Chapter 20 Mergers and Acquisitions and Financial Distress

1. Which of the following is defined as a transaction
in which two firms combine to form a single firm?
A. merger
B. synergy
C. acquisition
D. assignment

2. Which of the following is defined as the purchase
of one firm by another firm?
A. merger
B. synergy
C. acquisition
D. assignment

3. Which of the following is a type of merger in which
an entirely new firm is created?
A. composition
B. synergy
C. consolidation
D. assignment

4. Which of the following is a type of merger in which
two firms that sell the same products in different market areas are
combined?
A. vertical
B. conglomerate
C. product extension
D. market extension

5. Which of the following is a combination of a firm
with a supplier or distributor?
A. vertical merger
B. conglomerate merger
C. product extension merger
D. market extension merger

6. Which of the following combines two companies that
have no related products or markets?
A. vertical merger
B. conglomerate merger
C. product extension merger
D. market extension merger

7. Which of the following is a combination of firms
that sell different, but somewhat related, products?
A. vertical merger
B. conglomerate merger
C. product extension merger
D. market extension merger

8. Which of these terms is defined as the value of the
combined firms being greater than the sum of the value of the two firms
individually?
A. composition
B. synergy
C. consolidation
D. conglomerate

9. Which of the following is NOT one of the sources of
value enhancing synergy in a merger?
A. revenue enhancement
B. cost reduction
C. tax considerations
D. higher cost of capital

10. Which of the following is defined as a merged
firm’s ability to generate synergistic cost savings through the joint use of
inputs in producing multiple products?
A. economies of scale
B. economies of scope
C. economies of synergy
D. x-efficiencies

11. Which of the following is defined as a merged
firm’s advantage over smaller firms if cuts associated with the merger lower
the firm’s operating costs of production?
A. economies of scale
B. economies of scope
C. economies of synergy
D. x-efficiencies

12. Which of the following is cost savings usually
attributed to superior management skills and other difficult-to-measure
managerial factors?
A. economies of scale
B. economies of scope
C. economies of synergy
D. x-efficiencies

13. Which of the following is NOT a tax consideration
motive for a merger?
A. tax gains from net operating losses
B. tax gains from used debt capacity
C. tax gains from used equity capacity
D. tax gains from surplus firms

14. Which of these makes the following a true
statement? Diversification resulting from a merger can:
A. Make the debt of the merged firm more risky, thus lowering the cost of
capital.
B. Make the debt of the merged firm less risky, thus lowering the cost of
capital.
C. Make the debt of the merged firm less risky, thus raising the cost of
capital.
D. None of these make the statement true.

15. Which of the following is the most extreme type of
financial distress for a business?
A. business failure
B. economic failure
C. technical insolvency
D. business extension

16. Which of the following is the type of financial
distress in which the return on a firm’s assets is less than the firm’s cost of
capital?
A. business failure
B. economic failure
C. technical insolvency
D. business extension

17. Which of the following is the type of financial
distress in which a firm’s operating cash flows are not sufficient to pay its
liabilities as they come due?
A. business failure
B. economic failure
C. technical insolvency
D. business extension

18. Which of the following is the termination of the
firm as a going concern in which assets are sold and any proceeds go to pay off
the firm’s creditors?
A. liquidation
B. assignment
C. composition
D. consolidation

19. Which of the following is a voluntary liquidation
proceeding that passes the liquidation of the firm’s assets to a third party
that is designated as the assignee or trustee?
A. liquidation
B. assignment
C. composition
D. consolidation

20. Which of these is the person who liquidates the
firm’s assets through a private sale or public auction and then distributes any
proceeds from the sale to the firms’ creditors and stockholders?
A. assignor
B. grantor
C. trustor
D. trustee

21. Which of the following is a formal bankruptcy
proceeding which outlines the process to be followed for liquidating a failed
firm?
A. Chapter 7
B. Chapter 11
C. Chapter 13
D. Chapter 179

22. Which of the following is a formal bankruptcy
proceeding involving the reorganization of the corporation with some provision
for repayment to the firm’s creditors?
A. Chapter 7
B. Chapter 11
C. Chapter 13
D. Chapter 179

23. Which of the following involves a firm and its
creditors agreeing to a private reorganization outside the formal bankruptcy
process?
A. consolidation bankruptcy
B. prepackaged bankruptcy
C. Chapter 13
D. Chapter 7

