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FIN/444 Mergers, Acquisition and Corporate Restructuring

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1. The pooling of interest and the purchase method are the two methods allowed by the FASB in accounting for Mergers and Acquisitions.



2. FASB prefers the purchase method of accounting for business combinations because

  1. CEO’s of major corporations find it more beneficial
  2. Purchase method allows for amortization of goodwill over a maximum of 40 years
  3. Merger accounting and subsequent asset values should be consistent with market valuations
  4. Purchase method is more easily understood by accountants

3. Strategic planning is the responsibility of the CEO and executive management team?

  1. True
  2. False

4. Which of the statements below is an essential element of the strategic planning process

  1. Formulation of internal organizational performance measurements.
  2. Formulation of mid-range programs and short-run plans.
  3. Analysis of company, competitors, industry, domestic economy, and international economies.
  4. A and C only
  5. All of the above

5. Strategic planning processes can utilize formal procedures or develop through informal communications throughout the organization.

  1. True
  2. False

6. According to the study done by Jensen (1986) he found that

  1. Firms with substantially high free cash flow leads to value-reducing diversification decisions
  2. Mergers create cost saving synergies
  3.  Produce economies of scale
  4. B and C only

7. According to studies done by Hirshleifer and Png (1989) and French and McCormick (1984) suggested that

  1. a seller might want to limit the competitiveness of the selling process because it can indirectly affect the aggressiveness of any one bidder and adversely affect the combined net gains from the transaction.
  2. A seller might want to promote the competitiveness of the selling process because it can indirectly affect the aggressiveness of any one bidder and help increase the combined net gains from the transaction
  3. Bidders in a takeover attempt face a potential winner’s curse
  4. None of the above

8. Between 1895 and 1904 what type of merger was most prevalent?

  1. Vertical Mergers
  2. Conglomerate Mergers
  3. Horizontal Mergers
  4. None of the above

9. Andrade, Mitchell, and Stafford (2001) concluded that much of the merger activity that transpired during the ‘90s was caused by

  1. Technological Innovations
  2. Availability of Junk Bonds
  3. Capital Markets
  4. Deregulation

10. Which characteristics will not make a firm vulnerable to a takeover :

  1. A low stock price in relation to the replacement cost of assets or their potential earning power (a low q-ratio).

B. A highly liquid balance sheet with large amounts of excess cash, a valuable       securities portfolio,and significant unused debt capacity.

  1. Good cash flow relative to current stock prices; low P/EPS ratios.
  2. Subsidiaries or properties that could be sold off that would significantly impair cash flow.

11. Which of the following are defenses against hostile takeover bids:

  1. Classified Boards
  2. White Knight
  3. Super Majority Amendments
  4. All of the above
  5. B and C only

12. The leading methods used in the valuation of a firm for merger analysis are:

  1. the comparable companies or comparable transactions approach
  2. the spreadsheet approach
  3. the formula approach
  4. all of the above
  5. A and B only

13. The Black-Scholes option pricing model should be used with which of the valuation techniques?

  1. the spreadsheet approach
  2. the comparable companies or comparable transactions approach
  3. the MBA approach
  4. A and B only

14. When calculating the WACC we should use which of the following?

  1. Book value for both debt & equity
  2. Market value for both debt & equity
  3. Book value for debt & market value for equity
  4. Market value for debt & book value for equity

15. Three major types of merger motivations were identified by Berkovitch and Narayanan (1993):

  1. synergy
  2. hubris
  3. operating innovations
  4. All of the above
  5. A & B only

16. All are reasons for given for merger activity except

  1. Technological change
  2. Economies of scale
  3. New industries
  4. Super Majority amendments
  5. Deregulation and regulation

17. Tender offers can be either hostile or friendly

  1. True
  2. False

18. All are types of mergers except

  1. Horizontal
  2. Vertical
  3. Hubris
  4. Conglomerate

19. Which federal securities law regulates the sale of securities

  1. Securities Act of 1933 (SA)
  2. Securities Exchange Act of 1934 (SEA)
  3. Public Utility Holding Company Act of 1935 (PUHCA)
  4. Investment Company Act of 1940 (ICA)

