In which merger type would one be least likely to observe economies of scale?
D. All of these
52. Which of the following might you recommend to a firm with excessive free cash flow?
A. Acquire a firm to diversify.
B. Acquire a firm to bootstrap earnings.
C. A leveraged buyout.
D. A repurchase of shares.
53. Diversification is often a poor motive for mergers because:
A. vertical integration is rarely successful.
B. investors can diversify on their own account.
C. it does not produce economies of scale.
D. the increase in taxes overcomes gains in earnings.
54. One indication that investors expect no synergy from a merger would be that:
A. total market value of the merged firms does not change.
B. the P/E ratio of the merged firms changes.
C. the acquiring firm financed the merger with cash.
D. the merged firms are from different industries.
55. An increase in earnings per share after a merger may not indicate increased value if the:
A. number of shares has increased.
B. price of the acquirer's stock increases.
C. price-earnings ratios were different in the premerger firms.
D. firm's additional earnings are spent on legal expenses of the merger.
56. The cost of a merger may outweigh the potential gain if the:
A. present value of the acquired firm exceeds the price paid for it.
B. present value of the merged firms is greater than the sum of their individual values.
C. merger allows cost savings to occur.
D. acquired firm's shareholders receive more than the value of their firm.
57. The cost of a merger equals the:
A. cash paid for the target firm.
B. increase in total earnings less price paid.
C. premium paid over the target's value as a separate entity.
D. sum of cash and stock paid for the target firm.
58. ABC Corp. has offered 1 million shares having a total market value of $8 million for XYZ Corp. After the merger is announced, shares in ABC trade for $7 each. If ABC is confident about XYZ's value, what has happened to the cost of the merger?
A. It increases by $1 million.
B. It decreases by $1 million.
C. It increases by $9 million.
D. It remains constant.
59. The shareholders of firm A have offered 1 million shares valued at $10 each to acquire firm B. After the merger is announced, stock A trades for $9 per share. Which of the following statements is not correct?
A. Firm A appears to have overbid for firm B.
B. The NPV of the merger may differ from expectations.
C. Shareholders of firm A absorb all additional "cost."
D. Firm A's stockholders are better off than if the merger were cash financed for $10 million.
60. Large-scale efforts to make a firm less appealing in the midst of a potential merger are known as:
A. proxy fights.
B. leveraged buyouts.
C. shark repellents.
D. poison pills.
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