24. Calculation of Average Costs with Economies of
Scope Jan’s Bakery is considering a merger with Tina’s Cookies. Jan’s total
operating costs of producing services are $300,000 for a sales volume of $2
million. Tina’s total operating costs of producing services are $75,000 for a
sales volume of $600,000. If the two firms merge, calculate the total average
cost for the merged firm assuming no synergies.
A. 12.5%
B. 11.54%
C. 14.42%
D. 13.75%

25. Calculation of Average Costs with Economies of
Scope Flowers Galore is considering a merger with Balloons N More. Flowers
Galore’s total operating costs of producing services are $400,000 for a sales
volume of $4 million. Balloons’ total operating costs of producing services are
$30,000 for a sales volume of $700,000. If the two firms merge, calculate the
total average cost for the merged firm assuming no synergies.
A. 4.29%
B. 9.15%
C. 10.00%
D. 7.14%

26. Calculation of Average Costs with Economies of
Scope Building Supplies is considering a merger with Tools and More.
Building’s total operating costs of producing services are $4 million for a
sales volume of $20 million. Tools’ total operating costs of producing services
are $1 million for a sales volume of $5 million. Suppose that synergies in the
production process result in a cost of production for the merged firms totaling
$4.8 million with total sales remaining unchanged. Calculate the total average
cost for the merged firm.
A. 9.6%
B. 40.0%
C. 19.2%
D. 20.0%

27. Calculation of Altman’s Z-Score:
Suppose that the financial ratios of a potential borrowing firm took the
following values: X1 = Net working capital/Total assets =
.15, X2 = Retained earnings/Total assets = .10, X3
= Earnings before interest and taxes/Total assets = .15, X4
= Market value of equity/Book value of long-term debt = .40, X5
= Sales/Total assets ratio = 0.8. Calculate the Altman’s Z-score for
this firm.
A. 9.10
B. 1.60
C. 0.371
D. 1.855

28. Calculation of Altman’s Z-Score:
Suppose that the financial ratios of a potential borrowing firm took the
following values: X1 = Net working capital/Total assets =
.25, X2 = Retained earnings/Total assets = .30, X3
= Earnings before interest and taxes/Total assets = .35, X4
= Market value of equity/Book value of long-term debt = .50, X5
= Sales/Total assets ratio = 0.9. Calculate the Altman’s Z-score for
this firm.
A. 2.30
B. 3.075
C. 9.8
D. 1.96

29. Calculation of Altman’s Z-Score:
Suppose that the financial ratios of a potential borrowing firm took the
following values: X1 = Net working capital/Total assets =
.30, X2 = Retained earnings/Total assets = .40, X3
= Earnings before interest and taxes/Total assets = .43, X4
= Market value of equity/Book value of long-term debt = .65, X5
= Sales/Total assets ratio = 0.95. Calculate the Altman’s Z-score for
this firm.
A. 3.679
B. 2.73
C. 10.23
D. 2.046

30. Calculation of Altman’s Z-Score:
Suppose that the financial ratios of a potential borrowing firm took the
following values: X1 = Net working capital/Total assets =
.35, X2 = Retained earnings/Total assets = .50, X3
= Earnings before interest and taxes/Total assets = .60, X4
= Market value of equity/Book value of long-term debt = 1.50, X5
= Sales/Total assets ratio = 3.65. Calculate the Altman’s Z-score for
this firm.
A. 7.65
B. 1.54
C. 6.60
D. 1.32

31. Calculation of Bankruptcy Probability
Suppose a linear probability model you have developed finds there are two
factors influencing the past bankruptcy behavior of firms: the debt ratio and
the profit margin. Based on past bankruptcy experience, the linear probability
model is estimated as:
PDi = .20 (debt ratio) + .15 (profit margin)
A firm you are thinking of lending to has a debt ratio of 55 percent and a
profit margin of 10 percent. Calculate the firm’s expected probability of
default, or bankruptcy.
A. 12.5%
B. 10.0%
C. 1.65%
D. 10.25%

32. Calculation of Bankruptcy Probability
Suppose a linear probability model you have developed finds there are two
factors influencing the past bankruptcy behavior of firms: the debt ratio and
the profit margin. Based on past bankruptcy experience, the linear probability
model is estimated as:
PDi = .15 (debt ratio) + .05 (profit margin)
A firm you are thinking of lending to has a debt ratio of 50 percent and a
profit margin of 8 percent. Calculate the firm’s expected probability of
default, or bankruptcy.
A. 7.90%
B. 11.6%
C. 30.00%
D. 7.80%

