Question 1

A tax loss carry-forward of $1,000,000 for company ZZZ is not usually worth $1,000,000 in present value to a firm that might acquire company ZZZ.

Accepted Answer

The present value of a tax loss carry-forward depends on the tax rate and the time value of money. It is generally worth less than its face value because it can only be used to offset future taxable income and there is a time value of money. The acquiring firm may not have sufficient taxable income in the future to fully utilize the tax loss carry-forward, which reduces its value.

Question 2

Synergy is the greatest and most easily measured nonfinancial benefit in a merger.

Accepted Answer

Synergy is a significant nonfinancial benefit in a merger, aiming for a combined performance greater than the sum of the parts, but it is often challenging to measure accurately due to its qualitative nature.

Question 3

Vertical integration is usually prohibited or severely restricted by government competition regulations.

Accepted Answer

Vertical integration is not always prohibited or restricted by government competition regulations. However, in some cases, it may be limited if it could result in unfair market domination or anticompetitive behavior.

Question 4

When one company offers a large premium for another company,most of the upward movement in share price occurs after the public announcement of the merger offer and thus offers the best opportunity for profit to small investors.

Accepted Answer

Most of the upward movement in share price typically occurs before the public announcement due to speculation or insider information, leaving limited profit opportunities for small investors after the announcement.

Question 5

A tax loss carry-forward is a benefit to the acquired firm's shareholders.

Accepted Answer

The answer of A tax loss carry-forward is a benefit...

Question 6

Vertical integration represents acquisition of a competitor.

Accepted Answer

Vertical integration refers to the acquisition or merger of companies at different stages of the same supply chain, such as a manufacturer acquiring a supplier or a distributor. It does not necessarily involve the acquisition of a direct competitor.

Question 7

In a horizontal merger,the integration that occurs comes from acquiring companies that supply resources to the company's production process.

Accepted Answer

In a horizontal merger, the integration occurs between companies that operate in the same or similar industries and markets, not by acquiring companies that supply resources to the production process.

Question 8

In light of accounting considerations,the acquiring company has some inducement to offer cash,and the acquired company would rather receive cash than face possible dilution.

Accepted Answer

The answer of In light of accounting considerations,the acquiring company...

Question 9

Mergers often improve the financing flexibility that a larger company has available.

Accepted Answer

Mergers allow for a larger combined pool of resources and assets, which can improve a company's ability to raise capital and obtain financing options. This increase in financing flexibility can provide more opportunities for future growth and strategic investments.

Question 10

If the potential buyer cannot come to agreement on merger terms with the potential seller's management and board of directors describe which two alternatives are still open to the potential buyer.

Accepted Answer

The answer of If the potential buyer cannot come to...

Question 11

To avoid an unfriendly takeover,management may institute one or more of several takeover defences.List and explain in detail these defences.

Accepted Answer

The answer of To avoid an unfriendly takeover,management may institute...

Question 12

Following a merger,the change in the risk profile of the merged companies may influence the P/E ratio as much as the change in the overall growth rate.

Accepted Answer

The risk profile of a merged company can greatly impact the perceived value and future potential of the company, which can affect the P/E ratio. Therefore, the statement is true.

Question 13

The stock market reaction to divestitures may actually be positive if the divestiture is perceived to rid the company of an unprofitable business,or if it seems to sharpen the company's focus.

Accepted Answer

The statement is true. The stock market may react positively to divestitures if they are seen as a way to rid the company of an unprofitable business or to focus their efforts on the most profitable areas. This can lead to increased shareholder value and improved financial performance.

Question 14

Goodwill is created when a purchase of assets is used in an acquisition if the purchase price per share is well above the book value per share and 75 percent of goodwill can be considered an eligible capital expenditure,which has a 7 percent CCA rate.

Accepted Answer

Goodwill is created when the purchase price per share is well above the book value per share, and 75 percent of goodwill can be considered an eligible capital expenditure, which has a 7 percent CCA rate. Therefore, the statement is true.

Question 15

By using cash instead of stock,a company may diminish the perceived dilutive effects of a merger.

Accepted Answer

When a company uses cash to finance a merger, it does not issue new shares of stock, which means there is no increase in the number of outstanding shares. This leads to a lower dilution of earnings per share and can be perceived as less dilutive to existing stockholders.

Question 16

While a horizontal merger may improve profitability,it will not necessarily reduce the portfolio risk of the acquiring company.

Accepted Answer

A horizontal merger involves the consolidation of companies within the same industry, which may result in increased profitability due to economies of scale and market power. However, the portfolio risk of the acquiring company may not necessarily be reduced as it remains heavily exposed to the same industry risks. Therefore, a horizontal merger may enhance profitability without necessarily reducing portfolio risk.

Question 17

If an acquiring firm's merger proposal was initially rejected by a target firm's management and board of directors,the acquiring firm could utilize a tender offer to gain control of the target firm.

Accepted Answer

A tender offer allows the acquiring firm to make a direct offer to the target firm's shareholders to purchase their shares at a premium, bypassing the target firm's management and board of directors. This can be used as a strategy to gain control of the target firm even if the initial merger proposal was rejected by its management and board.

Question 18

Selling shareholders may receive a price well above current market value.

Accepted Answer

Selling shareholders may receive a higher price than the current market value of their shares if there is a high demand for the company's shares or if there are strategic investors willing to pay a premium for a stake in the company.

Question 19

Risk averse investors may discount the future expected performance of the merged firm at a lower rate.

Accepted Answer

Risk averse investors are more likely to discount the future expected performance of the merged firm at a lower rate because they are more cautious and prefer investments that are perceived as less risky. This means they may require a higher rate of return to compensate for the increased risk of investing in a merged company.

Question 20

Officers of a selling firm are almost always released.

Accepted Answer

This statement is false. Officers of a selling firm may be released or may still be employed depending on the circumstances.

Quiz 20: External Growth Through Mergers