Answer the following Review Questions:

1. What role do financial markets play in our economy? What are primary and secondary

markets? What relationship exists between financial institutions and financial markets?

2. What is the money market? What is the Eurocurrency market?

3. What is the capital market? What are the primary securities traded in it?

4. What are efficient markets? What determines the price of an individual security in such a

market?

5. What different aspects of financial markets do the

Slecurities Exchange Act of 1934 regulate?

1. Define and differentiate among the members of each of the following sets of terms: (a)

mergers, consolidations, and holding companies; (b) acquiring company and target

company; (c) friendly merger and hos- tile merger; and (d) strategic merger and financial

merger.

2. Briefly describe each of the following motives for merging: (a) growth or diversification, (b)

synergy, (c) fund raising, (d) increased managerial skill or technology, (e) tax

considerations, (f) increased ownership liquidity, and (g) defense against takeover.

3. Briefly describe each of the following types of mergers: (a) horizontal, (b) vertical, (c)

congeneric, and (d) conglomerate.

4. What is a leveraged buyout (LBO)? What are the three key attributes of an attractive

candidate for acquisition via an LBO?

5. What is an operating unit? What is a divestiture? What are four common methods used

by firms to divest themselves of operating units? What is breakup value?

1. Describe the procedures that are typically used by an acquirer to value a target

company, whether it is being acquired for its assets or as a going concern.

2. What is the ratio of exchange?

3. Is it based on the current market prices of the shares of the acquiring and target firms?

4. Why may a long-run view of the merged firm's earnings per share change a merger

decision?

5. What role do investment bankers often play in the merger negotiation process?