Multiple-Choice Quiz

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Chapter 23: Mergers and Other Forms of Corporate Restructuring

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1. Suppose that the market price of Company X is $45 per share and that of Company Y is $30. If X offers three-fourths a share of common stock for each share of Y, the ratio of exchange of market prices would be:

.667

1.0

1.125

1.5

2. The restructuring of a corporation should be undertaken if

the restructuring can prevent an unwanted takeover.

the restructuring is expected to create value for shareholders.

the restructuring is expected to increase the firm's revenue.

the interests of bondholders are not negatively affected.

3. The "information effect" refers to the notion that

a corporation's actions may convey information about its future prospects.

management is reluctant to provide financial information that is not required by law.

agents incur costs in trying to obtain information.

the financial manager should attempt to manage sensitive information about the firm.

4. In the long run, a successful acquisition is one that:

enables the acquirer to make an all-equity purchase, thereby avoiding additional financial
leverage.

enables the acquirer to diversify its asset base.

increases the market price of the acquirer's stock over what it would have been without
the acquisition.

increases financial leverage.

5. Bidding companies often pay too much for the acquired firm. The hubris hypothesis explains this by suggesting that the bidders

have too little information to make an optimal decision.

have big egos and this impedes rational decision-making.

have difficulty in thinking strategically over the long-term.

are overly influenced by the tax consequences of an acquisition.

6. A tender offer is

a goodwill gesture by a "white knight."

a would-be acquirer's friendly takeover attempt.

a would-be acquirer's offer to buy stock directly from shareholders.

viewed as sexual harassment when it occurs in the workplace.

7. The public sale of common stock in a subsidiary in which the parent usually retains majority control is called

a pure play.

a spin-off.

a partial sell-off.

an equity carve-out.

8. In the United States, goodwill charges arising from a current acquisition are generally deductible for "tax purposes" over

15 years.

20 years.

40 years.

no years (i.e., these goodwill charges are not deductible for "tax purposes").

9. Empirical evidence on acquisitions indicates excess returns on average to the shareholders of the selling company, and e xcess returns on average to those of the buying company.

no; no

substantial; no

no; substantial

substantial; substantial

10. One means for a company to "go private" is

divestiture.

the pure play.

the leveraged buyout (LBO).

the prepackaged reorganization.

11. Recent accounting changes in the US .

eliminated the purchase method, allowing only the pooling-of-interests method for mergers and acquisitions

eliminated the pooling-of-interests method, allowing only the purchase method for mergers and acquisitions

allow for both the purchase method and the pooling-of-interests method for mergers and acquisitions

outlawed the recording of goodwill for any merger or acquisition

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