Calculate the NPV of the merger.
Answer: A
NPV = Gain - cost; (11000-10400) - ((20)(40)-400) = 200
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Walt Disney's acquisition of ABC television network is an example of:
(I) Horizontal merger
(II) Vertical merger
(III) Conglomerate merger
(IV) Cross-border merger
Answer: B
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Firm A has a value of $200 million, and B has a value of $120 million. Merging the two would allow a cost savings with a present value of $30 million. Firm A purchases B for $130 million. How much do firm A's shareholders gain from this merger?
Answer: B
NPV = 30-10 = 20
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Following an acquisition, the acquiring firm's balance sheet shows an asset labeled "goodwill."
What form of merger accounting is being used?
Answer: C
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The main difference in a tax-free versus taxable acquisition to the shareholders is that:
(I) In a tax-free acquisition shares are only exchanged, while in a taxable transaction the shares are considered sold and realized capital gains or losses are taxed
(II) In a tax-free acquisition a capital gain and loss are realized and then new shares issued, while in a taxable transaction the assets are revalued, taxed on any capital gains and losses and then shares exchanged
(III) In a tax-free acquisition the shareholders simply take the cash and depart, while in a taxable transaction the shareholders must stay with the new entity
Answer: A
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The following are good reasons for mergers:
(I) Economies of scale
(II) Economics of vertical integration
(III) Complementary resources
(IV) Surplus funds
(V) Eliminating inefficiencies
(VI) Industry consolidation
Answer: D
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Suppose that the merger really does increase the value of the combined firms by $20,000 (i.e., PVAB – PVA – PVB = $20,000). What is the cost of the merger?
Answer: D
PVAB = 200,000 + 50,000 + 20,000 = 270,000; Price per share = 270,000/2,500 = 108;
Cost = (108)(500) 50,000 = 4,000
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The following reasons are good motives for mergers except:
(I) Economies of scale
(II) Complementary resources
(III) Diversification
(IV) Eliminating Inefficiencies
Answer: C
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Calculate the post merger P/E ratio assuming cash is used in the acquisition.
Answer: A
P/E ratio = 102/8 = 12.75
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Firm A has a value of $100 million, and B has a value of $70 million. Merging the two would allow a cost savings with a present value of $20 million. Firm A purchases B for $75 million. What is the cost of this merger?
Answer: C
Cost = 75 -70 = 5
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