1. Which of the following are legal and acceptable reasons for the high level of merger activity in the
U.S. during the 1980s?
a. Synergistic benefits arising from mergers.
b. A profitable firm acquires a firm with large accumulated tax losses that my be carried forward.
c. Attempts to stabilize earnings by diversifying.
d. Purchase of assets below their replacement costs.
e. Reduction in competition resulting from mergers.
2. Which of the following statements about valuing a firm using the APV approach is most
a. The value of operations is calculated by discounting the horizon value, the tax shields, and
the free cash flows at the cost of equity.
b. The value of equity is calculated by discounting the horizon value, the tax shields, and the
free cash flows at the cost of equity.
c. The value of operations is calculated by discounting the horizon value, the tax shields, and
the free cash flows before the horizon date at the unlevered cost of equity.
d. The value of equity is calculated by discounting the horizon value and the free cash flows at
the cost of equity.
e. The APV approach stands for the accounting pre-valuation approach.
3. Which of the following statements is most CORRECT?
a. If a company that produces military equipment merges with a company that manages a chain
of motels, this is an example of a horizontal merger.
b. A defensive merger is one where the firm's managers decide to merge with another firm to
avoid or lessen the possibility of being acquired through a hostile takeover.
c. Acquiring firms send a signal that their stock is undervalued if they choose to use stock to
pay for the acquisition.
d. Cash payments are used in takeovers but never in mergers.
e. Managers often are fired in takeovers, but never in mergers.
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