1- Merger activity is likely to heat up when interest rates are high because tar

Question

1- Merger activity is likely to heat up when interest rates are high because target firms can expect to receive an especially high premium over the pre-announcement stock price.

True

False

2- Synergistic benefits can arise from a number of different sources, including operating economies of scale, financial economies, and increased managerial efficiency.

True

False

3- A spin-off is a type of divestiture in which the assets of a division are sold to another firm.

True

False

4- Since managers' central goal is to maximize stock price, managerial control issues do not interfere with mergers that would benefit the target firm's stockholders.

True

False

5- In a merger with true synergies, the post-merger value exceeds the sum of the separate companies' pre-merger values.

True

False

6- The present value of the free cash flows discounted at the unlevered cost of equity is the value of the firm's operations if it had no debt.

True

False

7- Only if a target firm's value is greater to the acquiring firm than its market value as a separate entity will a merger be financially justified.

True

False

8- A company seeking to fight off a hostile takeover might employ the services of an investment banking firm to develop a defensive strategy.

True

False

9- Most defensive mergers occur as a result of managers' actions to maximize shareholders' wealth.

True

False

10- Borrowing funds on terms that would require immediate repayment of all funds if the firm is acquired, selling off valuable assets, and granting huge "golden parachutes" that open if the firm is acquired are three procedures used to defend against hostile takeovers. These strategies are known as "poison pills."

True

False

Explanation / Answer

1.FALSE
when interest rates are high, it adversely impacts merger activity as required rate of return will be high and target firm will have a lesser market value.

2.TRUE
Synergy depends upon all given sources.

3.FALSE
when an independent company is created from selling or distributing new shares of an existing business or division of a company, it’s called Spin-off.

4.FALSE
the primary purpose is to increase the value of acquiring stocks, so managerial control issues may interfere with mergers, if they are not in favor of primary purpose.

5.TRUE
wherever Synergy exist, it will increase the value after merger of two separate organizations.

6.TRUE
unlevered cost of equity refers to cost of a stock of a firm, which has no debt in capital structure.

7.TRUE

8.TRUE
an investment bank may provide required funds needed to avoid hostile takeover.

9.FALSE
defensive mergers occur just to survive in the market and has nothing to do with wealth maximization of shareholders.

10.TRUE
these tactics are generally used to safeguard a hostile takeover as it makes the target company very costly for an acquiring firm.

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