the integration effort more so than highly centralized structures. True or False

Answer 490

False

Question 491

27. The extent to which compensation plans for the acquiring and acquired firms are integrated depends on whether the two companies are going to be managed separately or fully integrated. True or False

Answer 491

true

Question 492

28. Benchmarking important functions such as the acquirer’s and the target’s manufacturing and information technology operations and processes is a useful starting point for determining how to integrate these activities. True or False

Answer 492

True

Question 493

29. When two companies with very different cultures merge, the new firm inevitably adopts one of the two cultures that existed prior to the merger. True or False

Answer 493

False

Question 494

30. Sharing common goals, standards, services, and space can be a highly effective and practical way to integrate disparate corporate cultures. True or False

Answer 494

True

Question 495

30. Sharing common goals, standards, services, and space can be a highly effective and practical way to integrate disparate corporate cultures. True or False

Answer 495

True

Question 496

32. A merger agreement should specify how the seller should be reimbursed for products shipped or services provided by the seller before closing but not paid for by the customer until after closing. True or False

Answer 496

True

Question 497

33. Pre-closing integration planning is likely to be easier in friendly than in hostile transactions. True or False

Answer 497

True

Question 498

34. Customers of newly acquired firms are usually slow to switch to other suppliers even if product quality deteriorates due to inertia. True or False

Answer 498

False

Question 499

35. Decentralized management control usually facilitates the integration of a newly acquired business. True or False

Answer 499

False

Question 500

Merging compensation systems can be one of the most challenging activities of the integration process. True or False

Answer 500

True

Question 501

Benchmarking important functions such as the acquirer’s and the target’s manufacturing and IT operations and processes is a useful starting point for determining how to integrate these activities. True or False

Answer 501

True

Question 502

Plant consolidation rarely requires the adoption of a common set of systems and standards for all manufacturing activities. True or False

Answer 502

False

Question 503

The extent to which the sales forces of the two firms are combined depends on their relative size, the nature of their products and markets, and their geographic location. True or False

Answer 503

True

Question 504

Enabling the customer to see a consistent image in advertising and promotional campaigns is often the greatest challenge facing the integration of the marketing function. True or False

Answer 504

True

Question 505

The speed with which two firms are merged is an important factor determining the long-term success of the merger. True or False

Answer 505

True

Question 506

Whenever possible, integration planning should begin before closing. True or False

Answer 506

true

Question 507

Newly merged firms frequently experience a loss of existing customers as a direct consequence of the merger. True or False

Answer 507

True

Question 508

Integration planning involves addressing human resource, customer, and supplier issues that overlap the change of ownership. True or False

Answer 508

True

Question 509

Integration of a new business into an existing one rarely affects current operations of either business. True or False

Answer 509

False

Question 510

When news about the integration is bad, it is critical never to share it with employees. True or False

Answer 510

False

Question 511

The newly integrated firm must be able to communicate a compelling vision to investors. True or False

Answer 511

True

Question 512

An effective starting point in setting up a structure is to learn from the past and to recognize that the needs of the business drive structure and not the other way around. True or False

Answer 512

True

Question 513

Staffing plans should be postponed to relatively late in the integration process. True or False

Answer 513

False

Question 514

The extent to which compensation plans are integrated depends on whether the two companies are going to be managed separated or integrated. True or False

Answer 514

True

Question 515

1. Rapid integration is usually important for all of the following reasons except for a. Minimizes employee turnover b. Improves the morale and productivity of current employees of both the acquiring and acquired firms c. Builds confidence in current employees in the competence of management d. Dispenses with the need for pre-integration planning e. Reduces customer turnover

Answer 515

d. Dispenses with the need for pre-integration planning

Question 516

All of the following are often cited as factors critical to the ultimate success of the integration effort except for a. Plan carefully, act quickly b. The use of project management techniques c. Early communication from the top of the organization d. Salary and benefit reductions for many employees of the acquired company in order to realize cost savings e. Making the tough decisions as early as possible

Answer 516

d. Salary and benefit reductions for many employees of the acquired company in order to realize cost savings

Question 517

Certain post integration issues are best addressed prior to the closing. These include all of the following except for a. Who will pay for employee severance expenses b. How will employee payroll be managed during ownership transition c. What will be done with checks from customers that the seller continues to receive after closing d. How will the seller be reimbursed for monies owed to suppliers for products sold prior to closing e. Who will pay for health care and disability claims that often arise just before a business is sold?