20. This act applies to public issues of debt securities with a value of $5 million or more.

  1. Securities Act of 1933 (SA)
  2. Securities Exchange Act of 1934 (SEA)
  3. The Trust Indenture Act of 1939
  4. Investment Company Act of 1940 (ICA)

21. Its stated purpose was to protect target shareholders from swift and secret takeovers

  1. Securities Act of 1933 (SA)
  2. Securities Exchange Act of 1934 (SEA)
  3. The Trust Indenture Act of 1939
  4. The Williams Act

22. A strategic alliance represents a combination of subsets of assets contributed by two (or more) business entities for a specific business purpose and a limited duration.

  1. True
  2. False

23. All of the following are rationales for joint ventures except

  1. Tax Aspects
  2. Knowledge Acquisition
  3. Risk Reduction
  4. Capital Markets

24. Strategic alliances are informal or formal decisions or agreements between two or more firms to cooperate in some form of relationship.

  1. True
  2. False

25. Defined contribution plans can be of three kinds: stock bonus plans, profit-sharing plans, and money purchase plans.

  1. True
  2. False

26. Under ERISA, ESOPs are stock bonus plans or combined stock bonus plans and money purchase plans designed to invest primarily in qualifying employer securities.

  1. True
  2. False

27. According to The U.S. General Accounting Office (GAO) (1986) all of the following are types of  ESOPs except: leveraged,

  1. leveragable
  2. nonleveraged
  3. stock
  4. tax credit

28. ESOP’s can be used as an antitakeover weapons

  1. True
  2. False

29. The master limited partnership (MLP) is a type of limited partnership whose shares are publicly traded.

  1. True
  2. False

30. The most widely used method for determining the cost of equity is

  1. The Dividend Growth Model
  2. The CAPM
  3. The Bond Yield Plus Equity Risk model
  4. None of the above

31. The risk free rate used in the CAPM is:

  1. AAA rated corporate bond
  2. U.S. 3 month Treasury Bill
  3. U.S. 10 year Treasury Bond
  4. Aaa rated corporate bond

32. Which of the following is a type of share repurchase?

  1. Clientele effect
  2. Signaling effect
  3. Dutch auctions
  4. None of the above

33. Which of the following is a form of restructuring and divestitures?

  1. Asset Sales
  2. Equity carve-outs
  3. Spin-offs
  4. A and C only
  5. All of the above

34. A split-up is defined as the separation of a company into two or more parts.

  1. True
  2. False

35. In all of the listed research papers, corporate divestitures, on average, create wealth for parent shareholders.

  1. True
  2. False

36. In dual-class recapitalizations (DCRs), firms have created a second class of common stock that has limited voting rights and usually a preferential claim to the firm’s cash flows.

  1. True
  2. False

37. The main reason/reasons for the large levels of foreign M&A activity is:

  1. Europe becoming a common market place
  2. Globalization
  3. International Competition
  4. All of the above

38. U.S. company acquisitions of non-U.S. companies are in the range of ______% to ______% of total world M&A activity.

  1. 4% to 7%
  2. 11% to 15%
  3. 1% to 3%
  4. None of the above

39. Growth is the most important motive for international mergers.

  1. True
  2. False

40. The fraud and self-dealing revelations of new millennium resulted in investigations by congress, the SEC, and the State Attorney General in several jurisdictions, particularly New York and led to the Sarbanes-Oxley Act (SOA).

  1. True
  2. False

41. A widely held view is that about 67% of acquisitions do not earn the buyers’ cost of capital.

  1. True
  2. False

42. Mergers fail for which of the following reason/reasons?

  1. Pay too much
  2. Overoptimistic expected synergies
  3. Greenmail
  4. All of the above
  5. A and B only

43. The modern literature on long-range planning indicates that long-range strategic planning involves at least the following elements:

A.  Environmental reassessment for new technologies, new industries, and new forms of competitors.

B.  A consideration of capabilities, missions, and environmental interactions from the   standpoint of the firm and its divisions.

C.  An emphasis on process rather than particular goals or objectives.

D.  An emphasis on iteration and on an iterative feedback process as a methodology for dealing with ill-structured problems.

E.  All of the above

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