33. Calculation of Bankruptcy Probability
Suppose a linear probability model you have developed finds there are two
factors influencing the past bankruptcy behavior of firms: the debt ratio and
the profit margin. Based on past bankruptcy experience, the linear probability
model is estimated as:
PDi = .23 (debt ratio) + .08 (profit margin)
A firm you are thinking of lending to has a debt ratio of 60 percent and a
profit margin of 12 percent. Calculate the firm’s expected probability of
default, or bankruptcy.
A. 14.76%
B. 22.32%
C. 10.30%
D. 13.25%

34. Calculation of Bankruptcy Probability
Suppose a linear probability model you have developed finds there are two
factors influencing the past bankruptcy behavior of firms: the debt ratio and
the profit margin. Based on past bankruptcy experience, the linear probability
model is estimated as:
PDi = .25 (debt ratio) + .12 (profit margin)
A firm you are thinking of lending to has a debt ratio of 62 percent and a profit
margin of 14 percent. Calculate the firm’s expected probability of default, or
bankruptcy.
A. 17.18%
B. 2.604%
C. 14.99%
D. 19.09%

35. Calculation of Average Costs with Economies of
Scope Dee’s Dry Cleaning is considering a merger with Larry’s Laundry
Supply Stores. Dee’s total operating costs of producing services are $600,000
for sales volume of $4 million. Larry’s total operating costs of producing
services are $200,000 for a sales volume (JP) of $1 million.
Calculate the average cost of production for the Dee’s and Larry’s firms,
respectively.
A. 15%, 20%
B. 20%, 15%
C. 16%, 16%
D. 60%, 5%

36. Calculation of Average Costs with Economies of
Scope Dee’s Dry Cleaning is considering a merger with Larry’s Laundry
Supply Stores. Dee’s total operating costs of producing services are $600,000
for sales volume of $4 million. Larry’s total operating costs of producing
services are $200,000 for a sales volume (JP) of $1 million.
For a sales volume of $5 million, calculate the reduction in production costs
the merged firms need to experience such that the total average cost (TAC)
for the merged firms is equal to 10%.
A. decrease of $500,000
B. decrease of $300,000
C. decrease of $100,000
D. decrease of $200,000

37. Calculation of Average Costs with Economies of
Scope Blinds N Such is considering a merger with Window Supply Stores.
Blinds’ total operating costs of producing services are $750,000 for sales
volume of $6 million. Window’s total operating costs of producing services are
$100,000 for a sales volume (JP) of $1 million. Calculate the
average cost of production for the Blinds and Window firms, respectively.
A. 10%, 12.5%
B. 12.5%, 10%
C. 75%, 1.67%
D. 13.93%, 13.93%

38. Calculation of Average Costs with Economies of
Scope Blinds N Such is considering a merger with Window Supply Stores.
Blinds’ total operating costs of producing services are $750,000 for sales
volume of $6 million. Window’s total operating costs of producing services are
$100,000 for a sales volume (JP) of $1 million. For a sales
volume of $7 million, calculate the reduction in production costs the merged
firms need to experience such that the total average cost (TAC) for the
merged firms is equal to 12%.
A. decrease of $840,000
B. decrease of $10,000
C. decrease of $40,000
D. decrease of $90,000

39. Calculation of Average Costs with Economies of
Scope Jewelry Designs is considering a merger with Beads Supply Stores.
Jewelry’s total operating costs of producing services are $300,000 for sales
volume of $2 million. Beads’ total operating costs of producing services are
$125,000 for a sales volume (JP) of $2.25 million. Calculate
the average cost of production for the Jewelry and Beads firms,
respectively.
A. 15%, 5.56%
B. 5.56%, 15%
C. 15%, 55.56%
D. 13.33%, 6.25%

40. Calculation of Average Costs with Economies of
Scope Jewelry Designs is considering a merger with Beads Supply Stores.
Jewelry’s total operating costs of producing services are $300,000 for sales
volume of $2 million. Beads’ total operating costs of producing services are
$125,000 for a sales volume (JP) of $2.25 million. For a
sales volume of $4.25 million, calculate the reduction in production costs the
merged firms need to experience such that the total average cost (TAC)
for the merged firms is equal to 8%.
A. decrease of $340,000
B. decrease of $85,000
C. decrease of $40,000
D. decrease of $25,000