Answer 517

d. How will the seller be reimbursed for monies owed to suppliers for products sold prior to closing

Question 518

Which of the following is not true about the primary responsibilities of the management integration team (MIT)? a. The MIT should direct the daily operations of the individual work teams set up to implement certain activities. b. Focus the organization on meeting ongoing business commitments and operational performance targets c. The creation of an early warning system to determine when performance targets are likely to be missed. d. Establish a rigorous communication program e. Establishing a master schedule of what should be done by whom and by what date.

Answer 518

a. The MIT should direct the daily operations of the individual work teams set up to implement certain activities.

Question 519

Which of the following is generally not true about communication during the integration period? a. Communication should be as frequent as possible b. Employees should be sheltered from bad news c. The CEO of the combined firms should lead the effort to communicate to employees at all levels d. Regularly scheduled employee meetings are often the best way to communicate progress to plan e. The reasons for changing work practices and compensation must be thoroughly explained to employees

Answer 519

b. Employees should be sheltered from bad news

Question 520

Customer attrition following an acquisition is commonly related to uncertainty about a. On time product delivery b. Product quality c. Pricing and payment terms d. A and B only e. A, B, and C

Answer 520

e. A, B, and C

Question 521

All of the following are generally considered stakeholders in the integration process except for a. Suppliers b. Employees c. Competitors d. Regulators e. Customers

Answer 521

c. Competitors

Question 522

All of the following are generally true about creating new organizations except for a. Learn from prior organizational strengths and weaknesses b. Business needs should drive structure and not the reverse c. Centralized organizations facilitate the pace of the integration d. The structure employed during the integration must be the one used in the long-run e. Senior managers should be given responsibility for selecting their own subordinates

Answer 522

d. The structure employed during the integration must be the one used in the long-run

Question 523

Developing staffing plans requires which of the following? a. Identifying personnel requirements b. Determining the availability of skilled employees to fill these requirements c. Developing compensation plans d. A and B only e. A, B, and C

Answer 523

e. A, B, and C

Question 524

All of the following are true about the challenges of integrating firms with different corporate cultures except for a. Cultural issues can run the gamut from dress codes to compensation b. The acquired firm’s overarching culture is generally rapidly accepted by the target firm’s employees c. Small companies are usually highly unstructured and informal d. There are often differences in culture even between firms in the same industry e. Integration may be inappropriate if acquirer and acquired firm’s cultures are extremely different.

Answer 524

b. The acquired firm’s overarching culture is generally rapidly accepted by the target firm’s employees

Question 525

Which of the following represent commonly used techniques for integrating corporate cultures? a. Employees are encouraged to share the same overall goals b. “Best practices” in one department are employed in other departments c. Multiple businesses share the same service such as the legal department d. Employees are co-located e. All of the above

Answer 525

e. All of the above

Question 526

Which of the following is not true about integrating business alliances? a. Teamwork is the underpinning that makes alliances work. b. Control is best exerted through coordination c. Decisions are made at the top of the organization d. Decisions are based on the premise that all participants to the alliance have had an opportunity to express their opinions. e. The failure of one party to meet commitments will erode trust

Answer 526

c. Decisions are made at the top of the organization

Question 527

Successfully integrated mergers and acquisitions are frequently those which a. Communicate candidly and continuously b. Appoint an integration manager and team with clearly defined goals and responsibilities c. Establish well defined lines of authority d. Focus on issues that have the greatest near-term impact e. All of the above

Answer 527

e. All of the above

Question 528

15. The acquirer’s sales force sells very complex software solutions to its customers. The target firm manufactures commodity hardware products. Customers of the two firms sometimes buy both products. The benefits of integrating the sales force of both the acquirer and target firms includes all of the following except for a. Generates significant cost savings by eliminating duplicate sales representatives b. Eliminates related sales support expenses c. Minimizes potential customer confusion by enabling customers to deal with a single sales representative d. Facilitates communication of a consistent brand image e. Makes product cross-selling more effective

Answer 528

e. Makes product cross-selling more effective

Question 529

The post-closing integration process consists of all of the following activities except for a. Integration planning b. Developing communication plans c. Creating a new organization d. Developing staffing plans e. Identifying the acquisition vehicle

