SOLVED

1) What does the term “merger” indicate? A) A larger business has absorbed a smaller business into its operations. B) A larger business has taken control of a smaller one against the wishes of the smaller company’s management. C) Shareholders of a one business no longer have a financial stake in the combined enterprise. D) There is mutual agreement between two businesses to combine. E) The businesses being combined are run independently as separate business units. 2) Granastein Grocers purchased Ridgway Food Warehousing and Logistics Inc. What is this type of merger? A) Vertical B) Conglomerate C) Unilateral D) Stratified E) Horizontal 3) When a large multinational packaged goods company purchased the advertising agency it has used for the past five years, its net savings after increases to salaries and overhead was equal to 12% of its media purchases and advertising production costs. There was no loss of the agency’s client base and creative success increased as revenue-generation concerns diminished. What is this an example of? A) Strategic Partnership. B) Synergy. C) Positive Integration. D) Collective Utility. E) Reciprocity. 4) Dominion Brands Inc., a packaged goods firm, has ten factories, total value of $150 million, that have been operating at an average capacity of 54%. The net income before tax and amortization (EBITDA) is $36 million annually. The company is considering the purchase of a regional manufacturer that went up for sale for $110 million. The assets of the acquisition would be broken up and sold and the production rolled into the Dominion facilities. It would provide an overall improvement in capacity to 70% and increase annual income to $47 million. The sale of assets, net of all transactions cost, would yield $40 million. Considering an investment horizon of 10 years with no residual value at the end and a cost of capital for Dominion of 10%, should the company go forward with the acquisition? A) Yes, because the purchase will yield a present value of $67.6 million to the company. B) Yes, because the purchase will yield a present value of $27.6 million. C) Yes, because the investment will provide a present value of $218.8 million. D) No, because the investment will yield a negative $41.5 million to the company. E) No, because the investment will yield a negative $2.4 million to the company. 5) When Tuscarora Transport was purchased by Domus Logistics Inc., Domus was able to reduce costs by using the larger customer base to ensure trucks filled to capacity on the routes, to increase utilization of salaried maintenance personnel in outlying regions to 80% from 60% and to more broadly allocate the costs of telecommunications hardware and administration. What is the term for these types of benefits to Domus of the Tuscarora acquisition? A) Diversification. B) Exerting market control. C) Vertical integration. D) Economies of scale. E) Combining complementary resources. 6) What is the concept underlying the term “market for corporate control”? A) Threat of takeover leads managers to adopt short term profit objectives rather than long-term development of shareholder wealth. B) Management talent is a scare resource that can be extended through strategic acquisitions. C) Competition by management teams for control of corporations deflects managers from their primary tasks of maximizing shareholder wealth. D) Shareholders may resist beneficial mergers because of fears of diluting their control of a corporation. E) Weak management teams will be eliminated through merger and acquisition and this activity helps to ensure maximum corporate profitability. 7) What type of merger occurs when a company eliminates a competitor by buying it? A) Vertical B) Conglomerate C) Horizontal D) Unilateral E) Stratified 8) To avoid the situation where a localized economic downturn eliminates the income of the company, which type of diversification should a company practice? A) Asset B) Conglomerate C) Revenue D) Geographic E) Investment capital 9) What are managers who pursue merger and acquisition activities for personal goals or interests at the expense of maximizing shareholder wealth demonstrating? A) Executive arrogance. B) The agency problem. C) Priority dissonance. D) Market for corporate control. E) Corporate disutility. 10) Craylon Corporation has net income after tax of $4.5 million, cash of $0.5 million, current liabilities of $3.4 million, debt of $6.8 million, retained earnings of $1.5 million, book value for its 5 million common shares of $30 million and a current price/earnings multiple of 18. It is considering the purchase of Dahlia Ltd. whose shares trade at $32.00 and at price/earnings multiple of 24. Craylon plans to offer two of its own shares for one of Dahlia’s. What is the disadvantage to this offer? A) It has higher risk to Craylon and may result in an increase in its cost of capital. B) It impacts negatively on the company’s liquidity and puts short term commitments at risk. C) It is less attractive to Dahlia as it is implicitly asking shareholders in the target company to bear the risk of the merger’s success. D) It will impact negatively on earnings, diluting long-term shareholder wealth. E) It is that Dahlia’s share price is not as high as the bid price and given the usual premium for mergers, Craylon is paying too much. 1