Question 1

Popular takeover defense methods include white knights, poison pills, greenmail, golden parachutes, and shark repellents.

Accepted Answer

These are indeed popular methods used by companies to defend themselves against hostile takeovers.

Question 2

If the P/E paid for a target company is less than the P/E of the acquiring company, the effect on the earnings per share of the acquired company will be ________.

Accepted Answer

The answer of If the P/E paid for a target...

Question 3

Jia's Oven Manufacturing is evaluating the acquisition of Cuisinaire Kitchen Appliance Co. Cuisinaire has a loss carryforward of $1.5 million which resulted from earlier operations. Jia's Oven can purchase Cuisinaire for $1.8 million and liquidate the assets for $1.3 million. Jia's Oven expects earnings before taxes in the five years following the acquisition to be as follows:  (These earnings are assumed to fall within the annual limit legally allowed for application of the tax loss carryforward resulting from the proposed acquisition.) Jia's Oven is in the 40 percent tax bracket and has a cost of capital of 17 percent.
(a) What is the tax advantage of the acquisition each year for Jia's Oven?
(b) What is the maximum cash price Jia's Oven would be willing to pay for Cuisinaire?
(c) Do you recommend the acquisition? Why or why not?

Accepted Answer

The answer of Jia's Oven Manufacturing is evaluating the acquisition...

Question 4

The actual ratio of exchange in a stock-exchange acquisition is the ratio of the ________.

Accepted Answer

The actual ratio of exchange in a stock-exchange acquisition is the ratio of how much the acquiring firm pays per share of the target company to the per share market price of the acquiring firm. This is because the transaction involves the exchange of stock in the acquiring firm for shares in the target company. Therefore, the ratio is based on the value of the shares being exchanged at the market prices of both firms.

Question 5

Tangshan Mining is attempting to acquire Zhengsen Mining. Selected financial data is presented for both companies in the table below:  Tangshan Mining has sufficient authorized but unissued shares to carry out the proposed merger.
(a) Calculate the EPS of Tangshan Mining and Zhengsen Mining before the merger.
(b) If the ratio of exchange is 1.8, what will be the earnings per share of the merged company?
(c) Repeat part (a) if the ratio of exchange is 2.0.
(d) Repeat part (a) if the ratio of exchange is 2.2
(e) discuss the principal illustrated by your answers to parts (a) through (d)

Accepted Answer

The answer of Tangshan Mining is attempting to acquire Zhengsen...

Question 6

A two-tier offer is a tender offer in which the terms offered are more attractive to those who tender shares early.

Accepted Answer

In a two-tier offer, the terms offered are designed to reward early participation. This means that shareholders who tender their shares early will receive more favorable terms than those who wait until later to participate. As a result, early participation is incentivized and the bidder can more quickly and easily acquire a majority stake in the target company.

Question 7

Greenmail is a takeover defense under which a target firm repurchases a large block of stock at a premium from one or more shareholders in order to end a hostile takeover attempt by those shareholders.

Accepted Answer

The statement accurately describes the concept of greenmail as a takeover defense tactic.

Question 8

If the P/E paid for a target company is less than the P/E of the acquiring company, the effect on the earnings per share of the acquiring company will be ________.

Accepted Answer

If the P/E paid for a target company is less than the P/E of the acquiring company, it means the acquiring company is paying a lower price for each dollar of earnings generated by the target company compared to its own price. This will lead to an increase in the overall earnings per share of the acquiring company, which is a positive effect.

Question 9

If the P/E paid for a target company is greater than the P/E of the acquiring company, the effect on the earnings per share of the acquiring company will be ________.

Accepted Answer

If the P/E paid for a target company is greater than the P/E of the acquiring company, it means that the acquiring company paid a higher price for the earnings of the target company. This results in dilution of the earnings per share (EPS) of the acquiring company, as it now has to share a portion of its earnings with the shareholders of the target company. Hence, the effect on the EPS of the acquiring company will be negative.

Question 10

The owners of a holding company can control significantly larger amounts of assets than they could acquire through mergers.

Accepted Answer

A holding company can control the assets of its subsidiaries, which allows its owners to control a larger amount of assets than they could acquire through mergers with other companies.