Answer 529

e. Identifying the acquisition vehicle

Question 530

Which of the following activities are likely to extend beyond what is normally considered the conclusion of the post-closing integration period? a. Developing communication plans b. Cultural integration c. Integration planning d. Developing staffing plans e. None of the above

Answer 530

b. Cultural integration

Question 531

Delay in integrating the acquired business contributes to which of the following? a. Employee anxiety b. Customer attrition c. Supplier anxiety d. Deteriorating employee productivity e. All of the above

Answer 531

e. All of the above

Question 532

Successfully integrated M&As are those that demonstrate leadership by candidly and continuously communicating which of the following? a. A clear vision b. A set of values c. Unambiguous priorities for each employee d. A & B only e. A, B, & C

Answer 532

e. A, B, & C

Question 533

Which of the following represent important decisions that must be made early in the integration process? a. Identifying the appropriate organizational structure b. Defining key reporting relationships c. Selecting the right managers d. Identifying and communicating key roles and responsibilities e. All of the above

Answer 533

e. All of the above

Question 534

Poorly executed integration often results in high employee turnover. The costs of such turnover include which of the following? a. Declining morale among those that remain b. Retraining costs c. Declining productivity d. Deteriorating customer service e. All of the above

Answer 534

e. All of the above

Question 535

Which of the following factors affect customer attrition that normally accompanies post-merger integration? a. Customer uncertainty about on-time delivery b. More aggressive pricing from competitors c. Deteriorating customer services d. Deteriorating product quality e. All of the above

Answer 535

e. All of the above

Question 536

Which of the following is not true about the recommendation that integration should occur rapidly? a. All significant operations of the two firms must be integrated immediately. b. Rapid integration helps to minimize customer attritition. c. Rapid integration reduces unwanted employee turnover. d. Rapid integration reduces employee anxiety. e. None of the above

Answer 536

a. All significant operations of the two firms must be integrated immediately.

Question 537

Key management integration team responsibilities include all of the following except for a. Building a master schedule of activities that need to be accomplished b. Establishing work teams c. Tracking the daily operation of the firms d. Monitoring and expediting key decisions e. Establishing a rigorous communications program

Answer 537

c. Tracking the daily operation of the firms

Question 538

When corporate cultures are substantially different, it may be appropriate to a. Integrate the businesses as rapidly as possible b. Leave the businesses separate indefinitely c. Initially leave the businesses separate but integrate at a later time d. A or B e. B or C

Answer 538

e. B or C

Question 539

The comparable companies’ valuation method uses the discounted value of a firm’s free cash flow. True or False

Answer 539

False

Question 540

The comparable recent transactions method is usually considered less reliable than the comparable companies’ valuation method. True or False

Answer 540

False

Question 541

If the market leader in an industry has a $300 million market value and a 30% market share, the market is valuing each percentage point of market share at $10 million. If a target company in the same industry has a 20% market share, the market value of the target company is $200 million. True or False

Answer 541

True

Question 542

If the market leader in an industry has a $300 million market value and a 30% market share, the market is valuing each percentage point of market share at $10 million. If a target company in the same industry has a 20% market share, the market value of the target company is $200 million. True or False

Answer 542

False

Question 543

If the tangible book value of a firm significantly exceeds its market value for an extended period of time, it can become an attractive takeover target. True or False

Answer 543

True

Question 544

Valuations of target firms based on the comparable companies and recent transactions methods must be adjusted to reflect control premiums. True or False

Answer 544

False

Question 545

The replacement cost approach to valuation of a target firm ignores value created by operating the assets in combination as a going concern. True or False

Answer 545

True

Question 546

The replacement cost approach to valuation of a target firm ignores value created by operating the assets in combination as a going concern. True or False

Answer 546

False

Question 547

Break-up value assumes that individual businesses can be sold quickly without any material loss of value. True or False

Answer 547

True

Question 548

Liquidation value provides an estimate of the minimum value of the target firm. True or False

Answer 548

True

Question 549

The capitalization rate is equivalent to the discount rate when the firm’s revenues are not expected to grow. True or False

Answer 549

True

Question 550

Book values are maligned as measures of value, because they represent historical rather than current market values. True or False

Answer 550

True

Question 551

The principal limitation to the comparable companies’ valuation approach is the difficulty in finding companies that are truly comparable to the target firm. True or False

