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Chapter 23:   Mergers and Other Forms of Corporate Restructuring

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1. Historically, the shareholders of selling companies have benefited more in a merger than have the shareholders of the buying companies.

2. In leveraged buyouts, very little debt and considerable equity are used to make a cash purchase.

3. A service company would be a good candidate for an LBO.

4. If an acquisition is paid for with common or voting preferred stock, the transaction is not taxable at the time of sale.

5. If management is primarily concerned with the long-term value of a merger, it is more likely to use the earnings-per-share approach to analyzing the merger's benefits.

6. A divestiture implies the forced sale of a portion of a company or of the company as a whole.

7. A company may be acquired either by the purchase of its assets or its common stock.

8. Free cash flow is the cash flow in excess of that required to fund all projects with a positive NPV when discounted at appropriate rates of return.

9. The higher the P/E ratio of the acquiring company in relation to the selling company and the larger the earnings of the selling company in relation to the acquiring company, the greater the increase in earnings per share of the acquiring company.

10. An example of value creation through synergy is an increase of earnings per share due to "bootstrapping."

11. In the US, goodwill must be tested at least annually for impairment (or decline).

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