2. In 2014, Italian Fiat Group Automobiles and Chrysler Corp entered into a merger. The merged firm, Fiat Chrysler Automobiles (FCA), made its Wall Street debut on October 13, 2014. This type of merger can best be described as [I] Cross-border merger [II] Horizontal merger [III] Vertical merger [IV] Conglomerate merger.

   		I and II
   		II and III
   		III and IV
   		I and III
   		None of the above

QUESTION 2

1. Which of the following statements is correct?

   		Although diversification is a motive in conglomerate mergers, it is uncertain as to whether such mergers are beneficial to investors since stockholders are able to diversify their investments on their own and often at a lower cost than firms can.
   		A firm acquiring another firm in a horizontal merger will not have its required rate of return affected because the two firms will have similar betas.
   		In most mergers, the benefits of synergy and the price premium the acquirer pays over market price are summed and then divided equally between the shareholders of the acquiring and target firms.
   		Financial theory says that the choice of how to pay for a merger is really irrelevant because, although it may affect the firm's capital structure, it will not affect the firm's overall required rate of return.

1. Kazeem Metals Company has a debt ratio of 60%. Interest rate on its debt is 9%. Its unlevered beta is 1.3 and tax rate is 40%. Suppose that the riskfree interest rate is 5% and the required rate of return on the market is 12%. Calculate Kazeem's cost of unlevered equity (i.e. rEU). Use the formula: rEU = wDrD + wErEL.

   16.34%

   14.32%

   16.44%

   14.21%

   None of the above

QUESTION 18

1. Suppose in a M&A, the target firm's current market value is $50 million. But you estimate the target firm's value in the merger to be $60 million. The target firm has 2 million shares outstanding. What is the most the acquirer should bid in order to preserve all of the synergistic benefits for its (acquirer's) stockholders?

   $25 per share

   $10 per share

   $30 per share

   $5 per share

   None of the above

QUESTION 19

1. Suppose again that in a M&A, the target firm's current market value is $50 million. You estimate the target's value in the merger to be $60 million. The target firm has 2 million shares outstanding. If all of the synergistic benefits should go to the target firm's stockholders, how much would the acquirer have to pay?

   $25 per share

   $10 per share

   $30 per share

   $5 per share

   None of the above

2. Which of the following is a function of the investment banker in a M&A process? [I] identifying potential target firms [II] arranging mergers [III] developing defensive tactics [IV] establishing a fair value of the target firm [V] arranging financing of the merger.

   I, II, III

   II, III, IV

   III, IV, V

   All of the above

QUESTION 23

1. FOR THIS AND THE NEXT 2 QUESTIONS. The following data are for a target firm in a merger valuation. The analysis is based on the adjusted present value (APV) approach. Calculate the unlevered horizon value of the firm.

   Current market value of equity	$70
   Value of debt	$20
   Debt ratio	0.60
   Cost of unlevered equity	10%
   WACC	12%
   Growth rate after the horizon: g	4%
   Tax rate: T	40%
   	Current	Year 1	Year 2	Year 3
   Revenues		$115.00	$125.00	$150.00
   Cost of goods sold		80.00	95.00	110.00
   Selling and administration expenses		10.00	12.00	13.00
   Depreciation		10.00	10.00	10.00
   EBIT		$15.00	$8.00	$17.00
   Interest charges		$2.00	$2.50	$3.00
   Total net operating capital	$200.00	$205.00	$208.00	$215.00

   $55.47

   $80.67

   $20.80

   $67.28

   None of the above

QUESTION 24

1. Refer to above data. Calculate the horizon value of the interest tax savings.

   $55.47

   $80.67

   $20.80

   $67.28

   None of the above

QUESTION 25

1. Refer to above data. Calculate the value of the target firm's operations.

   $55.47

   $80.67

   $20.80

   $67.28

   None of the above

QUESTION 26

1. Which of the following is a weakness in the book value method of determining the value of a firm in a merger? [I] It does not account for inflation effects [II] It overestimates the future prospects of the firm [III] It includes intangible assets such as patents and managerial reputation which often tends to bias the value of the firm [IV] It is based on book values which do not necessarily reflect current costs

   II, IV

   II, III

   I, IV

   All are weaknesses

QUESTION 27

1. Which of the following valuation methods is helpful if the target's stock is actively traded and the market is believed to be efficient in that the firm's stock price incorporates all relevant information about the firm and its industry?

   Book

   Market

   Liquidation

   Replacement-cost

   Intrinsic value

   Adjusted present value

QUESTION 28

1. Which of the following forms of payment in a takeover bid may suggest a hostile takeover?

   Acquirer buys target's shares directly from the stockholders

   Acquirer buys target's shares directly through the target's management

   Acquirer pays for the acquisition with its own shares

   Acquirer makes a preemptive bid

   None of the above

QUESTION 29

1. Empirical studies show that mergers:

   Do not create value for either the acquirer or the target firm

   Do not create value for the acquirer

   Do not create value for the target firm

   Merger premiums below market price are common

   None of the above

QUESTION 30

1. Which of the following financial institutions assist firms in arranging mergers?

   Commercial banks

   Investment banks

   Investment companies

   Life insurance companies

   None of the above