Answer 551

True

Question 552

Price-to-earnings ratios of comparable companies provide an excellent means of valuing the target firm at any point in the business cycle. True or False

Answer 552

False

Question 553

Market-based valuation measures are meaningful only for firms with a stable earnings, cash flow, or sales history. True or False

Answer 553

True

Question 554

Asset oriented approaches to valuation involve the use of tangible book value, liquidation value, discounted cash flows, and break-up values. True or False

Answer 554

False

Question 555

The weighted average valuation approach involves the use of a number of different valuation methods, weighted by the relative importance the appraiser attributes to each method. True or False

Answer 555

True

Question 556

Relative valuation methods are often described as market-based, as they reflect the amounts investors are willing to pay for each dollar of earnings, cash flow, sales, or book value at a moment in time. True or False

Answer 556

True

Question 557

If the P/E ratio for the comparable firm is equal to 10 and the after-tax earnings of the target firm are $2 million, the market value of the target firm would be $5 million. True or False

Answer 557

False

Question 558

The use of market-based valuation methods usually reflect actual demand and supply considerations at a moment in time. True or False

Answer 558

True

Question 559

The comparable companies’ method is widely used in so-called “fairness opinion” letters. True or False

Answer 559

True

Question 560

The comparable companies’ transactions valuation method is generally considered the most accurate of all the valuation methods. True or False

Answer 560

False

Question 561

The value of the comparable companies’ method may vary widely depending upon when it is calculated in the business cycle. True or False

Answer 561

True

Question 562

Like the recent transactions method, comparable company valuation estimates do not require the addition of a purchase price premium. True or False

Answer 562

False

Question 563

Market-based valuation methods are less prone to manipulation than discounted cash flow methods because they require a more detailed statement of assumptions. True or False

Answer 563

False

Question 564

The analyst should be careful not to mechanically add an acquisition premium to the target firm’s estimated value based on the comparable companies’ method if there is evidence that the market values of these “comparable firms” already reflect the effects of acquisition activity elsewhere in the industry. True or False

Answer 564

True

Question 565

Studies show that rival firms’ share prices will rise in response to the announced acquisition of a competitor, regardless of whether the proposed acquisition is ultimately successful or unsuccessful. True or False

Answer 565

True

Question 566

Studies show that rival firms’ share prices will rise in response to the announced acquisition of a competitor, regardless of whether the proposed acquisition is ultimately successful or unsuccessful. True or False

Answer 566

True

Question 567

Disadvantages of the comparable industry method of valuation include the presumption that industry multiples are actually comparable and that analysts’ earnings projections are unbiased. True or False

Answer 567

True

Question 568

Analysts have increasingly used the relationship between enterprise value to earnings before interest and taxes, depreciation, and amortization to value firms. True or False

Answer 568

True

Question 569

The enterprise value to EBITDA multiple relates the total book value of the firm from the perspective of the liability side of the balance sheet (i.e., long-term debt plus preferred and common equity), excluding cash, to EBITDA. True or False

Answer 569

False

Question 570

In constructing the enterprise value, the market value of the firm’s common equity value is added to the market value of the firm’s long-term debt and the market value of preferred stock. True or False

Answer 570

True

Question 571

The enterprise value to EBITDA method is useful because more firms are likely to have negative earnings than negative EBITDA. True or False

Answer 571

True

Question 572

The enterprise to EBITDA method of valuation can be compared more readily among firms exhibiting different levels of leverage than for other measures of earnings, since the numerator represents the total value of the firm and the denominator measures earnings before interest. True or False

Answer 572

True

Question 573

A higher P/E ratio for a firm may be justified if its earnings are expected to grow significantly faster than firm’s future earnings. True or False

Answer 573

True

Question 574

The so-called PEG ratio is calculated by dividing the firm’s price-to-earning ratio by the expected growth rate in the firm’s share price. True or False

Answer 574

False

Question 575

Conceptually, firms with P/E ratios less than their projected growth rates may be considered undervalued; while those with P/E ratios greater than their projected growth rates may be viewed as overvalued. True or False

Answer 575

True

Question 576

It is critical for the analyst to remember that high growth rates by themselves are likely to increase multiples such as a firm’s price to earnings ratio even without any improvement in financial returns. True or False

