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

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Question 51

Multiple Choice

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Maxi, Inc. is evaluating the acquisition of Mini, Inc., which had a loss carryforward of $2.75 million which resulted from earlier operations. Maxi can purchase Mini for $3.5 million and liquidate the assets for $1.25 million. Maxi expects earnings before taxes in the three years following the acquisition to be as follows: (These earnings are assumed to fall within the limit legally allowed for application of a tax loss carryforward resulting from the proposed acquisition.) Maxi has a 40 percent tax rate and a cost of capital of 10 percent. The total present value of tax advantage of the acquisition in the following three years is

A) $440,000.
B) $842,000.
C) $1.1 million.
D) $2.75 million.

E) A) and B)
F) A) and C)

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Question 52

Multiple Choice

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In defending against a hostile takeover, the strategy involving the payment of a large, debt-financed, cash dividend is the ________ strategy.

A) shark repellent
B) golden parachute
C) leveraged recapitalization
D) white knight

E) A) and B)
F) All of the above

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Question 53

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The basic difficulty in applying the capital budgeting approach to the acquisition of a going concern is the estimation of initial cash flows and certain risk consideration.

Typically in a leveraged buyout approximately ________ percent (if not more) of the purchase price is financed with debt.

A leveraged buyout needs to be carried out through

The combination of two or more companies that results in one of the corporations having a voting control of one or more of the other companies is a

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

A strategic merger is a merger transaction undertaken with the goal of restructuring the acquired company in order to improve its cash flow and unlock its hidden value.

The goals of divestiture include all of the following EXCEPT

The primary causes of business failure are inventory mismanagement, poor marketing campaigns, and corporate theft.

The combination of two or more companies to form a completely new corporation is a

Business combinations are used by firms to externally expand in order to achieve all of the following objectives EXCEPT

A merger occurs when two or more firms are combined to form a completely new corporation.

The firm in a merger transaction that attempts to merge or takeover another company is called the

A form of divestiture in which an operating unit becomes an independent company by issuing shares in it on a pro rata basis to the parent company's shareholders is called

A poison pill is a takeover defense in which the 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.

The primary causes of business failure are mismanagement, poor economic conditions, and corporate maturity.

In the broadest sense, activities involving expansion or contraction of a firm's operations or changes in its assets or ownership structure are called corporate restructuring.

The ratio of exchange in market price indicates the market price per share of the acquiring firm paid for each dollar of market price per share of the target firm.

A ________ occurs when the operations of the acquiring and target firms are combined in order to achieve economies and thereby cause the performance of the merged firm to exceed that of the pre-merged firm.