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Exam 21: Mergers and Acquisitions

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Question 21

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The text gives a number of valid,acceptable reasons for companies to merge.Which of the following is NOT acceptable?

A) Synergistic benefits arising from mergers.
B) Reduction in competition resulting from mergers.
C) Acquisition of assets at below replacement value.
D) Attempts to minimize taxes by acquiring a firm with large accumulated losses that can be used immediately.
E) Using surplus cash to acquire another firm and prevent unfavorable tax consequences for shareholders.

F) D) and E)
G) B) and D)

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Question 22

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The rate used to discount projected merger cash flows should be the overall cost of capital of the new consolidated firm because it incorporates the actual capital structure of the new firm.

A) True
B) False

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Question 23

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Anacott Steel is acquiring Terafly Incorporated.Terafly is expected to provide Anacott with operating cash flows of $12,$21,$16,and $9 million over the next four years,respectively.In addition,the horizon value of all remaining cash flows at the end of Year 4 is estimated at $18 million.The merger will cost Anacott $47 million today.If the value of the merger is estimated at $8.00 per share and Anacott has 1,000,000 shares outstanding,what equity discount rate must the firm be using to value this acquisition?

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

Since the primary rationale for any operating merger is synergy,in planning such mergers the development of accurate pro forma cash flows is the single most important task.

Most defensive mergers occur as a result of managers' actions to maximize shareholders' wealth.

Post-merger control and the negotiated price paid by the acquirer are two of the most important issues in the terms to merger agreements.

In a financial merger,the relevant post-merger cash flows are simply the sum of the expected cash flows of the two companies,measured as if they were operated independently.

The value of the target firm is calculated by discounting residual cash flows that belong to the acquiring firm's shareholders at the target's cost of equity reflecting any changes to its capital structure as a result of the merger.

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

Since managers' central goal is to maximize stock price,managers' personal incentives do not interfere with mergers that would benefit the target firm's stockholders.

Which of the following statements is most CORRECT?

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

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

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

Which of the following statements is most CORRECT?

Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the discount rate can only be determined after the merger is consummated.

A conglomerate merger occurs when two firms with either a horizontal or a vertical business relationship combine.

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