Answer 576

False

Question 577

Investors may be willing to pay considerably more for a stock whose PEG ratio is greater than one if they believe the increase in earnings will result in future financial returns that significantly exceed the firm’s cost of equity. True or False

Answer 577

True

Question 578

Empirical evidence suggests that forecasts of earnings and other value indicators are better predictors of firm value than value indicators based on historical data. True or Falsee

Answer 578

True

Question 579

The PEG ratio can be helpful in evaluating the potential market values of a number of different firms in the same industry in selecting which may be the most attractive acquisition target. True or False

Answer 579

True

Question 580

In the absence of earnings, other factors that drive the creation of value for a firm may be used for valuation purposes. True or False

Answer 580

True

Question 581

Macro value drivers are those factors which directly influence specific activities within the firm. True or False

Answer 581

False

Question 582

The number of billing errors as a percent of total invoices is a specific example of a macro value driver. True or False

Answer 582

False

Question 583

Micro value drivers are those factors affecting specific functions within the firm. True or False

Answer 583

True

Question 584

The major advantage of the value driver approach to valuation is the implied assumption that a single value driver or factor is representative of the total value of the business. True or False

Answer 584

False

Question 585

Tangible book value is widely used for valuing financial services companies, where tangible book value is primarily cash or liquid assets. True or False

Answer 585

True

Question 586

Liquidation or breakup value is the projected price of the firm’s assets sold separately in liquidating or breaking up the firm. True or False

Answer 586

False

Question 587

When estimating liquidation value, analysts often make a simplifying assumption that the assets can be sold in an orderly fashion, which is defined as a reasonable amount of time to solicit bids from qualified buyers. True or False

Answer 587

True

Question 588

In determining the liquidation value of inventories, it is not necessary to look at their composition. True or False

Answer 588

False

Question 589

The replacement cost approach to valuation estimates what it would cost to replace the target firm’s assets at current market prices using professional appraisers less the present value of the firm’s liabilities. True or False

Answer 589

True

Question 590

Valuing the assets separately in terms of what it would cost to replace them may seriously overstate the firm’s true going concern value. True or False

Answer 590

False

Question 591

An option is the exclusive right, but not the obligation, to buy, sell, or use property for a specific period of time in exchange for a predetermined amount of money. True or False

Answer 591

True

Question 592

Real options include the right to buy land, commercial property, and equipment. Such assets can be valued as call options if its current value exceeds the difference between the asset’s current value and some predetermined level. True or False

Answer 592

True

Question 593

Real options, also called strategic management options, refer to management’s ability to adopt and later revise corporate investment decisions. True or False

Answer 593

True

Question 594

Real options, also called strategic management options, refer to management’s ability to adopt and later revise corporate investment decisions. True or False

Answer 594

True

Question 595

Investment decisions, including M&As, often contain certain “embedded options” such as the ability to accelerate growth by adding to the initial investment (i.e., expand), to delay the timing of the initial investment (i.e., delay), or to walk away from the project (i.e., abandon). True or False

Answer 595

True

Question 596

The NPV of an acquisition of a manufacturer operating at full capacity may have a lower value than if the NPV is adjusted for a decision made at a later date to expand capacity. If the additional capacity is fully utilized, the resulting higher level of future cash flows may increase the acquisition’s NPV. In this instance, the value of the real option to expand is the difference between the NPV with and without expansion. True or False

Answer 596

True

Question 597

All investment decisions include clearly identifiable and measurable real options whose estimated value should be included in the valuation of the opportunity. True or False

Answer 597

False

Question 598

All investment decisions include clearly identifiable and measurable real options whose estimated value should be included in the valuation of the opportunity. True or False

Answer 598

True

Question 599

1. Which one of the following factors is not considered calculating a firm’s PEG ratio? a. Projected growth rate of the value indicator (e.g., earnings) b. Ratio of market price to value indicator (e.g., P/E) c. Share exchange ratio d. Historical growth rate of the value indicator e. None of the above

Answer 599

c. Share exchange ratio

Question 600

2. In determining the purchase price for an acquisition target, which one of the following valuation methods does not require the addition of a purchase price premium? a. Discounted cash flow method b. Comparable companies’ method c. Comparable industries’ method d. Recent transactions’ method e. A & B only