Question 11

Tangshan Mining is attempting to acquire Zhengsen Mining. Selected financial data is presented for both companies in the table below:  Tangshan Mining has sufficient authorized but unissued shares to carry out the proposed merger. If the ratio of exchange is 1.8, what will be the EPS of the merged firm?

Accepted Answer

The answer of Tangshan Mining is attempting to acquire Zhengsen...

Question 12

ZhenYee Electronics, Inc. is considering the acquisition of Datamatic, Inc. at a cash price of $5,000,000. Datamatic, Inc. has short-term liabilities of $1,500,000. As a result of acquiring Datamatic, Inc., ZhenYee Electronics would also acquire rights to one major patent which would provide an estimated cash inflow of $1,800,000 per year for the next eight years. The firm has a cost of capital of 12 percent. Would you recommend the cash acquisition?

Accepted Answer

The answer of ZhenYee Electronics, Inc. is considering the acquisition...

Question 13

A poison pill is a takeover defense in which a target firm finds an acquirer more to its liking than the initial hostile acquirer and prompts the two to compete to take over the firm.

Accepted Answer

A poison pill is a defensive strategy used by a target company to prevent or discourage a hostile takeover by making its stock less attractive to the acquirer, often by allowing existing shareholders (except the acquirer) to buy more shares at a discount, diluting the potential acquirer's stake.

Question 14

If the P/E paid is greater than the P/E of the acquiring company, the effect on the earnings per share of the acquired company will be ________.

Accepted Answer

The P/E paid is the price paid for each share of the acquired company divided by the earnings per share of the acquired company. The P/E of the acquiring company is the price paid for each share of the acquiring company divided by the earnings per share of the acquiring company. If the P/E paid is greater than the P/E of the acquiring company, then the acquiring company is paying a higher price for each dollar of earnings of the acquired company. This will result in a lower earnings per share for the acquired company.

Question 15

If the P/E paid for a target company is equal to the P/E of the acquiring company, the effect on the earnings per share of the acquired company will be ________.

Accepted Answer

If the P/E paid for a target company is equal to the P/E of the acquiring company, the effect on the earnings per share of the acquired company will be neutral. This is because the acquiring company is valuing the target company based on the same multiples as their own, so there is no immediate change in the earnings per share of the acquired company.

Question 16

When the ratio of exchange in a merger is equal to one and both the acquiring and the target companies have the same premerger earnings per share, the merged firm's earnings per share will initially ________.

Accepted Answer

When the ratio of exchange is equal to one and both companies have the same premerger earnings per share, the merged firm's earnings per share will remain constant. This is because each shareholder's ownership percentage and earnings remain the same after the merger.

Question 17

The long-run effect on the earnings per share of the merged firm depends largely on ________.

Accepted Answer

The long-run effect on the earnings per share of the merged firm depends largely on the synergy of the merged firm. Synergy refers to the additional value that is created from the combination of two companies. If the merged firm is able to achieve synergy, it can lead to higher earnings per share in the long run. Factors such as the pre-merger P/E ratio, ratio of exchange, and tax considerations can also have an impact, but they are not as important as the synergy of the merged firm.

Question 18

When the ratio of exchange in a merger is equal to one and both the acquiring and the target companies have the same premerger earnings per share, both the acquiring and the target companies have the same ________.

Accepted Answer

When the ratio of exchange in a merger is equal to one and both companies have the same premerger earnings per share (EPS), it implies that they also have the same price-to-earnings (P/E) ratio. This is because the P/E ratio is calculated by dividing the market price per share by the earnings per share. If the earnings per share are the same and the exchange ratio is one, it suggests that their market valuations in terms of P/E are aligned.

Question 19

Before paying dividends, a subsidiary must pay federal and state taxes on its earnings.

Accepted Answer

It is true that before paying dividends, a subsidiary must pay federal and state taxes on its earnings. This is because dividends are paid out of after-tax profits.

Question 20

A white knight is a takeover defense in which a firm issues securities that give their holders certain rights that become effective when a takeover is attempted and that make the target firm less desirable to a hostile acquirer.

Accepted Answer

A white knight is a friendly investor or company that acquires a corporation at fair consideration when it is under the threat of a hostile takeover, not a takeover defense mechanism involving the issuance of securities with special rights.

Quiz 18: Mergers, Lbos, Divestitures, and Business Failure