Chapter 1 Study Test
True/False Questions:
1. A leveraged buyout involves the purchase of a company financed primarily by debt. True
or False
2. A merger is a combination of two firms in which only one firm’s identity survives. True
or False
3. In a consolidation, two or more firms combine to form a new company. True or False
4. A horizontal merger occurs between firms at different stages of the value chain. True or
False
5. The primary advantage of a holding company is the potential leverage that can
be achieved by gaining effective control of other companies’ assets at a lower overall
cost than would be required if the firm were to acquire 100% of the target’s outstanding
shares. True or False
6. Joint ventures are usually more profitable than mergers or acquisitions. True or False
7. A fairness opinion is a certification provided by a third party that guarantees that the
price paid for a specific company is fair. True or False
8. Arbitrageurs buy the stock and make a profit on the difference between the bid price and
the target’s current stock price if the deal is consummated. True or False
9. Empirical studies show that the share price of a target firm rarely rises in advance of the
announcement of a takeover attempt. True or False
10. Perceived synergy is rarely a motivation for M&A. True or False
11. Empirical studies show that unrelated diversification is an excellent way to increase
shareholder value. True or False
12. Tax considerations such as acquiring net operating loss carry forwards and investment tax
credits are often excellent reasons to justify an acquisition. True of False
13. Market power is a motive for M&A in which the acquirer is seeking to gain market share
in order to get more control over its ability to set prices. True or False
14. M&A’s rarely pay off for target firm shareholders. True or False
15. Studies suggest that as many as 50% to 80% of M&A’s fail to meet expectations. True or
False
Multiple Choice Questions:
16. Which of the following are commonly cited reasons for M&As?
a. Synergy
b. Market power
c. Strategic realignment
d. All of the above
17. A merger is a combination of businesses in which
a. two businesses combine to form a new business.
b. the participants are necessarily comparable in size, competitive position,
profitability, and market capitalization.
c. one of the two firms becomes a wholly owned subsidiary of the other firm.
d. none of the above.
18. Vertical mergers are those in which the participants are
a. in the same industry.
b. in different industries
c. in different phases of the value chain.
d. none of the above.
19. An employee stock ownership plan (ESOP) is a trust that
a. can be used as alternative to a divestiture.
b. can be used to purchase the shares of the owners of a privately held firm in a
leveraged buyout.
c. can be used as a means of placing a firm’s stock in “friendly” hands to help
dissuade an unwanted takeover attempt.
d. all of the above.
20. All of the following are common motives for a merger or acquisition except for
a. operating synergy
b. financial synergy
c. raising the cost of capital.
d. buying undervalued assets.
Answers to Test Questions
True/False 1. True
2. True
3. True
4. False
5. True
6. False
7. False
8. True
9. False
10. False
11. False
12. False
13. True
14. False
15. True
Multiple Choice 16. D
17. D
18. C
19. D
20. C