Answer 600

d. Recent transactions’ method

Question 601

3. Limitations in applying the comparable companies’ method of valuation include which of the following? a. Finding truly comparable companies is difficult b. The use of market-based methods can result in significant under- or overvaluation during periods of declining or rising stock markets c. Market-based methods can be manipulated easily, because the methods do not require a clear statement of assumptions with respect to risk, growth, or the timing or magnitude of future earnings and cash flows. d. A, B, & C e. A & B only

Answer 601

d. A, B, & C

Question 602

4. Which of the following represent options available to managers in making investment decisions? a. Delay initial investment b. Accelerate cumulative investment c. Abandon the investment at a later date d. A & B only e. A, B, & C

Answer 602

e. A, B, & C

Question 603

5. Which one of the following is not a commonly used method of valuing target firms? a. Discounted cash flow b. Comparable companies method c. Recent transactions method d. Asset oriented method e. Share exchange ratio method

Answer 603

e. Share exchange ratio method

Question 604

6. Which of the following is not true about real options? a. All investment decisions contain identifiable and measurable real options. b. Under certain circumstances, management may be able to delay their initial investment in a project or M&A. c. Real options may be valued as the expected value of various alternative cash flow projections. d. Real options can be valued using the Black-Sholes method. e. None of the above

Answer 604

a. All investment decisions contain identifiable and measurable real options.

Question 605

7. Which of the following represent limitations of real options? a. Key assumptions often are very difficult to quantify, especially volatility b. Project delays may incur significant opportunity costs c. Options often are not independent; therefore, selecting one option may foreclose other options d. Often requires complex modeling e. All of the above

Answer 605

e. All of the above

Question 606

8. Which of the following statements about the comparable companies’ valuation method is not true? a. Requires the use of firms that are “substantially” similar to the target firm b. Uses market based rather than cash flow based valuations c. Often used as the basis of investment banker fairness opinions d. Generally provides the most accurate valuation method e. Provides an estimate of the target firm at a moment in time.

Answer 606

d. Generally provides the most accurate valuation method

Question 607

9. The tangible book value or equity per share method is applicable primarily to the following industries: a. Steel and financial services b. Distribution and financial services c. Electric and natural gas utilities d. Coal and copper mining e. Space and defense

Answer 607

b. Distribution and financial services

Question 608

10. Which of the following is not true about the liquidation/break-up valuation methods? a. Highly diversified companies are often valued in terms of the sum of the standalone values of their operating units b. The calculation of such values is heavily dependent on the skill of appraisers who are intimately familiar with the operations to be liquidated. c. Assets can sometimes be liquidated in an orderly fashion. d. Legal, appraisal, and consulting fees may comprise a substantial share of the total proceeds of the sale of the assets e. The liquidation value of most of the firm’s assets is about the same.

Answer 608

e. The liquidation value of most of the firm’s assets is about the same.

Question 609

11. Intangible assets often constitute a substantial source of value to the acquiring firm. Which of the following are not generally considered intangible assets? a. Patents and technical know-how b. Warranty and contingent claims c. Trademarks and customer lists d. Covenants not to compete and franchises e. Copyrights and software

Answer 609

b. Warranty and contingent claims

Question 610

12. Which of the following represent advantages of the comparable companies’ valuation method? a. Uses the most accurate market-based valuation at a point in time b. Valuations need to be adjusted to reflect control premiums c. Adjusts for risk of future cash flows d. Adjusts for the timing of future cash flows e. A & B only

Answer 610

a. Uses the most accurate market-based valuation at a point in time

Question 611

13. Which of the following is not generally considered a valuation method? a. Discounted cash flow method b. Comparable companies’ method c. Share exchange ratio method d. Liquidation value method e. Comparable transaction’s method

Answer 611

c. Share exchange ratio method

Question 612

14. All of the following are true for market based valuation methods except for which of the following? a. Assumes that markets are efficient such that current values reflect all the information currently known about the business b. Current values represent what a willing buyer and seller are willing to pay for a business in the absence of full information c. Market based methods are always superior to discounted cash flow techniques d. Include comparable company and recent transactions methods e. Include the tangible book value approach

Answer 612

c. Market based methods are always superior to discounted cash flow techniques

Question 613

15. Which of the following are examples of intangible assets that may have value to the acquiring company? a. Patents b. Trade names c. Customer lists and relationships d. Covenants not to compete e. All of the above

Answer 613

e. All of the above